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MEANING
Currency future contracts are contracts specifying a
Meaning
It is a derivative instrument Forwards are traded over the counter Futures are traded in organised exchanges (separate financial futures exchanges) Futures are transacted through brokers Traded only in a limited number of currencies
Features
Standardised terms Clearing house Margin system Closing of futures
Standardised terms
Contract size is standardised Example: 62,500 Sterling; 125,000 Euro; 100,000 Can Dollar Chicago Mercantile exchange Date of delivery is predetermined Third Wednesday of Jan, March, April, June, July, Sept., Oct., Dec.
Clearing house
Each exchange has a clearing house Clearing house arranges for delivery of asset and payment of money Clearing house becomes the counter party to the original parties
Original parties: buyer and seller Clearing house becomes counter party to buyer (to deliver the asset) Clearing house becomes the counter party to the seller (to make payment)
Margin system
There are 3 types of margins Initial margin, maintenance margin and variation margin Initial margin to be paid upfront Balance is marked to the market every day Maintenance margin to be maintained throughout the duration of the contract Variation margin (shortfall in margin) to be remitted promptly
Closing of futures
Forward contract is settled on delivery date by delivery of asset and payment of money Futures can be closed:
Exchange of asset and cash on delivery date Cash settlement through a reverse trade on any day
Mismatch in maturity date of futures contract and date of cash transaction Mismatch between size of futures contract and size of cash transaction
Size mismatch
Maturity and size mismatch Hedging with currency futures may not result in perfect hedge