Foreign Exchange Contract

Foreign Exchange Contract
Guillermo "Fred" Rivera
ECO440 - International Economics and Trade
April 11, 2015

Week 5 - Activity - Foreign Exchange Contract
Abstract:
Trading commodity futures and options is a volatile, complex and risky
venture that is rarely suitable for individual investors or "retail
customers" (U. S. Commodity …, n. d.). This analysis looks at the various
effects in trading futures contracts has on individual investors as well as
major competitors both, in the United States of America and abroad. When
investing in the Futures contract markets an individual must be aware of
the risks involved and ensure that he or she is able to absorb the loses
(if any) and be able to cover the extra expenses incurred when attaining a
futures contract. Since the late 1800's Agricultural commodities Futures
contracts have been traded in the U.S. Federal regulation has taken care
of these contracts since the since the 1920s. The Grain Futures Act of
1922 set the basic authority and was changed by the Commodity Exchange Act
of 1936 (US Futures …, n.d.).
Introduction:
Since the 1970s, trading in futures contracts has expanded rapidly
beyond traditional physical and agricultural commodities into a vast array
of financial instruments, including foreign currencies, U.S. and foreign
government securities, and U.S. and foreign stock indices. Many
individuals lose all of their money, and can be required to pay more than
they invested initially the futures market in the United States of America.
Futures contracts evolved from what were known as "Forward Contracts".
Forward contracts serve the same function as futures contracts except for
the fact that forward contracts are privately entered into by producer and
buyer of a commodity without an official exchange nor standardized terms
(History of Futures Trading, 2010).
Table 11.4 of the textbook explains both Forward Contracts and Future
Contracts. Here are the differences:
Forward Contract Futures Contract
Issuer Commercial bank International Monetary
Market

(IMM) of the Chicago Mercantile

Exchange and other foreign

exchanges such as the Tokyo

International Financial Futures

Exchange
Trading "Over the counter" by telephone On the IMM's market
floor
Contract size Tailored to the needs of the exporter
Standardized in round lots
/importer/investor; no set size
Date of
delivery Negotiable Only on particular dates
Contract
costs Based on the bid/offer spread Brokerage fees for
sell and buy

orders
Settlement On expiration date only,
Profits or losses paid daily
at prearranged price
at close of trading

As the textbook explains, "Trading in foreign exchange can also be
done in the futures market" (Carbaugh, 2011. Pg 378). Although the
trading of physical commodities was called forward contracts in earlier
ages, (maybe as early as biblical times), these contracts were used to aid
in the simplification of trading physical commodities. In addition, these
forward contracts have existed for a very long time, the progress of the
contracts known as the futures contracts and the futures market known these
days, in fact started in the United States almost two centuries ago. These
contracts were known as the "to-arrive" contracts and were mainly used by
grain traders who in 1948 also formed what is now known as the Chicago
Board of Trade (CBOT).
The way these contracts worked was that the individuals involved come
to an agreement to exchange future notes and set applicable exchange rates
in advance. The futures market is distinguished from the forward market in
that only a limited number of leading currencies are traded; moreover,
trading takes place in standardized contract amounts and in a specific
geographic location (Carbaugh, 2011). These futures contracts trading grew
with time and started to be standardized and regulated more and more with
the passing of time. This step in the futures contracts created the
futures market known this day becoming a public and open market that is
standardized and offers guarantees for said contracts. These same trading
of futures stretched out after 1970, encompassing interest rate and
currency futures, and ultimately indexes and stocks of all kinds.
Important to note is the fact that these new futures contracts have
speeded up the structure of the market and their way of listing them for
trading, feats that have been consummated in the past few years. The
research of the effect of past traded futures contracts is important when
dealing with new futures contracts. Therefore, individuals or businesses
participating in this, must pay attention to the unpredictability of
futures contracts prices because this is one of the most important
properties of futures contracts. Important to keep in mind is the fact
that many nineteenth century critics were suspicious of a form of business
in which one man sold what he did not own to another who did not want it
(Bender, 2002). As a way to attain long-term exposure to equity indexes,
traders and established investors have accepted Futures contracts. This
trend started as a way to hedge currencies, interest rates, commodities and
equity risks, index futures are now considered attaches of the market.
Below is a table containing some of the most valued currencies and
commodities on today's market.
Currencies
"Name "Contract "Last "Change "Open "High "Low "Time "
"U.S. Dollar "DXM15 (Jun "96.695 "-0.978 "97.825 "97.865 "96.560 "09:23"
"Index "'15) " " " " " " "
"British Pound "B6M15 (Jun "1.4915 "+0.0098 "1.4822 "1.4939 "1.4803 "09:22"
" "'15) " " " " " " "
"Canadian Dollar"D6M15 (Jun "0.80310"+0.00800"0.79540"0.80380"0.79450"09:23"
" "'15) " " " " " " "
"Japanese Yen "J6M15 (Jun "0.84220"+0.00600"0.83590"0.84310"0.83390"09:23"
" "'15) " " " " " " "
"Swiss Franc "S6M15 (Jun "1.05550"+0.00970"1.04530"1.05790"1.04360"09:23"
" "'15) " " " " " " "
"Euro FX "E6M15 (Jun "1.10180"+0.01130"1.08930"1.10380"1.08730"09:23"
" "'15) " " " " " " "
"Australian "A6M15 (Jun "0.76380"+0.00830"0.75600"0.76850"0.75420"09:23"
"Dollar "'15) " " " " " " "
"Mexican Peso "M6M15 (Jun "0.06730"+0.00094"0.06641"0.06730"0.06619"09:22"
" "'15) "0 "0 "0 "0 "0 " "
"New Zealand "N6M15 (Jun "0.75670"+0.01110"0.74620"0.75800"0.74470"09:22"
"Dollar "'15) " " " " " " "


Energies

"Name "Contract "Last "Change "Open "High "Low "Time "
"Crude Oil WTI "CLK15 (May "49.14s"-0.95 "49.59"50.27"48.11"04/02/1"
" "'15) " " " " " "5 "
"ULSD NY Harbor "HOK15 (May "1.6825"-0.0644"1.736"1.748"1.665"04/02/1"
" "'15) "s " "9 "9 "3 "5 "
"Gasoline RBOB "RBK15 (May "1.7613"-0.0699"1.822"1.834"1.734"04/02/1"
" "'15) "s " "1 "2 "5 "5 "
"Natural Gas "NGK15 (May "2.713s"+0.108 "2.601"2.719"2.591"04/02/1"
" "'15) " " " " " "5 "
"Crude Oil Brent "QAM15 (Jun "56.09s"-2.10 "57.74"58.19"55.18"04/02/1"
"(F) "'15) " " " " " "5 "
"Ethanol Futures "ZKK15 (May "1.573s"+0.002 "1.562"1.587"1.550"04/02/1"
" "'15) " " " " " "5 "


Financials

"Name "Contract "Last "Change "Open "High "Low "Time "
"T-Bond "ZBM15 (Jun "165-29"+1-11 "164-12"166-27"164-09"09:22"
" "'15) " " " " " " "
"Ultra T-Bond "UDM15 (Jun "171-31"+1-13 "170-11"173-02"170-06"09:22"
" "'15) " " " " " " "
"10-Year T-Note "ZNM15 (Jun "129-30"+0-250 "129-04"130-04"129-03"09:22"
" "'15) "5 " "0 "0 "5 " "
"5-Year T-Note "ZFM15 (Jun "120-27"+0-155 "120-11"120-30"120-11"09:22"
" "'15) "5 " "5 "0 "0 " "
"2-Year T-Note "ZTM15 (Jun "109-23"+0-042 "109-19"109-24"109-19"09:21"
" "'15) "7 " "7 "5 "7 " "
"30-Day Fed "ZQN15 (Jul "99.850"+0.0150"99.835"99.850"99.830"09:07"
"Funds "'15) "0 " "0 "0 "0 " "
"Eurodollar "GEZ15 (Dec "99.405"+0.0500"99.360"99.420"99.355"09:23"
" "'15) "0 " "0 "0 "0 " "


Grains

"Name "Contract "Last "Change "Open "High "Low "Time "
"Wheat "ZWK15 (May '15) "536-2s"+7-6 "528-0"544-2"522-4"04/02/1"
" " " " " " " "5 "
"Corn "ZCK15 (May '15) "386-4s"+4-6 "381-6"388-4"378-2"04/02/1"
" " " " " " " "5 "
"Soybeans "ZSK15 (May '15) "986-0s"-3-6 "988-0"993-0"980-6"04/02/1"
" " " " " " " "5 "
"Soybean Meal "ZMK15 (May '15) "327.3s"-4.6 "331.2"332.3"326.3"04/02/1"
" " " " " " " "5 "
"Soybean Oil "ZLK15 (May '15) "31.04s"+0.35 "30.60"31.10"30.60"04/02/1"
" " " " " " " "5 "
"Oats "ZOK15 (May '15) "269-0s"+7-0 "262-0"271-6"262-0"04/02/1"
" " " " " " " "5 "
"Rough Rice "ZRK15 (May '15) "10.865"+0.085 "10.78"10.90"10.76"04/02/1"
" " "s " "0 "0 "5 "5 "
"Hard Red Wheat"KEK15 (May '15) "582-6s"+10-6 "571-6"587-6"564-6"04/02/1"
" " " " " " " "5 "
"Spring Wheat "MWK15 (May '15) "595-4s"+5-0 "590-2"600-4"584-4"04/02/1"
" " " " " " " "5 "
"Canola "RSK15 (May '15) "462.00"+1.70 "460.3"463.3"457.5"04/02/1"
" " "s " "0 "0 "0 "5 "


Indices

"Name "Contract "Last "Change"Open "High "Low "Time "
"E-Mini S&P 500 "ESM15 (Jun "2,039.7"-19.75"2,060."2,063."2,038."08:15 "
" "'15) "5 " "00 "75 "00 " "
"E-Mini Nasdaq "NQM15 (Jun "4,263.0"-44.25"4,306."4,313."4,262."08:14 "
"100 "'15) "0 " "75 "75 "00 " "
"DJIA mini-sized "YMM15 (Jun "17,511 "-165 "17,681"17,702"17,495"08:14 "
" "'15) " " " " " " "
"Russell 2000 "RJM15 (Jun "1,252.3"unch "1,250."1,255."1,235."04/03/"
"Mini "'15) "0s " "60 "00 "70 "15 "
"E-Mini S&P "EWM15 (Jun "1,503.4"-17.60"1,519."1,523."1,503."08:14 "
"Midcap "'15) "0 " "90 "50 "10 " "
"S&P 500 Index "SPM15 (Jun "2,039.4"-20.10"2,059."2,062."2,038."08:12 "
" "'15) "0 " "30 "10 "90 " "
"Nasdaq 100 "NDM15 (Jun "4,307.2"-5.75 "4,307."4,319."4,294."04/02/"
" "'15) "5s " "00 "00 "00 "15 "
"DJIA "DJM15 (Jun "17,676s"+61 "17,635"17,690"17,635"04/02/"
" "'15) " " " " " "15 "
"S&P GSCI "GDJ15 (Apr "401.00s"-4.95 "399.60"404.85"399.60"04/02/"
" "'15) " " " " " "15 "
"CBOE S&P 500 VIX"VIJ15 (Apr "16.250 "+0.625"15.650"16.270"15.550"08:14 "
" "'15) " " " " " " "


Meats

"Name "Contract "Last "Change "Open "High "Low "Time "
"Live Cattle"LEM15 (Jun '15)"153.375"+1.150 "152.85"153.45"152.42"04/02/1"
" " "s " "0 "0 "5 "5 "
"Feeder "GFK15 (May '15)"217.450"+0.800 "217.22"218.02"216.87"04/02/1"
"Cattle " "s " "5 "5 "5 "5 "
"Lean Hogs "HEM15 (Jun '15)"75.700s"-0.550 "76.350"76.600"74.500"04/02/1"
" " " " " " " "5 "
"Class III "DLK15 (May '15)"15.57s "-0.05 "15.62 "15.78 "15.52 "04/02/1"
"Milk " " " " " " "5 "


Metals

"Name "Contract "Last "Change"Open "High "Low "Time "
"Gold "GCM15 (Jun "1,200.9"-7.3 "1,204."1,207."1,194."04/02/"
" "'15) "s " "3 "4 "8 "15 "
"Silver "SIK15 (May "16.701s"-0.358"16.935"17.000"16.570"04/02/"
" "'15) " " " " " "15 "
"High Grade "HGK15 (May "2.7340s"-0.014"2.7440"2.7655"2.7165"04/02/"
"Copper "'15) " "5 " " " "15 "
"Platinum "PLN15 (Jul "1,154.5"-11.5 "1,164."1,166."1,150."04/02/"
" "'15) "s " "4 "0 "4 "15 "
"Palladium "PAM15 (Jun "746.30s"-2.55 "748.55"754.95"740.60"04/02/"
" "'15) " " " " " "15 "
"Gold "YGM15 (Jun "1,200.9"-7.30 "1,205."1,208."1,195."04/02/"
"mini-sized "'15) "0s " "80 "20 "80 "15 "
"Silver "YIK15 (May "16.701s"-0.358"16.951"17.009"16.594"04/02/"
"mini-sized "'15) " " " " " "15 "


Softs

"Name "Contract "Last "Change "Open "High "Low "Time "
"Cotton #2 "CTK15 (May '15) "63.69s "+1.11 "62.58 "63.89 "62.58 "04/02/15"
"Orange "OJK15 (May '15) "124.80s"+1.10 "123.40"125.55"122.55"04/02/15"
"Juice " " " " " " " "
"Coffee "KCK15 (May '15) "140.90s"+6.05 "134.15"141.45"134.05"04/02/15"
"Sugar #11 "SBK15 (May '15) "12.74s "+0.42 "12.39 "12.75 "12.33 "04/02/15"
"Cocoa "CCK15 (May '15) "2,768s "+20 "2,750 "2,788 "2,747 "04/02/15"
"Sugar #16 "SDK15 (May '15) "23.85s "+0.12 "23.75 "24.15 "23.75 "04/02/15"
"Lumber "LSK15 (May '15) "276.60s"+3.60 "276.60"278.90"274.00"04/02/15"

Table courtesy of: Barchart's Futures Prices as of April 3rd. 2015.
In conclusion:
Futures contracts have become invaluable tools in the financial market
these days, in part because of they are not of a stable nature, in
addition, these contracts are used for leverage and hedging, total return
tactics and merely receiving exposure to a specific market. In addition,
many investors are experiencing Futures contracts price raising, this is
something they are wary of and are trying to compensate for the price raise
by investing in other venues such as exchange traded funds ( ETF's), which
are alternative delta-one financial instruments as cost-effective
substitutes for futures contracts.



References:
BarChart's Futures Prices as of April 3rd. 2015. Retrieved from:
http://www.barchart.com
/commodityfutures/All
Carbaugh, R. (2011). International Economics. 13th ed. Mason, OH: South-
Western
Dennis W. Carlton (1984). "Futures Markets: Their Purpose, Their History,
Their Growth, Their
Successes and Failures". Journal of Futures Markets 4 (3):
237–71.
History of Futures Trading, 2010. Retrieved from:
http://www.futurestradingpedia.com
/history_of_futures_trading.htm
Thomas Bender, 2002. Rethinking American History in a Global Age. (Quote
by: Morton
Rothstein, 1966). University of California Press, 2002
US Futures Trading and Regulation Before the Creation of the CFTC, n.d.
Retrieved from:
http://www.cftc.gov/About/HistoryoftheCFTC/history_precftc
Womach, J. 2005. "Report for Congress: Agriculture: A Glossary of Terms,
Programs, and
Laws, 2005 Edition" Retrieved from:
http://www.cnie.org/NLE/CRSreports/05jun/97-
905.pdf