This document provides information on currency and interest rate futures contracts. It discusses key features of futures contracts including standardized contracts, clearing houses, margin requirements and daily mark to market. It also compares futures to forward contracts. Several global futures exchanges are listed and contract specifications for British pound and Japanese yen futures contracts on the Chicago Mercantile Exchange are provided.

1. CURRENCY AND
INTEREST RATE
FUTURES

2. Introduction
 A futures contract, like a forward contract is an
agreement between two parties to exchange
one asset for another, at a specified date in the
future, at a rate of exchange specified up front.
However, there are a number of significant
differences.

3. Future Contracts
• Major features
– Organised exchanges
– Standardisation
– Clearing House
– Initial margins
– Marking to Market
– Actual delivery is rare

4. Global Futures Exchanges
• IMM: International Monetary Market
• LIFFE: London International Financial Futures
Exchange
• CBOT: Chicago Board of Trade
• SIMEX: Singapore International Monetary
Exchange
• DTB: Deutsche Termin Bourse
• HKFE: Hong Kong Futures Exchange

5. Comparison of the Forward & Futures Markets
Forward Markets Futures Markets
Contract size Customized Standardized
Delivery date Customized Standardized
Participants Banks, brokers, Banks, brokers,
MNCs. Public MNCs. Qualified
speculation not public speculation
encouraged. encouraged.
Security Compensating Small security
Deposit bank balances or deposit required.
credit lines needed.
Clearing Handled by Handled by
operation individual banks exchange
& brokers. clearinghouse.
Daily settlements
to market prices.

6. Comparison of the Forward & Futures Markets
Forward Markets Futures Markets
Marketplace Worldwide Central exchange
telephone floor with worldwide
network communications.
Regulation Self-regulating Commodity
Futures Trading
Commission,
National Futures
Association.
Liquidation Mostly settled by Mostly settled by
actual delivery. offset.
Transaction Bank’s bid/ask Negotiated
Costs spread. brokerage fees.

7. FUTURES CONTRACTS
• Advantages of
Futures:
• 1) Easy liquidation
• 2) Well- organized and
stable market.
• 3) No credit risk
• Disadvantages
of Futures:
• 1) Limited to a few
currencies
• 2) Limited dates of
delivery
• 3) Rigid contract
sizes

8. The Futures trading Process
 Is a system of open outcry on the trading floor of a
centralized and regulated exchange
 Increasingly, trading with electronic screens is
becoming the preferred mode in many exchanges
around the world.
 Floor traders – trade for own account
 Floor brokers – trade on behalf of others
 Dual traders – do both
 Variables to be negotiated in any deal are the
price and the number of contracts

9. The Futures trading Process
 The buyer of the Future acquires a long
position while the seller acquires a short
position

10. Exchange traded currency futures were launched in India
on August 29, 2008. As of now only USD-INR contracts
have been permitted with contract size of USD 1000 with
monthly maturities upto twelve months. The contracts will
be cash settled in INR. Contracts will expire on the last
working day of the month. Quotations will be given in rupee
terms.
Unlike OTC forwards, no underlying exposure is required to
trade in USD-INR futures. Individuals can also trade for
purely speculative purposes.
Margins will be calculated using a VAR framework.
Contracts have started trading on NSE. Eventually, they will
also be traded on MCX and BSE. Contracts between INR
and other currencies will be introduced later based on
perception of market interest.

11. Futures Price Quotations
• The Day’s opening price
• The highest price reached during day
• The Day’s lowest price
• Day’s closing price
• The change in the closing price of the
previous day
• The trading volume in the particular contract
• The settlement price of the prior day
• Number of contracts that are still outstanding

12. System of Margins
• Initial margin : When position is opened
• Variation Margin: Settlement of daily gains and losses
• Maintenance Margin : Minimum balance in margin account.
Balance falls below this, margin call issued. If not met,
position liquidated.
• Regulators specify minimum margins between clearing
members and clearinghouse. Margins at other levels
negotiated
• Margins can be deposited in cash or specified securities
such as T-bills. Interest on securities continues to accrue to
owner. Margin is a performance bond.
• Levels of margins may be changed if volatility increases.

13. System of Margins
• With clearing house guarantee, buyer-seller need
not worry about each other’s creditworthiness.
• Standardized contracts with margin system
increase liquidity.
Protects clearing house; enhances financial
integrity of the exchange. Credit risk issues almost
eliminated

14. CLEARING
HOUSE
CLEARING MEMBER
A
CLEARING
MEMBER B
NON-CLEARING
MEMBER
CUSTOMER
CUSTOMER
NON-CLEARING
MEMBER CUSTOMER
CUSTOMER

15. TYPES OF ORDERS IN FUTURES MARKETS
Market Orders : Execute at best available price
Limit Orders: Sell above or buy below stated limits
Market If Touched or MIT Orders: Become market orders
if price touches a trigger
Stop-Loss Orders : Sell if price falls below a limit; buy if it rises
above a limit. Used to limit losses on existing positions
Stop Limit Orders : Stop loss plus limit
Time of Day Orders, Day Orders, Good Till Canceled(GTC)
Orders
Participants : Brokers, Floor Traders, Dual Traders, Futures
Commission Merchants. Hedgers and
speculators
both participate.

16. Currency Futures Contract Specifications
Exchange: IMM at Chicago Mercantile Exchange(CME)
British Pound Japan Yen
Size: £625000 ¥12,500,000
"Tick": $ 0002 per £ $0.000001 per ¥
(Per Contract) ($12.50) ($12.50)
Expiry Months: January, March, April, June, July, September,
October, December, & Spot Month (Both GBP and JPY)
Limit: NO LIMIT FOR THE FIRST 15 MINUTES OF TRADING. A
schedule of expanding price limits will be in effect when the 15-
minute period is ended. (Both GBP and JPY)
“Tick” : Minimum size of price movement.