FX SPOT/Currency Futures Spread

S

scalpmaster

Hi,

does the spread between Spot Fx and it's corresponding futures
narrow as expiration draws close? For example, if I long EURO spot and short EURO futures at the same time, will their values always come closer or farther apart as expiration date draws nearer? How does interest rate affect this spread?

How do you rollover a currency or index futures without realizing your loss? Simply closing current contract and re-buying the farther contract means cutting loss such that you may not be allowed to keep the same number of contracts.

Does buying a spread in the farther contract automatically rollover your expirating contract without locking in your losses?
 
No. The futures have a premium built in that includes the interest the contract would earn (or pay) until expiration. As time draws close to expiration you will see the futures and the spot prices converge.
 
But wouldn't the interest you received from the long position
in SPOT FX partially cancel out the interest from premium in short position in currency futures?

Is there a possibility that SPOT FX and currency futures diverge
at expiration and why?
 
Quote from scalpmaster:

But wouldn't the interest you received from the long position
in SPOT FX partially cancel out the interest from premium in short position in currency futures?

Is there a possibility that SPOT FX and currency futures diverge
at expiration and why?
More...

You're looking for an easy free lunch and there isn't any. The premium/discount on the futures equates to the interest you will either pay or get paid on the cash so no dice. The futures are arbed to the cash so a divergence coming into expiration is a remote opportunity, particularly for a retail trader with slow execution speed compared to those doing the arbing.
 
If divergence is a remote possibility, then why can't we
make a profit from the spread? we want convergence of
the spread between spot and futures.

Speed is not the issue.We place long/short orders simultaneously at the middle of a 3 months contract and close both sides 2 weeks before expiration.
 
Quote from scalpmaster:

Hi,

does the spread between Spot Fx and it's corresponding futures
narrow as expiration draws close? For example, if I long EURO spot and short EURO futures at the same time, will their values always come closer or farther apart as expiration date draws nearer? How does interest rate affect this spread?

How do you rollover a currency or index futures without realizing your loss? Simply closing current contract and re-buying the farther contract means cutting loss such that you may not be allowed to keep the same number of contracts.

Does buying a spread in the farther contract automatically rollover your expirating contract without locking in your losses?
More...

See my post concerning this question in the other thread :

http://www.elitetrader.com/vb/showthread.php?s=&threadid=75992&perpage=6&pagenumber=4



« …. Ok, I know some of you are thinking "but futures prices are slightly different that spot prices" ... yes, true, but this is only because the interest credited/debited on spot positions are not incorporated in the price whilst the interest credited/debited in FX futures are priced into the contango/backwardation. ... see for yourself, just look at how eur/usd futures are more expensive (contango) as you go further out in the expiries. This contango will almost precisely equal the interest paid, over the same period, on a long eur/usd spot position (vice versa for short positions)….”
 
Quote from scalpmaster:

If divergence is a remote possibility, then why can't we
make a profit from the spread? we want convergence of
the spread between spot and futures.

Speed is not the issue.We place long/short orders simultaneously at the middle of a 3 months contract and close both sides 2 weeks before expiration.
More...

There are indeed arbitrage opportunities between spot & furures from time to time. However, the "arb opportunity" is often a question of sometimes a single measly pip, and the "opportunity" oly may last a second or 2, and these opportunities are far and few between, and are only possible if you are dealing on a multi dealer ECN with miniscule spreads.

... otherwise said, if you are trying to arb there, you will be working for alot less than Somolian minimum wage even if you have a fairly large account.

FX is the purest market and most liquid. Trying to arb FX (other than maybe some exotic FX derivatives that are difficult to price) is a total waste of time. If you are in to arbitrage, why not look at something like the crack spread on energies or something that is possible to accomplish?
 
Quote from scalpmaster:

If divergence is a remote possibility, then why can't we
make a profit from the spread? we want convergence of
the spread between spot and futures.

Speed is not the issue.We place long/short orders simultaneously at the middle of a 3 months contract and close both sides 2 weeks before expiration.
More...

Give it a try and let us know how you do.
 
Quote from scalpmaster:

If divergence is a remote possibility, then why can't we
make a profit from the spread? we want convergence of
the spread between spot and futures.

Speed is not the issue.We place long/short orders simultaneously at the middle of a 3 months contract and close both sides 2 weeks before expiration.
More...

You're right, speed is not the issue -- the issue is that there is no opportunity here. You need to re-read the post before you wrote this one. The interest you pay out/receive on spot cancels out the premium/discount from futures.
 
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