Currency futures allow parties to agree to buy or sell a currency at a future date at a price determined today. Trading in currency futures began in 1972 on the Chicago Mercantile Exchange. Futures contracts are standardized and traded on organized exchanges. The clearing house guarantees the financial integrity of the market by acting as the counterparty to all contracts. Currency futures are marked to market daily, where open positions are repriced and profits and losses are settled through margin payments maintained by traders.

1. INTERNATIONAL FINANCIAL
MANAGEMENT
CURRENCY FUTURES
By
V S SARMA ,PROF, MBA VJIT
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2. INTERNATIONAL FINANCIAL MANAGEMENT
CURRENCY FUTURES
 Future contracts: It is contract to buy or sell a good with the
delivery and payment at future date and at a price determined
today.
 Trading in futures stared in May, 1972 in Chicago Mercantile
Exchange (CME)
 Trading turn over : in 1978 : 2 million futures
in 2004 : 48 millions futures
 Expiration cycle: Trade in 4 qrts - March, June, September, December
 Delivery date : 3rdWednesday of Expiration month
 Last date for trading: Just 2 business days prior to delivery date
 Regular business : 7.20 am to 2.00 pm
 Underlying assets: Currency, stock index, Treasury bills or any
other asset.
 CH guarantees financial integrity of Market
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3. INTERNATIONAL FINANCIAL MANAGEMENT
CURRENCY FUTURES
 Positions of under takers:
- Long position : Buy (agree to buy)
- Short position : Sell ( agree to sell)
 Futures are Standardized form of Forward contract (Institutionalized)
 Traded in organized Exchanges or listed contracts – Physical
place -- must
 One has contract but no currency
 Zero sum game : some body’s loss is some body’s gain
 Buyers and sellers act through brokers
 These orders are communicated to the Exchange. Prices
fixed on ‘Open cry’ in ‘trading pits’ between the brokers and
traders
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4. INTERNATIONAL FINANCIAL MANAGEMENT
CURRENCY FUTURES
 FEATURES OF CURRENCY FUTURES:-
(1) Traded only in organized stock Exchanges .Physical location must
(2) Standardization of contracts
(3) Minimum variation(tick size) This is the minimum price variation for
settlement. Tick size may vary Stock Exchange to Sock Exchange.
Generally 0.01% or 0.01 cent per US$
(4) Clearing House : When once the parties to buy or sell came to an
agreement, the clearing house steps into the shoes of these counter
(above)parties.
- e.g. (A) and (B) agrees to buy and sell respectively
- This is one contract is replaced by two contracts immediately after (A)
(B)’s agreement viz.,
1st contract = Clearing House vs Party (A)
2nd contract = Clearing House vs Party (B)
C.H is responsible for : - Margin money account keeping
- Settlement of deliveries
- other information and data
- No need to (A) and (B) to investigate each others credit worthiness
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5. INTERNATIONAL FINANCIAL MANAGEMENT
CURRENCY FUTURES
MARKING TO MARKET :
 Settlement on daily basis. Profits and losses are determined
daily
 Outstanding future contracts are ‘Re priced every day’
 Profits/losses adjusted in Margin payments
 Each trader has to maintain minimum margin 2.5% to 10%
of contract value
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6. INTERNATIONAL FINANCIAL MANAGEMENT
CURRENCY FUTURES
MARKING TO MARKET (contd..)
 Due to this adjustment future contracts are called ‘daily
reconnected forwards’
 Margins : (a) Cash/performance bond, deposits with clearing
houses
(b) Security, good faith deposit
(c ) Designed to be sufficient to meet Maximum
possible days loss
(d) In the shape of currency, securities, Treasury
bills, L.Cs etc.,
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7. INTERNATIONAL FINANCIAL MANAGEMENT
CURRENCY FUTURES
OFF SETTING
 A person in future --- establish long or short (buy or sell)
 Margin monies deposited by parties to clearing house
 Profits and losses settles on daily basis
e.g. A party X opened long (buy) position. He wishes to close this
future contract
- He (X) has to reenter the market and close the above
position by taking short position
 This amounts to selling a previously purchased future ‘buy’
contract
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8. INTERNATIONAL FINANCIAL MANAGEMENT
CURRENCY FUTURES
OFF SETTING (contd..)
FUNGIBILITY:
 Future contracts can be offset with any counter party
 Need not be original party
 Fungibility is assured by the fact that the CH itself assumes the
role of counter party to each other party
 e.g. In January ‘x’ purchased an S&P 500 currency future of
March.
- On 15th Feb he decides to close the position
- ‘X’ goes back to market and offers for sale of ‘March S&P 500
futures
- Once ‘x’ finds a buyer then ‘X’ holds – one long and one short
positions in the same contract.
 CH considers that ‘x’ has no longer has a position in the contract.
Just closed
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9. INTERNATIONAL FINANCIAL MANAGEMENT
CURRENCY FUTURES
PROBLEM Marking to Market:
-Consider an ‘X’ futures contract in which current price is $212
- The initial margin required is US$ 10 per contract and the
maintenance margin requirement is US$ 8 per contract
- You go ling 20 contracts and meet al margin calls but do not
withdraw any excess margin
- When could there be a margin call?
- Future/settlement prices (0 - 6 days) 0 – us$ 212, 1- us$211,
2 - us$ 214, 3 - us$209, 4 - us$210, 5 - us$204 and 6 - us$202
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10. INTERNATIONAL FINANCIAL MANAGEMENT
SOLUTION :
- Settlement /future price: Clearing house fixes this price by averaging final few trades of the
day.
- 20 Contracts X US$ 10 for each contract as margin money (20 X 10 = 200)
- Maintenance Margin = US$ 8 per contract (20 X 8 = 160). If it falls below, margin call will be
given by stock exchange
- At the end of third and fifth day the maintenance margin money had fallen to less than US$
160 hence fresh deposit of Us$ 40 was called
- If the margin money is in excess of Us$ 2005TH ,this will not be given to the party
10
Day OB -
margin
Margin/funds
deposit
Future
price
Price
change
Gain/loss(20
contracts)
CB of margin
money
0 - 200 212 - - 200
1 200 0 211 -1 -20 180
2 180 0 214 3 60 240
3 240 0 209 -5 -100 140
4 140 60 210 +1 20 220
5 220 0 204 -6 -120 100
6 100 100 202 -2 -40 160