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11/17/16
Meaning
It is a derivative instrument
Definition is the same as currency forward
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
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Currency futures -
Features
Standardised terms
Clearing house
Margin system
Closing of futures
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Currency 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.
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Currency futures -
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
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Currency futures -
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
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Currency futures -
Closing of futures
Forward contract is settled on delivery
date by delivery of asset and payment
of money
Futures can be closed:
Currency futures -
Currency futures -
Imperfections in hedging
with currency futures
Maturity mismatch
Size mismatch
Currency futures -
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Currency futures -