Futures Products - Currencies RSS Feed

Currency Quotes

CME Group — Fri, 26 Sep 2008 11:47:00 EST

Currency quotes show the relationship between two currencies. Specifically, they are prices of currencies and are expressed in two different ways, depending on the trader’s perspective:

1.Direct quote: expresses the price of a foreign currency in terms of a country’s domestic currency
2.Indirect quote: expresses the price of the domestic currency in terms of the foreign currency

Using E-quivalents Tool to Convert Spot to Future Pricing

CME Group — Fri, 26 Sep 2008 11:40:00 EST

E-quivalents is a CME Group application utilizing real-time updates of FX futures prices and quantities, paired with user defined forward points, to calculate spot FX equivalent prices and quantities for each currency pair.

Trading FX Futures

CME Group — Fri, 26 Sep 2008 11:39:00 EST

This interactive video provides specific insights into trading FX futures including:

1.Distinctions between the OTC and exchange traded FX products
2.Contract specifications and costs for FX
3.Details on how to get started trading FX futures

Calculating Forward Exchange Rates

CME Group — Fri, 26 Sep 2008 11:36:00 EST

The forward exchange rate between two currencies is based on the current exchange rate, in the spot or cash market, adjusted for the risk-free interest rate for each currency to account for geo-political differences in the countries.

Interpreting Forward Rates

CME Group — Fri, 26 Sep 2008 11:35:00 EST

Forward rates provide expected prices of currencies at later dates and are determined by the spot rate and the interest rates of the two countries represented by the currencies. When evaluated in American terms:

1.Countries with interest rates lower than those in the US have currencies that trade at a premium to the spot rate.
2.Countries with interest rates higher than those in the US have currencies that trade at a discount to the spot rate.

Forward Rates and Interest Rate Parity

CME Group — Fri, 26 Sep 2008 11:34:00 EST

The existence of forward rates, in addition to spot rates, results from the relationship between the exchange rates and interest rates of the two countries. This relationship is known as interest rate parity (IRP).

Interest rate parity is a relationship where interest rates and exchange rates form a single system where forward foreign exchange rates adjust to ensure no advantage is gained by choosing to invest in a foreign capital market in favor of a domestic one.

According to IRP, foreign exchange rates will adjust to ensure that a trader earns the same return by investing in risk-free instruments of any currency, assuming the proceeds from investment are repatriated into the home currency by a forward contract initiated at the outset of the holding period.

Calculating the Forward Rate

CME Group — Fri, 26 Sep 2008 11:32:00 EST

The relationship between interest rate parity and forward rates can be summed up by the following expression:

forward price = spot price + forwards points

Return Neutrality Under IRP

CME Group — Fri, 26 Sep 2008 11:30:00 EST

According to interest rate parity, the return an investor realizes from using the spot and forward markets, to take advantage of higher foreign interest rates, will not vary significantly from the investor whose currency earns a lower domestic rate.

Forward Points

CME Group — Fri, 26 Sep 2008 11:28:00 EST

The OTC foreign exchange market has taken the interest rate parity relationship and created a metric that can be employed to calculate forward exchange rates more quickly than with the IRP equation. This metric is known as forward points.

Forward Points to Forward Price

CME Group — Fri, 26 Sep 2008 11:26:00 EST

This forward points equation makes the following assumptions:

the base currency is quoted in direct terms (base currency is foreign and quote currency is domestic)

points have been converted to decimal form to be consistent with the price quotes

Using Forward Price for Direct and Indirect Bid and Ask

CME Group — Fri, 26 Sep 2008 11:24:00 EST

Click each of the details below to see an example of how forward price is used for both direct and indirect quotes on Bid and Ask.

Defining the Foreign Exchange Market (FX)

CME Group — Thu, 25 Sep 2008 09:49:00 EST

Foreign exchange (FX) is the conversion of one currency into another. These markets developed as an efficient means by which buyers and sellers, holding different currencies, could find and transact with each other. Currency quotes show the relationship between two currencies:

1.The first currency in the pair is always the base currency
2.The second is always the quote currency

Direction of FX Currency

CME Group — Thu, 25 Sep 2008 08:16:00 EST

Buying and selling futures contracts are the two most basic futures strategies. Both of them rely on an expected direction in the movement of the underlying currency:

1.Long position: buyer anticipates currency to strengthen or increase in value
2.Short position: seller expects currency to weaken or decrease in value

Interest Rates and FX Currency

CME Group — Thu, 25 Sep 2008 08:14:00 EST

If you anticipate that there will be a significant change in the relationship between two countries’ interest rates over a given time period, you could use FX futures time spreads to benefit from this change. This strategy involves interest rate behavior and contract maturity rather than exchange rates. Time spreads are more sophisticated than simple long and short positions. Conversely, they are created by selling FX futures contracts with a short maturity and by purchasing FX futures contracts with a relatively longer maturity.

Interest Rate and Purchasing Power Parity

CME Group — Thu, 25 Sep 2008 08:13:00 EST

Currency moves between countries in two primary ways:

1.Balance of financial asset flows (capital account)
2.Balance of trade in goods and services (current account)

History of FX Futures

CME Group — Thu, 25 Sep 2008 08:12:00 EST

CME Group introduced foreign exchange futures in 1972 in support of free-floating exchange rates between countries when the gold standard was removed for the U.S. Dollar. Some of the major events and dates were:

1.1944: Bretton Woods Accord establishes the Gold Standard
2.1971: Smithsonian Agreement abandons the Gold Standard
3.1972: Chicago Mercantile Exchange (CME) introduces futures trading
4.1979: Europe adopts European Monetary System (EMS)
5.1984: CME introduces options on currency futures products
6.1993: EMS liberalizes pricing bands, adding to global free float currency exchange
7.1999: EuroFX is introduced as standard currency through most of western Europe

U.S. Currency Pairs

CME Group — Thu, 25 Sep 2008 08:11:00 EST

The top five currency pairs account for over 70 percent of the daily volume, with the top three pairs being:

1.EUR/USD: 28 percent
2.USD/JPY: 18 percent
3.GBP/USD (also called sterling or cable ): 14 percent

Below are contract details for each of the U.S. currency pairs traded at CME Group.

Cross Rates

CME Group — Thu, 25 Sep 2008 08:10:00 EST

Overview of cross rates
Cross rate behavior
Cross rate quotes
Calculating cross rates
CME Euro FX Cross Rate contract specs

The Hidden Power of Price Scales and CME FX Trading

CME Group — Wed, 20 Aug 2008 13:19:00 EST

Price Scales: The Hidden Power of Price Scales and CME FX Trading

CME Group FX Products Overview

CME Group — Wed, 20 Aug 2008 13:17:00 EST

FX Overview: CME Group FX Products Overview