Currency futures - why?
- Thread starter Vortex
- Start date
I have noticed this as well. But also, some weird stuff - in spot FX the AUDUSD is the 5th most liquid pair, but in futures it seems way up there for some reason. USDCHF on the other hand, our 3rd most liquid pair in spot, doesn't even feature much in volume in futures.
I have been told that is due to the SNB "pegging" the EURCHF, but that is rubbish, they are simply "guarding" a certain level. Also, no two pairs move exactly the same, we hardly have similar positions or levels in both.
Thank you kindly!
rmorse
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Quote from Vortex:
Hello!
This may seem like a strange question - but why do, or why would traders or institutions trade currency futures at all, as opposed to simple spot? What is the advantage? Surely spot is simpler and more liquid?
Much appreciated for any thoughts. I am an old hand at spot fx, but a total newbie at futures.
Thank you!
Traders are there to make money from adding depth and liquidity to the markets. But Futures exist because there is demand for the future pricing of a commodity or asset. In the case of FX futures, companies can lock in pricing for a currency swap in the future, to lock in a cost. If I'm IBM selling computer software services in Germany, billed in Euros, but every month I want to bring that money back into USD, I would buy that future. IBM does not have to hold that future until delivery. They can unwind near expiration, then use the spot market to convert.
The futures are not priced by the exchange. They are priced by the mkt-makers that operate within the context of the exchange. The mkt-makers price the futures from spot, based on simple carry (interest rate parity) calculations (since futures are just exchange-traded FX fwds). OTC spot and FX fwd mkts is where all the liquidity is and that's where the mkt-maker would hedge, if they want to. Given all of the above, futures are as manipulated/dysfunctional as the mainstream OTC FX mkt (which, obviously, doesn't include the FX bucket shops, where all bets are off, as you say).
Ignorant, sorry. No, they are priced by teh exchagne. The exchagne ticker plant evaluates both sides to construct the order book and publishes the resultsing books and trades.
Naturally the market makers submit their quotes, but I do not ask them for their prices, nor do I see them. It is the exchange publishing the consolidated data stream, independently.
Forex is different as it is the broker putting the order book together from the banks. The tricky part here is that the broker may or may not be trustworthy - but it is not independant. Again, check some of the MetaTrader "add ons" that autoamtically screw customers by manipulating tickets and order feeds.
You're barking up the wrong tree. That's not my point. My point is that, for all effects and purposes, the actual executable mkt is made by the very same people in both cases. As I said, where do you think the mkt-makers that submit their quotes to the exchange get them?
That's not a relevant context here. Sure, there are bucket shops that can and will screw you, but, relative to the size of the mkt, these flows are inconsequential. I don't think an interbank venue like EBS allows any MT add-ons for "customer screwing".
EDIT: to be sure, if you trade some nice and proper EM crosses, like, say, PLNZAR or smth like that, a dealer can screw w/stops in conditions of low liquidity (I remember cases like that from a couple of years back). However, for stuff like that, if there were futures, they will most definitely move in line w/the spot. That's just how those mkts are.
I think this is somewhat correct. However, wouldn't corporations like IBM for example, simply swap currencies with one of the money center banks fx arms (market maker) in order to tailor the value and settlement terms. Then the banks would hedge their books out in the futures markets as the intermediary (the swap warehouser in this case)?
I could be way off here, but my understanding is that most fx is otc in order to match required terms.
JO
rmorse
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I was just using IBM as an example. A firm as big as IBM that wants to hedge out currency risk, can do it in many different ways. I was making a point to the original question. You would only use Spot FX, for transaction at that time. You need a forward contact like futures to price out activities in the future. These futures contracts are a very important part of defining future costs of doing business. Big and small firms use them.
We often look at the markets from only the traders point of view. Without hedgers, few futures markets would attract any interest. You pointed out that many FX forward contracts might be OTC. That might be true. But, the party selling the contract to a hedger, will want to layoff their risk somewhere. Without pricing from a public exchange, spreads would widen and so would depth and liquidity in the OTC market.
Bob