TWO TYPES OF MARKET PARTICIPANTS

Speculators – attempts to profit from a most change in the

future price

Hedger – wants to avoid price variation by locking in a

purchase price of the underlying asset
through a long position in the future
contract or a sales price through a short
position.
 Both forward and furures markets for foreign exchange is
liquid.

 A reversing trade can ve made in either market that will close

out, or neutralize, a positon.
 In forward market, approximately 90% of all contracts result in
the short making delivery of the underlying asset to the long.
This is natural given the tailor-made terms of forward contracts.
By contrast, only about 1% of currency futures contracts result in
delivery.
 While futures contracts are useful for speculation and hedging,
their standardized delivery dates are unlikely to correspond to
the actual future dates whenforeign exchange transactions will
transpire. Thus, they are generally closed out in a reversing
trade.
 The commission that buyers and sellers pay to transact in the
futures market is a single amount paid up front that covers the
round-trip transactions of initiating and closing out the position.
 In future markets, a clearinghouse serves as the third party to
all transacton.

 The buyer of furure contracts effectively buys from clearinghouse and

the seller sells to the clearinghouse.
 The clearinghouse is made up of clearing members.
 The clearinghouse’s liability is limited because a contractholder’s
position is marked-to-market daily.

 A future exchange may have a daily price limit on the future

price that is, a limit as to how much the settlement price can
increase or decrease fom the privious day’s settlement price.
 CURRENCY FUTURES MARKET
 May 16, 1972 - CME – CHICAGO MERCANTILE EXCHANGE
 1978 – 2 million contracts
 2009 - 152 million contracts
 2007 – CME Group
[merger between CME and CBOT (CHICAGO BOARD OF TRADE)].
 2008 – acquired the (NYMEX) NEW YORK MERCANTILE
EXCHANGE
 GLOBEX – is a worldwide automated order-entry and matching
system for futures and option that facilities nearly 24hrs
trading after the close of regular exchange trading.
 1998 –(PBOT) PHILADELPHIA BOARD OF TRADE
 2008 – NASDAQ OMX acquired PBOT
now Future Exchange (NFX)
NFX – trades World Currency Future in 17 currencies.