Introduction Currency Futures

Introduction Currency Futures

Currency Futures were launched in 1972 on the International Money Market (IMM) at Chicago. They were the first finan­cial Futures that developed after coming into existence of the floating exchange rate regime. It is to be noted that commodity Futures (corn, oats, wheat, soybeans, butter, egg and silver) had been in use for a long time. The Chicago Board of Trade (CBOT), established in 1948, specialized in future contract of cereals. The Chicago Mercantile Exchange (CME) started with the future contracts of butter and egg. Later on, other Currency Future markets developed at Philadelphia (Philadelphia Board of Trade), London (London International Financial Futures Exchange (LIFFE)), Tokyo (Tokyo International Financial Futures Exchange), Sydney (Sydney Futures Exchange), and Singapore International Monetary Exchange (SIMEX).

The volume traded on the Futures market is much smaller than that traded on Forward market. However, it holds a very significant position in USA and UK (especially London) and it is developing at a fast rate.

While a futures contract is similar to a forward contract, there are several differences between them. While a forward contract is tailor-made for the client by his international bank, a futures contract has standardized features - the contract size and maturity dates are standardized. Futures can be traded only on an organized exchange and they are traded competitively. Margins are not required in respect of a forward contract but margins are required of all participants in the futures market-an initial margin must be deposited into a collateral account to establish a futures position.

            There are three types of participants on the currency futures market: floor traders, floor brokers and broker-traders. Floor traders operate for their own accounts. They are the specula­tors whose time horizon is short-term. Some of them are repre­sentatives of banks or financial institutions which use futures to supplement their operations on Forward market. They enable the market to become more liquid. In contrast, floor brokers, representing the brokers' firms, operate on behalf of their clients and, therefore, are remunerated through commis­sion. The third category, called broker-traders, operate either on the behalf of clients or for their own accounts.

Enterprises pass through their brokers and generally operate on the Future markets to cover their currency exposures. They are referred to as hedgers. They may be either in the business of export-import or they may have entered into the contracts for' borrowing or lending.