Foreign exchange futures are a standardized contract transaction in which both parties agree to exchange one currency for another at a certain time in the future, based on the currently agreed ratio. Refers to a futures contract with exchange rate as the subject matter, which is used to avoid exchange rate risk. It is the earliest variety in financial futures.
Features of currency futures trading
Compared with forward foreign exchange transactions, currency futures trading has the following characteristics:
(1) Different market participants. Participants in forward foreign exchange transactions are mainly banks and other financial institutions and large enterprises such as multinational companies. Currency futures transactions provide various companies with risk-avoidance management tools in a flexible manner.
(2) Different liquidity. Due to the limitation of the number of participants in forward foreign exchange transactions, the liquidity of contracts is generally low, while currency futures transactions are relatively liquid due to the large number of participants and a large number of speculators and arbitrageurs.
(3) Different trading methods. The market for forward foreign exchange transactions is intangible and is constructed by financial institutions and their customers using various communication means. Currency futures transactions are conducted in specialized exchanges, which are tangible market transactions.
(4) The degree of standardization of the contract is different. The contract content of forward foreign exchange transactions is negotiated by financial institutions and customers according to their requirements. Contracts for currency futures transactions are standardized contracts. Items such as transaction types, units, range of changes, price limits, and delivery time are all made in advance. definite.
(5) Different credit risks. The transaction between the two parties in the forward foreign exchange transaction is mainly based on the credit of the other party. Relatively speaking, the risk is relatively high. Currency futures transactions are guaranteed by the exchange or settlement agency, and the risk is borne by the exchange. (6) Different performance methods. The performance of forward foreign exchange transactions is mainly the full cash settlement of foreign exchange, while currency futures transactions mostly adopt the method of settlement of transactions in j, and a small part of it adopts the method of cash delivery.
General specifications of foreign exchange futures contracts
Foreign exchange futures contracts are standardized futures contracts with foreign exchange as the delivery content. It mainly includes the following aspects:
First, the trading unit of foreign exchange futures contracts, each foreign exchange futures contract has a standard trading unit specified by the exchange. For example, the trading unit of the Deutsche Mark futures contract is 125,000 marks per share;
Second, the delivery month. The delivery month of all foreign exchange futures contracts in the international currency market is the same, which is March, June, September and December each year. The third Wednesday of the delivery month is the delivery day of the month;
Third, the general code. In the actual operation, exchanges, futures commission merchants, and futures quotation tables all use codes to represent foreign exchange futures. The common codes for the foreign exchange futures of the eight major currencies are British pound BP, Canadian dollar CD, Dutch guilder DG, German mark DM, Japanese yen JY, Mexican peso MP, Swiss franc SF, and French franc FR;
Fourth, the minimum price fluctuation range. The international currency market has stipulated the minimum fluctuation range of each foreign exchange futures quotation. In the trading floor, the broker's bid or asking price can only be a multiple of the minimum fluctuation range. The minimum volatility of the eight major foreign exchange futures contracts are as follows: British pound 0.0005 US dollars, Canadian dollars 0.0001 US dollars, Dutch guilders 0.0001 US dollars, Deutsche Mark 0.0001 US dollars, Japanese yen 0.000001 US dollars, Mexican pesos 0.0001 US dollars. US$ 00001, US$ 0.0001 of Swiss franc, US$ 0.0005 of French franc;
Fifth, the daily price limit is the maximum fluctuation range of a futures contract that is higher or lower than the settlement price of the previous trading day in a day. The price limits of the eight foreign exchange futures contracts are as follows: Mark 1,250 USD, Japanese Yen 1,250 USD, Swiss franc 1,875 USD, Mexican peso 1,500 USD, Dutch guild USD 1,250, and French franc 1,250 USD. Once the quotation exceeds the limit, the transaction will be invalid. .
The method of using foreign exchange futures for hedging
The large fluctuations in exchange rates and interest rates make holders, trading companies, banks, and enterprises all need to use hedging to minimize risks. The so-called foreign exchange hedging refers to buying or selling in the spot foreign exchange market while simultaneously selling or buying a futures contract of roughly the same amount in the futures market. At the expiration of the contract, the profit and loss of spot foreign exchange purchases caused by exchange rate changes can be compensated by the profit and loss of foreign exchange futures transactions.
Foreign exchange futures hedging can be divided into buying hedging and selling hedging. Buyer hedging refers to buying futures contracts in the futures market of people who are in a short position in the spot market. The purpose is to prevent the risks caused by rising exchange rates. It applies to importers and short-term debtors in international trade. Selling hedging refers to a person who is in a long position in the spot market and sells futures contracts in the futures market in order to prevent the risk of falling exchange rates. It is suitable for exporters, money market deposits of receivables, etc.
Foreign exchange futures-pound sterling
Britain has a long history of developing capitalism. It was once a world industrial power. Throughout the 19th century and the beginning of this century, the pound sterling has been the most important international payment method and central reserve currency. However, since the First World War, the pound has gone from prosperity to decline. After the Bretton Woods Conference in 1944, the dollar replaced the pound's world financial hegemony. Since the economic crisis that swept the Western world in the 1930s, the British economy has been in a state of depression. The destruction of World War II has weakened the British economy even more, making economic development basically stagnant. The gross national product in 1983 was only 1948. Doubled, the fiscal deficit has been in deficit for 28 consecutive years.
The decline in the competitiveness of British companies has made it difficult to compete with other capitalist countries. Although Mrs. Thatcher has made some bold attempts to change during her tenure, the speed of economic growth has not been greatly improved. Although at one time the growth rate of the gross national product reached 4.8%. Domestic demand has turned strong and the inflation rate has fallen, but the unfavorable situation of the British economy has not been fundamentally reversed. In short, the inflation rate and unemployment rate have remained high for a long time, the foreign trade balance has been in deficit for years, and the poor economic situation is the root cause of the continued weakness of the pound.
Between 1947 and 1972, there were 14 crises in the pound. The year 1992 was the most unfortunate year in the history of the British pound. On September 16, the exchange rate of the British pound to the mark fell below the floating lower limit stipulated by the European currency exchange rate mechanism. The exchange rate of the pound to the mark in the New York foreign exchange market fell to the lowest point in history after World War II. In order to maintain the prospect of foreign trade and economic growth, the Central Bank of the United Kingdom had to announce a reduction in interest rates twice a day. Britain was forced to announce its withdrawal from joining the European currency exchange rate mechanism, which was less than two years old.
Sterling futures trading is mainly conducted on the Chicago Mercantile Exchange (CME).
Foreign exchange futures-Japanese yen
Japan has adopted the gold standard since 1886 and issued Japanese bank notes that can be exchanged for gold coins. During World War I, Japan abolished the gold standard. The yen became a convertible currency in 1964. After the collapse of the Bretton Woods system, the yen began to implement a floating exchange rate in 1973. Since then, the yen has strengthened day by day, in sharp contrast with the weakness of the U.S. dollar, and has become a strong international currency.
Japan is a country with poor natural resources and a small territory. The strong driving force for economic development must come from foreign trade. Japan’s imports are very high, but its exports are even higher. It has a huge foreign trade surplus every year and is the world’s third largest importer and exporter. Japan's economy has maintained a high growth rate in recent years. The average annual growth rate of GDP from 1951 to 1973 was 10.1%, which is second to none in many Western countries. In 1968, Japan's GDP reached 142.8 billion U.S. dollars, second only to the United States and second in the world. In 1985, Japan replaced the United States as the world's largest creditor nation. Although the appreciation of the yen in 1985 had an adverse effect on foreign trade, after industrial adjustments, industrial production quickly recovered and the unemployment rate dropped. From the end of 1991 to the beginning of 1992, Japan's financial scandals repeated one after another, the economy began to slump, and the growth rate slowed down. At present, the Japanese economy has not yet fully recovered, and the Bank of Japan has lowered interest rates again in order to stimulate economic development.
Yen futures are mainly traded on the Chicago Mercantile Exchange (CME).
Foreign exchange futures-U.S. dollar
In 1933, the United States abolished the gold standard, and the U.S. dollar began to be used as a fixed price and trade settlement tool for determining other currencies, competing for the position of the world's central currency. The Bretton Woods Conference in 1944 created an international monetary system designed to solve the Great Depression and other economic and financial problems caused by the Second World War. According to the Bretton Woods agreement, central banks of various countries can exchange gold with the United States at the official price of US$35 per ounce. The currencies of various countries and the US dollar have set a fixed ratio. The US dollar has become the standard for currency valuation and the reserve currency equivalent to gold.
In the 1960s, under the influence of the US's current balance of payments deficit and the reduction of gold reserves, the status of the US dollar continued to weaken, and the fixed exchange rate system began to falter. Beginning in 1971, the U.S. trade balance has turned from a surplus to a deficit for eight consecutive years, which intensified the outflow of the U.S. dollar and gold. The currencies of Western countries have adopted floating exchange rates to decouple from the U.S. dollar.
Eurodollars are all U.S. dollar deposits outside the United States. The emergence and development of the Eurodollar market was the result of the increasingly tense world political situation in the 1950s and 1960s. In order to prevent the United States from freezing and confiscating its deposits in New York, the former Soviet Union and other socialist countries transferred US dollar deposits to London and other financial centers in Europe. Now, the Eurodollar market has become an international capital market not under the jurisdiction of the Federal Reserve System of the United States. More and more banks and companies have begun to use the Eurodollar market to provide funds for repayment of foreign debts.
The fluctuation of a country's currency value is affected by many economic factors. Since the 1980s, the U.S. economy has grown at a low rate, the fiscal deficit has not been resolved for a long time, and the foreign trade balance has been in deficit for years. In 1985, the United States changed from the world's largest creditor country to a debtor country, with annual debt service interest reaching US$264.9 billion, exceeding social security expenditure (US$245 billion) and becoming the third largest expenditure item after defense expenditure (US$299.8 billion). In 1991, the US economic growth rate was negative for the first time since 1982. Except in the early 1980s, the U.S. dollar was basically in a downward trend, except for the short-term recovery of the U.S. dollar due to the high interest rate policy adopted by the U.S. The poor state of the US economy is the real reason for the dollar's decline.
The special status of the U.S. dollar determines the decline in the exchange rate of the U.S. dollar, which will inevitably lead to a decrease in the value of a large number of U.S. dollar reserves held by developed countries, aggravate the balance of payments deficit of developing countries, reduce oil revenues of oil exporting countries, and make the international monetary and financial markets. Often in turmoil. Frequent dollar crises and increased exchange rate fluctuations. Central banks in various countries often use the dual financial risks of rising and falling interest rates and exchange rates. This has also contributed to the development and improvement of the international financial futures market. Over the years, foreign exchange futures contracts have been recognized and used by more and more people as an ideal hedging and hedging tool.
Foreign Exchange Futures-Mark
The former West German Mark has been freely convertible since 1959. West Germany joined the European Economic and Monetary Union in 1970 and announced in 1972 that the upper and lower limits of the currency exchange rates of the member states of the European Community would not exceed 2.25%. West Germany joined the European Monetary System (EMS) and the European Monetary Unit (ECU) in 1978. After the reunification of East and West Germany in 1990, the former West German Mark became the unified currency unit of Germany, that is, the current Deutsche Mark.
The Second World War devastated the German economy severely. After the war, the German economy recovered and developed rapidly. From 1965 to 1980, it maintained a relatively high level of economic growth of 3.5% per year. It was a leader among Western countries. Mark's credit and international status have been continuously strengthened as a result. In the 1960s, it became one of the most sought-after hard currencies in the world.
Germany has a high degree of industrialization and belongs to an export-oriented economy dominated by heavy industry. As a very important link in its economy, foreign trade has always maintained a good momentum of development, and foreign trade revenue and expenditure have been in surplus year after year. Although the reunification of the two Germanys in 1990 brought some effects on economic development, the economic growth rate of Germany in 1991 still reached 2.4%. After the reunification, the eastern enterprises were faced with system transformation and the unemployment rate remained high.
Nevertheless, on the whole, the low inflation rate and the real exchange rate that maintains international competition still strongly support the Mark. In 1992, the exchange rate of the mark against the U.S. dollar and the British pound reached a record level, which caused a huge shock to the European foreign exchange market. Recently, in order to stimulate economic development, the German Central Bank has also adopted loose monetary policy to lower interest rates.
Deutsche Mark futures trading is mainly conducted on the Chicago Mercantile Exchange (CME).