By Dr. William Pugh
Example of a currency futures table using the Swiss Franc.
SWISS FRANC (CME) 125,000 francs; $ per franc
Open High Low Settle Change
March .7122 .7299 .7101
.7200 + .0070
June .7163
.7342 .7143 .7241 + .0070
Note the important information at the top of each currency's table. First is the contract size for futures contract. The second piece of information is the unit of U.S. currency that the future is being quoted in. Usually it is dollars per unit of forex (here the franc). For the Yen it is cents per Yen: $ (00)
The best way to understand the table is to analyze some price quotes. I will illustrate using both speculators and hedgers.
Let's look at a Speculator
Suppose you are a speculator and are bullish on the Swiss Franc. You could buy a futures contract. How much you paid (this is yesterday's action after all) depends on when you bought and which contract you bought. Suppose you simply bought at the open ( typical order: buy Swissies at the open!).
If you bought the March contract you agreed to pay $0.7122 per Swiss franc (for 125,000 francs). If you bought the June contract you agreed to pay $0.7163 per Swiss franc (for 125,000 francs). Why more? It has nothing to do with a time premium. Interest rate parity establishes the difference.
Basically, someone who bullish on the Swiss Franc can buy the futures … or buy at spot and hold the currency in a crummy 1.3 percent interest-bearing Swiss account. Where do you get the dollars to buy Swissies at spot? Either borrow them or take them out of your 5.3 percent dollar account. So not having to pay (or give up) 5.3% in the U.S. makes specualting with futures more attractive - and the longer you don't have to tie up your money (you don't with futures) the higher premium you should be willing to pay.
Back to the March contact: it settled at 72 cents. Congratulations, you made a profit the first day (.7200- .7122 = $0.0078. Multiply that by 125,000 and you have a profit of ? per contract . This gain will be posted to your account that night through the clearinghouse. You can withdraw and spend it immediately. This daily realization of gains (or losses) is called "marking-to-market".
At some point, you will decide to close out your position (hopefully at a profit). You would simply sell an equivalent June CHF contract (at say .7500) and you have gained $0.0378 per Swiss Franc. A speculator would be very unlikely to hold the contract in order to take delivery of the currency.
Let's look at a Hedger
Suppose you are hedger, who is "long" the Swiss franc (someone owes you Swissies). You can "lock in " a forward or future rate by selling the CHF on the forward market, futures markets, orborrow some francs (the spot or money-market hedge). And sell them for dollars. In theory, all three methods will work out about the same. Forward contracts have higher transactions fees, but are usually more convenient for someone intending to deliver or take delivery of a currency.
Suppose you sold at the open (sell Swissies at the open!).
If you sold the March contract you agreed to accept $0.7122 per Swiss franc (for 125,000 francs) when you (in theory) deliver the CHF that will get in the near future from your customer. So the contract settled at 72 cents. Ouch! Way to go - you lost money the first day (.7122- .7200 = -$0.0078). Multiply that by 125,000 and you have a loss of ? per contract. This loss will be posted to your account that night through the clearinghouse. It will come from your deposit (margin). Keep this up too long and you will face a margin call.
At some point, you will probably decide to close out your position. The alternative is to hold the contract to maturity and fulfill it: that is, sell the Swissies you eventually get, from your customer, through the futures market - but contracts are rarely carried out. Instead you buy back your contract (offsetting trade again) at, as in the case above, $0.7500. You have lost 3.78 cents per Swiss franc! Fear not, you sell your newly arrived Swiss francs at roughly the same price and enjoy a windfall gain on the spot market. The gain on the spot market and the loss on the futures hedge usually cancel out, leaving you "locked in" from the beginning at $0.7122.