CHAPTER 11 FOREIGN CURRENCY FUTURES.

CHAPTER 11 FOREIGN CURRENCY FUTURES.

Futures in foreign currencies

A futures contract is an agreement negotiated on an exchange or regulated market, which requires contracting parties to buy or sell a number of assets or securities (underlying) at a future date, but at a price set in advance.

Whoever buys futures contracts, adopts a "long" position, so you have the right to receive at maturity of the underlying contract under negotiation. Also, who sells contracts adopts a "short" before the market position so that upon reaching the expiration date of the contract shall deliver the relevant underlying asset, receiving the full amount agreed at the trade date of the futures contract.

The futures contract whose price is formed in close connection with the reference asset or underlying, quoted throughout the negotiation process, and can be bought or sold at any time during the trading session, allowing the active participation of operators typically perform speculative transactions in order to generate profits, but they provide the necessary liquidity to those who wish to enter into hedging transactions can find counterpart.

For more than two centuries futures contracts on commodities, precious metals, agricultural products and various commodities are traded, but for financial products traded for two decades, existing interest rate futures short, medium and long term future currency and stock index futures.

Contract specifications (CME):

1. The size of the contract depends on the currency

2. The exchange rates are quoted in US terms

3. Due dates are standard

4. To guarantee compliance is mandatory deposit initial margin and maintenance margin

5. At maturity the physical delivery is possible but rare

6. Customers pay a commission to their agents

7. The clearinghouse is the counterpart of all contracts

Open = The first trading session

High / Low = Maximum Price and session low

Last = The last contribution, when consultation

Sett = The closing price of the session

Pt. Change = change in points. The difference between sett. today and the day before

Est.Vol. = Number of contracts traded

Open interest = Number of contracts in force

The initial margin is a good faith deposit that the client makes his broker. On average it is 5% of the contract value, depending on the volatility of the underlying.

In MexDer the initial margin is called Minimum Initial Contribution (AIM)

The maintenance margin is the minimum balance of the initial margin, usually 75%. By the balance maintenance margin level, the customer must make an additional deposit to recover the original initial margin (margin call).

The margin account is controlled by the Clearing House as an implicit guarantee of fulfillment of contractual obligations. The account produces a risk-free return and your balance belongs to the client.

At the end of each day the gain or loss is calculated in the contract and the sum (or difference) the balance of the margin account. This process is called market valuation (marking to market)

Those involved in the futures market made gains or absorb their losses every day.

Set daily margin account. Long position in a futures contract dollar in MexDer. .

The futures contract is a series of daily bets on the future value of TC. The bet is settled at the end of the day. The investor not closed position, makes a bet the next day.

It's like a forward contract is concluded and it closed each day, before concluding another contract at the same time and by the same amount.

The aim of daily settlement is to avoid an accumulation of losses.

Suppose the contract owner of example you want to close your position after two days. Since I bought dollars to future, now have to sell a contract at the same date. He bought a $ 94.500 and now sells 95,200, realizing a gain of $ 700.

If you continue in the game, on day 4 not only have lost all their previous earnings, but accumulate a net loss of $ 800.

The gain or loss can be calculated in two ways.

1. Adding the gains and losses from day 0 until the closing of the position.

2. Subtract the final value of the contract baseline

Since most futures contracts are closed before maturity, it is a short-term speculation, regardless of the expiration date of the contract.

Futures are a perfect tool for speculation.

To make it easier to close the positions, the market must have a minimum liquidity.

When you close your position the client pays a fee for the round trip. Usually the commission is low.

Features:

1. futures

2. forwards

3. Where is negotiated

4. Contract Size

5. maturity

6. liquidation

7. Transaction costs

8. liquidity

9. primary Use

10. In the Bag

11. Standard (small)

12. A set of fixed dates

13. daily

14. commission

15. limited

16. speculation

17. OTC

18. Any size (large)

19. any time

20. physical delivery

21. Bid-ask spread

22. very large

23. coverage

E.G.: The future exchange rate is calculated based on the formula of parity of interest rates.

Where: F0 is the exchange rate to future

S0 is the spot exchange rate

RM is the interest rate in domestic currency

RE is the interest rate in foreign currency

Interest rates in the two currencies are risk-free and are at the same time that the term of the future.

S0 = 9.24, OR = 6.5%, 1.8% RE =

Missing 45 days to expiration on

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