International Finance: Putting Theory Into Practice

232 CHAPTER 6. THE MARKET FOR CURRENCY FUTURES

Figure 6.1:WSJ information on currency futures

P. Sercu and R. Uppal The International Finance Workbook page 7.5

1.1. Organized markets

1. What are Currency Futures

• Forward contracts:


• decentralized pricing. OTC, market makers.


• No information on when a transaction took place, and at what price.


• No secondary market.


• Futures contracts:


• organized exchanges. Price results from centralized meeting of demand & supply.


• "open outcry" system (US, LIFFE, MATIF)


• computerized Public Limit Order Book (many continental European exchanges).


• price and transaction information.


• secondary market.
  FUTURES PRICES [...] C U R R E N C Y
  Lifetime Open
  Open High Low Settle Change High Low Interest
  JAPAN YEN (CME) — 12.5 million yen ; $ per yen (.00)
  Sept .9458 .9466 .9386 .9389 – .0046.9540 .7945 73,221
  Dec .9425 .9470 .9393 .9396 – .0049.9529 .7970 3,455
  Mr94 Est vol 28,844; .9417vol Wed – 36,595; .0051open .9490int 77,028, .8700+ 1.820 318

6.2.6 How Futures Prices Are Reported

Figure 6.1 contains an excerpt from The Wall Street Journal, showing information
on yen futures trading at the International Money Market (IMM) of the Chicago
Mercantile Exchange (CME). The heading,JAPAN YEN, shows the size of the contract
(12.5m yen) and somewhat obscurely tries to say that the prices are expressed in
usdcents. The June 1993 contract had expired more than a month before, so the
three contracts being traded on July 29, 1993, are the September and December
1993 contracts, and the March 1994 contracts. In each row, the first four prices
relate to trading on Thursday, July 29—the price at the start of trading (open),
the highest and lowest transaction price during the day, and the settlement price
(“Settle”), which is representative of the transaction prices around the close.

The settlement price is the basis of marking to market. The column, “Change,”
contains the change of today’s settlement price relative to yesterday. For instance, on
Thursday, July 29, the settlement price of the September contract dropped by 0.0046
cents, implying that a holder of a purchase contract has lost 12.5m×(0.0046/100)
=usd575 per contract and that a seller has madeusd575 per contract. The next
two columns show the highest and lowest prices that have been observed during the
life of the contract. For the March contract, the “High-Low” range is more narrow
than for the older contracts, since the March contract has been trading for little
more than a month. “Open Interest” refers to the number of outstanding contracts.
Notice how most of the trading is in the nearest-maturity contract. Open interest
in the March ’94 contract is minimal, and there has not even been any trading that
day. (There are no open, high, and low data.) The settlement price for the March
’94 contract has been set by theCMEon the basis of bid-ask quotes.

The line below the price information gives an estimate of the volume traded
that day and the previous day (Wednesday). Also shown are the total open interest
across the three contracts, and the change in open interest relative to the day before.

* * *

This finishes our review of how futures differ from forwards. From a theoretical
perspective, the main difference is the marking to market, or, if you wish, the