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The FOREX market is essentially a cash or spot market in which over 90 percent of the trades are liquidated within 48 hoursSpot or Futures FOREX? IntroductionFutures Contracts The overwhelming majority of currency trading volume is in the spot market. FOREX inevitably means spot trading to most participants. But it is possible to trade FOREX as a futures vehicle. The volume of futures FOREX has also increased. The primary advantage of futures FOREX lies in the fact that the futures markets are centalized and as such are more heavily regulated. A secondary advantage is that many popular technical trading methods use volume of trading and open interest. While aggregate volume is known in FOREX, daily figures are unobtainable because of the decentralized nature of the business. Attempts are under way, including those by the author, to synthesize spot FOREX volume and open interest statistics from other data using statistical methods. A futures contract is an agreement between two parties: a short position, the party who agrees to deliver a commodity, and a long position, the party who agrees to receive a commodity. For example, a grain farmer would be the holder of the short position (agreeing to sell the grain) while the bakery would be the holder of the long (agreeing to buy the grain). In a futures contract, everything is precisely specified: the quantity and quality of the underlying commodity, the specific price per unit, and the date and method of delivery. The price of a futures contract is represented by the agreed-upon price of the underlying commodity or financial instrument that will be delivered in the future. For example, in the grain scenario, the price of the contract might be 5,000 bushels of grain at a price of four dollars per bushel and the delivery date may be the third Wednesday in September of the current year. Currency Futures The FOREX market is essentially a cash or spot market in which over 90 percent of the trades are liquidated within 48 hours. Currency trades held longer than this are normally routed through an authorized commodity futures exchange such as the International Monetary Market. IMM was founded in 1972 and is a division of the Chicago Mercantile Exchange (CME) that specializes in currency futures, interest-rate futures, and stock index futures, as well as options on futures. Clearinghouses (the futures exchange) and introducing brokers are subject to more stringent regulations from the SEC, CFTC, and NFA agencies than the FOREX spot market (see www.cme.com for more details). It should also be noted that FOREX traders are charged only a transaction cost per trade, which is simply the difference between the current bid and ask prices. Currency futures traders are charged a round-turn commission that varies from broker house to broker house. In addition, margin requirements for futures contracts are usually slightly higher than the requirements for the FOREX spot market. Contract Specifications A list of currencies traded through IMM at the Chicago Mercantile Exchange and their contract specifications. Size represents one contract requirement though some brokers offer minicontracts, usually one-tenth the size of the standard contract. Months identify the month of contract delivery. The tick symbols H, M, U, Z are abbreviations for March, June, September, and December respectively. Hours indicate the local trading hours in Chicago. The minimum fluctuation represents the smallest monetary unit that is registered as one pip in price movement at the exchange and is usually one ten-thousandth of the base currency. Currencies Trading Volume Table 3.2 summarizes the trading activity of selected futures contracts in currencies, precious metals, and some financial instruments. The volume and open interest readings are not trade signals. They are intended only to provide a brief synopsis of each markets liquidity and volatility based on the average of 30 trading days. TABLE 3.2 Futures Volume and Open Interest MarketSymExchVolOIS&P 500 e-miniESCME489.1377.9Nasdaq 100 e-miniNQCME237.6158.4EurodollarEDCME93.9772.5S&P 500SPCME59.3531.4EurocurrencyECCME49.5112.9Mini DowYMCBOT48.130.210-year T-noteTYCBOT43.1676.4GoldGCNYMEX33.7163.05-year T-noteFVCBOT29.6582.830-year T-bondUSCBOT25.9324.1Japanese YenJYCME18.6132.1Canadian DollarCDCME18.064.2Nasdaq 100NDCME13.365.4British PoundBPCME12.258.3SilverSINYMEX10.084.2Swiss FrancSFCME9.345.6Mexican PesoMECME8.830.5Dow JonesDJCBOT8.729.5Aussie DollarADCME7.855.72-year T-noteTUCME7.0108.6CopperHGNYMEX4.232.8 Legend: Sym: Ticker symbol, Exch: Futures exchange on which contract is traded, Vol: 30-day average daily volume, in thousands, OI: Open interest, in thousands. TABLE 3.3 U.S. Dollar Index CurrencyWeight %Eurocurrency57.6Japanese Yen13.6British Pound11.9Canadian Dollar9.1Swedish Krona4.2Swiss Franc3.6 U.S. Dollar Index The U.S. Dollar Index (ticker symbol = DX) is an openly traded futures contract offered by the New York Board of Trade. It is computed using a tradeweighted geometric average of six currencies. See Table 3.3. IMM currency futures traders monitor the U.S. Dollar Index to gauge the dollars overall performance in world currency markets. If the Dollar Index is trending lower, then it is very likely that a major currency that is a component of the Dollar Index is trading higher. When a currency trader takes a quick glance at the price of the U.S. Dollar Index, it gives the trader a good feel for what is going on in the FOREX market worldwide. For traders who are interested in more details on commodity futures, I recommend Todd Loftons paperbound book, Getting Started in Futures (John Wiley & Sons, 2001). Summary Almost all retail traders prefer spot FOREX . But futures FOREX has its advantages: (1) a centralized exchange, (2) stronger regulation, and (3) availability of daily volume and open interest statistics. |
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