Currency futures are standardized financial contracts traded on exchanges and through electronic networks like the Chicago Mercantile Exchange (CME) and its GLOBEX® system. Currency futures are quoted in dollars per unit of foreign currency at the Chicago Mercantile Exchange. To determine the dollar value of a futures contract, simply multiply the contract size by the current price.
Example (click to display)
The Swiss Franc Futures contract traded at the CME represents 125,000 Swiss Franc. At the price of $0.9010 USD/SF, the value of the contract would be $112,625 USD ($0.9010 x 125,000).
Now suppose that the price of the Swiss Franc currency future moved to $0.9020. The holder of the contract has profited from the increase in the value of the contract from $112,625 USD to $112,750 or $125.00.
Another way to calculate the same change in value is to multiply the change in price (in ticks) by the value of a single tick. The value of a tick is set by the exchange and represents the minimum price fluctuation for a particular contract. The minimum fluctuation (tick) of the Swiss Franc contract is .0001 and the value of that tick is $12.50. In our example the price moved from .9010 to .9020 or 10 ticks or $125.00 (10 x 12.50)
Margin
Due to the fact that these are highly leveraged instruments, a thorough understanding of margin is a crucial concept when trading currency futures. During each trading day, a currency futures trading account is marked-to-market for any losses or gains. These losses or gains are then immediately debited or credited from/to the account.
Example (click to display)
A Terra Nova customer with a $18,000 account balance purchases 6 September Swiss Franc contracts at an opening price of $.9004 USDSF. One Swiss Franc contract contains 125,000 Swiss Francs. The total dollar value of the contracts are: $.9004 X 125,000 X 6 = $675,300. The current initial margin for the position is $17,820 ($2970 margin for one contract X 6 contracts = $17,820). Since the account balance is $18,000, the initial margin requirement has been met with the cash in the account. Please note that Terra Nova enforces minimum exchange margin requirements for all overnight positions. These requirements are subject to change at any time without notification. Please consult the exchange website for up-to-date margin information.
In the second day of trading, the settlement price declines to $0.8975. The price of one contract has dropped 0.0029 or 29 ticks, resulting in a loss of $362.50 per contract and $2,175 on six contracts. The value of the contracts is now $523,125 (0.8975 X 125,000 x 6 = $673,125). The total value of the 6 contracts has declined from $675,300 to $673,125 or a loss in value of $2,175. This amount is deducted from the account as profits and losses are continually marked to the market throughout each trading day. The total account balance is then $18,000 - $2,175 or $15,825. The current maintenance margin on one September Swiss Franc contract is $2,200. The maintenance margin on the six-contract position is therefore $13,200 ($2,200 X 6 = $13,200). As the account balance is above the maintenance margin of $13,200, no action is required on this account.
Suppose now that the settlement price at the end of the following trading day is $.9009 (an increase in the settlement price). The price of the contract has increased by 0.0034 (34 ticks per contract), resulting in a gain of $425 per contract (12.50 x 34) or $2,550 for the six-contract position ) ($425 X 6). The value of the contracts is now $675,675 (0.9009 X 125,000 X 6). The value of the account has increased by $2,550 to $18,375 ($15,825 + $2,550). As the account balance is above the maintenance margin of $13,200, no action is required on this account.
Instead of the gain noted above, suppose the next day there was a drop in the settlement price to $0.8850 from $0.8975. The price of the Swiss Franc contract decreased 0.0125 (125 ticks) resulting in a loss of $1,562.50 per contract ($12.50 X 125) and $9,375 ($12.50 X 125 X 6) on six contracts. The value of the contract is now $110,625 ($0.8850 X 125,000) and the value of the six-contract position is $663,750 ($0.6850 X 125,000 X 6). The value of the account has decreased to $6,450 ($15,825 - $9,375). Since the account value is lower than the current maintenance margin of $2,200 for each contract, the customer will be required to bring in at least $11,370 to meet the initial margin requirement to continue holding the full six-contract September Swiss Franc position (($2,970 X 6) –$6,450).
View the most current margin rates for currencies. Unless you currently hold the underlying commodity, be sure to look at the “spec” (or speculator) performance bond figure.
Expiration and Delivery of Currency Futures Contracts
Since currency futures contracts are delivered in the respective foreign country’s currency upon expiration, Terra Nova does not allow a currency futures contract to be held to the expiration date. To prevent a currency futures contract from expiring within a customer’s account, Terra Nova requires that customers either liquidate or roll their position to a contract with a later expiration date. Initial margin may be raised to 100% just prior to expiration.
Roll Dates are days when traders switch their focus from a contract that is due to expire to the next available contract month. The new contract then becomes the ‘lead’ or most actively traded contract. After this date the liquidity in the contract that is due to expire may drop off quite dramatically. For this reason, anyone wishing to initiate a new position should do so in the new contract month. People with existing positions in the expiring contract month should have already rolled their positions into the new lead contract or prepare to liquidate their positions.
Example (click to display)
You are long a September 2008 Swiss Franc contract.
By September 8, 2008 you should sell that contract and buy a December 2008 contract to “roll” your position to the next contract month (December 2008) or plan to sell your remaining September contract and exit the position in the next few days.
