Swaps/Rollover Interest in Futures???

M

mmccormac

Can someone please explain either of these two things...


1. If I trade in the spot FX market and I go long on the GBP/JPY it pays me around $22 a day on the Swap or interest difference for 100k USD. I am looking at trading FX via the futures markets and as a large income stream comes from my carry trades I would like to understand how this works on Globex. I know that it is "priced in" but is there a way to calculate what the daily interest would be... Exactly? I just want to be sure that the swap earned in the futures markets is close to what I'm making now on my carry trades in the Spot markets.


2. Can anyone explain Rollover (contract rollover not daily swap) in the futures markets? Is there a way to rollover a contract without taking profit/taking a loss? I manage most positions I have back to profitability and like to hold them long term in some situations so this is important.


Thanks for anyone that can provide information... All I've been able to find out is general info "The swap is priced in" or "yes you can rollover positions" and would like to know how you futures traders (That trade currency) handle or figure the Swap rates and how you rollover your contracts without taking profit or a loss. Thanks!
 
Do most traders not pay attention to premium??? Surely there are some successful currency futures traders in this forum. Guys if you don't think it can add up to much just look. If you trade like a hedge fund and protect your position when it goes the wrong direction you can make profit on the interest paid plus on the moves against you... You just use the positive interest position (carry trade) as your long term hold and the others as your "day trades" to keep your margin balance going up every day when price goes against your carry trade.

Example:

This is the spotFX market (And is why I want to know about how the futures compares) but here we go:

If you just manage 10million in the way described above the interest would work out to around $66,000 per month.

Spot market premium per 100k contract is around $22 a day.

22 * 100 (10m contract size) = $2,200. * 30 days (1month)= $66,000.

Now any successful traders out there know about this... Is there nobody trading this way in the futures markets that pay attention to this forum?

Please any help would be appreciated. I can't find a solid answer on how this works in the futures other than "It's priced in". Anyone know how the premium compares to the Spot market?
 
Don't know about currency futures, but it is possible to make the premium, or more, in index futures.
To make money on the premium (s&p 500 emini) : if you sell when the premium is about 12 points/contract ($600) and at expiry the price of the basket (s&p 500) has increased less than 12 points, then you'll make the difference. If the basket has decreased at expiry, you'll get about the number of points it decreased plus the 12 points premium. If at expiry the price (of the basket) has increased by 13 points, you'll lose 1 point.

Also, every day you'll have a profit/loss in a futures account. It is marked to market each day.
 
Ok...

So anyone know about the daily Swap on the Currency contracts in the Globex? Is it priced in daily??? If not it would provide a good Arb opportunity. I'm interested to see if anyone trades this way here. From the looks of things I'm guessing not many do since there have been tons of views and no real responses in regards to the currency futures (Globex).
 
Oh, one more thing... If you trade the spot market either ECN or with a market maker (They are the worst) then you may be getting screwed. An honest broker will keep the premium close on both sides of the coin. Also 9 out of 10 "no commission" low spread "brokers" are stealing the premium from you. Also many of them "make a mistake" and don't credit the premium so check your account every day. Just FYI. I don't hear much talk about the Swap premium but it's just another way for MM's to take your money so be careful.
 
To make a long story short, the forward interest rate differential (IRD) is always priced in to the futures continuously over the life of the contract. Many firms run automated arb systems which monitor for any arb opportunities between spot/futures given interest rates, thus aiding to keep the market optimally priced at all times.

There is a way to calculate the interest on the futures price, I would google around for it or read some books on the subject. CME lets you input the forward points on their real-time data for comparison:

http://equivalentsrdc.cme.com:443/index.html

In most cases, it will benefit you to opt for futures vs spot if you're looking to profit from the IRD. In terms of spot trading, your broker will take a cut of any interest earned and charge a healthy spread above the benchmark rates for interest paid. InteractiveBrokers, which has some of the best rates around, will keep between 25-50 BP on your interest earned (long currency), plus charge you an additional 25-150 BP on your interest expense (short currency).

Whereas with futures, you're not paying any interest rate spread to your broker. It's a fair game for any size player, you're earning/paying the same IRD as the major banks. Hence a major reason for the popularity of fx futures vs spot.

mmccormac: Load up a chart of a spot currency and overlay that with a chart of the current fx futures contract. The futures price will be above/below the spot given a +/- IRD between the two currencies. The differential will decrease daily as the futures reaches expiration. The change in that differential is equivalent to the swap interest earned/paid in the spot currencies (with no broker spread being paid).
 
Quote from Trader KGB:

To make a long story short, the forward interest rate differential (IRD) is always priced in to the futures continuously over the life of the contract. Many firms run automated arb systems which monitor for any arb opportunities between spot/futures given interest rates, thus aiding to keep the market optimally priced at all times.

There is a way to calculate the interest on the futures price, I would google around for it or read some books on the subject. CME lets you input the forward points on their real-time data for comparison:

http://equivalentsrdc.cme.com:443/index.html

In most cases, it will benefit you to opt for futures vs spot if you're looking to profit from the IRD. In terms of spot trading, your broker will take a cut of any interest earned and charge a healthy spread above the benchmark rates for interest paid. InteractiveBrokers, which has some of the best rates around, will keep between 25-50 BP on your interest earned (long currency), plus charge you an additional 25-150 BP on your interest expense (short currency).

Whereas with futures, you're not paying any interest rate spread to your broker. It's a fair game for any size player, you're earning/paying the same IRD as the major banks. Hence a major reason for the popularity of fx futures vs spot.

mmccormac: Load up a chart of a spot currency and overlay that with a chart of the current fx futures contract. The futures price will be above/below the spot given a +/- IRD between the two currencies. The differential will decrease daily as the futures reaches expiration. The change in that differential is equivalent to the swap interest earned/paid in the spot currencies (with no broker spread being paid).
More...

Thanks for the help! I can figure it from there.

One other question in regards to rollover (contract rollover). If I have carry trades and don't want to lock in my Profit/Loss (If i want to hold the position longer than 6 months) then the contract rollover would allow this? Can anyone explain how exactly that process would work? If I can in fact rollover with out locking in the Profit/Loss and the Swap Premiums are better than the Spot premiums then I see no reason to keep my money in the Spot market. I will need to check the premium rates on the futures contracts to compare to the Spot market but other than that if rollover works the way some have said then why trade Spot (Other than the liquidity problem for very large positions)? Of course I will have to see how execution compares as well. Thanks for the help!
 
"If I have carry trades and don't want to lock in my Profit/Loss (If i want to hold the position longer than 6 months) then the contract rollover would allow this?"

I understand where you're coming from and this is where futures differ from spot and equities. Your profit/loss is marked to market everyday. If your position is up $1k for the day, your account is credited that $1k (even though you didn't sell), vice versa if you are down on the day. Think of it as if you are closing out your position every day, that's how futures are treated. Therefore, "closing a position" in terms of actually selling it is no different than the daily process of holding a futures contract.

"if rollover works the way some have said then why trade Spot (Other than the liquidity problem for very large positions)?"

There really is no liquidity problem what with the Euro FX futures alone trading in excess of 500k contracts a day (~$80B notional value).

"Of course I will have to see how execution compares as well."

Spreads will be tighter and more transparent. Execution will be vastly superior as unlike the spot market, the futures markets are highly regulated. You won't be dealing with the false spreads, ECNs, interest rate broker spreads (or no interest/spot premium!), stop order shakeouts, and all the other myriad of games the FX bucketshops have been accused of doing.
 
"I understand where you're coming from and this is where futures differ from spot and equities. Your profit/loss is marked to market everyday. If your position is up $1k for the day, your account is credited that $1k (even though you didn't sell), vice versa if you are down on the day. Think of it as if you are closing out your position every day, that's how futures are treated. Therefore, "closing a position" in terms of actually selling it is no different than the daily process of holding a futures contract."

Well, as long as I can hold the contract then it should kind of be the same... When I have Spot positions running against me it is a floating loss (Which eats my margin and equity anyway) and is offset by hedge trades and other positions held. So the position is "marked to market" everyday and the balance goes up or down but that isn't a concern as it's really the same in the Spot market (The loss is there just the position is not closed out). But so I understand It's marked to market and the balance goes up or down but the position is still floating (don't have to re-enter and pay a new commission and spread) and I will be able to collect the daily swap (that's priced in) and rollover my position before contract expiration if the position is held that long? Thanks for your help. Just want to be sure I understand it correctly.

About the Swap do you or have you held any carry trades and tracked this to compare with Spot? I've looked at the stuff you mentioned but I'm still trying to get it straight in my mind. Was wondering how much difference there is in comparison to what I'm doing now. I'm sure it's going to hurt when I find that I've been getting cheated on swap (even though I get some of the highest I've seen in the spot market) all these years. Again, thanks for all your help!
 
"But so I understand It's marked to market and the balance goes up or down but the position is still floating (don't have to re-enter and pay a new commission and spread) and I will be able to collect the daily swap (that's priced in) and rollover my position before contract expiration if the position is held that long?"

Yes and no. Yes you can rollover. No you don't "collect", it's priced in. ;)

"do you or have you held any carry trades and tracked this to compare with Spot?"

I track the spot in terms of TA, but in terms of comparing the swap premium for carry trades, I have not. It really depends on the rates your broker is charging/paying.

"I'm sure it's going to hurt when I find that I've been getting cheated on swap (even though I get some of the highest I've seen in the spot market) all these years."

Who is your broker? Do they post their interest earned/expense rates on their website? To their credit, IB presents everything quite clearly. Very few other brokers follow such an example unfortunately. Even if your broker offered IB's rates, that's ~150BP (over the true IRD) that you're paying to them for your spot trades.
 
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