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Possibly dumb question: What is the point of a futures market for a currency? I understand why futures markets exist for e.g. oranges (seasonal production cycl

Possibly dumb question: What is the point of a futures market for a currency? I understand why futures markets exist for e.g. oranges (seasonal production cycles) and jet fuel (to avoid storing a years' worth yourself). But currencies are available 24/7/365 and have zero storage cost.

dfabulich 9y ago
1) You may not be aware that there are futures markets for all fiat currencies, e.g. the USDX for dollars. 2) Currency futures markets exist to allow you to bet that the value of the currency will decrease, by offering to sell you the currency at price below the current market rate in the future. In markets where there's no easy/legal way to bet that prices will decrease, asset bubbles are common, as "bulls" bid up the price, and "bears" just sit on the outside waiting for the bubble to pop. If bears could bet that the value would decrease, this would lower the price of the asset today. In this way, price signaling can allow the market to reach an optimal shared opinion about the "true value" of an asset. There are a lot of cryptocurrency bears who think that the long-term value of Bitcoin and Ether are approximately zero, that cryptocurrencies are in an asset bubble, and that this is wasting valuable time and money that the economy should spend on other things. By betting against cryptocurrency, bears could help to end the bubble in a safer and slower way. (Or so they say. Sometimes future markets can exacerbate price instability when the whole market behaves irrationally.) (The other reason futures markets exist is to allow people holding the currency to reduce ("hedge") the risk that the value of the currency will decrease. Thus they can make small bets against the currency, and if it rises, they'll still make money, and if the value falls, well, at least they'll win their bet.)
- kcanini 9y ago
  Example: 1 USD is currently worth 0.79 GBP. If I wanted to bet that the USD would decrease in value against the GBP, I could enter into a futures contract (assuming the existence of a wiling counterparty) to purchase 0.75 GBP for 1 USD at a date 3 months in the future. If I was right, and the exchange rate drops to 1 USD = 0.7 GBP, then I profit 0.75 - 0.7 = 0.05 GBP. Instead, I could have just bought the 0.79 GBP immediately and then waited 3 months, and then I would have profited even more: 0.79 - 0.7 = 0.09 GBP. What does the existence of the futures market allow me to do that I can't already do in this scenario? My point was that in cases where production is cyclical or storage fees are nonzero, it might be difficult/impossible to trade on the spot market, or it might be prohibitively expensive to hold the item yourself. But currencies don't have either of these problems.
  - asdfaoeu 9y ago
    What if you don't have any USD? You can also instead by 10 futures contracts and make 0.50 GBP. Additionally futures aren't just for "betting" they are also for offloading risk. For example a company might expect an sale in another currency and might want to "convert" that earlier to offload the risk of making another purchase in a different currency.
    - kcanini 9y ago
      I guess I'm assuming you can always borrow USD if you want to make this type of trade on the spot market without actually owning USD in the first place, or if you want leverage.
  - nivertech 9y ago
    1. What you describing is a forward contract, not futures. 2. Holding spot currency position is not "zero storage cost", you need to pay daily interest - futures has this built-in in their price. 3. Futures are leveraged 4. Futures contracts are standardized - which makes finding counterparty much easier and allow market makers. 5. Futures traded on regulated exchanges (CFTC in US), unlike spot FX - which is more similar to how crypto exchanges operate.
    - joosters 9y ago
      What you describing is a forward contract, not futures. What's the point in splitting hairs. A future is a standardised form of a forward contract, generally so they can be traded more easily. It doesn't affect the underlying financial concepts.
      - jnordwick 9y ago
        I would love to do a real crypto FX futures market. Everything i read tonight seems so amateur hour. Do the calendar spreads, implieds, volatility, high performance matching engine, and market makers.
bradleyjg 9y ago
Suppose I have 1MM USD payment expected in six months and owe my vendor 1.3MM CAD the same day. If I have them, I could take other dollars and convert them to CAD at today's spot. I could wait six months and convert then. Either way I'm taking on currency risk. I can choose instead to offload that currency risk to a counterparty for a small fee. It's classic hedging.
- kcanini 9y ago
  > I could take other dollars and convert them to CAD at today's spot. I could wait six months and convert then. Either way I'm taking on currency risk. I see how the second case (waiting six months to convert USD to CAD) involves currency risk. But I don't understand how the first case involves currency risk. If I converted some USD into 1.3MM CAD today, and then held it for six months before paying my vendor, what currency risk did I incur that is eliminated by the futures contract?
  - bboreham 9y ago
    If you exchange now, you risk the price could get better over six months and you missed out. An FX future has the same currency risk profile as exchanging now. What is different is you trade on margin, and you have interest rate risk in a different currency. People who actually want to fix an FX rate in the future would use a 'forward', simply a contract to exchange at a later date. Again no change in FX risk. The true hedge is an FX option, where you can lock in a price (for a fee) yet still back out if you want to.
lordnacho 9y ago
The futures market for anything (including FX) is a convenient way to get risk without doing daily settlements. You know what the cost of carry is up to the futures expiry date, so you use that (non arbitrage) to set the adjustment for the futures price. So then when you trade the future, you're not in need of settling some item (currency, bonds, cows) against some payment each day. Currencies are indeed available each day, and are easily settled each day, but there's a number of reasons why you might want the future: - If you settle each day, your account PnL depends on interest payments. With futures, it's just the difference between the prices traded. So easier to account for. - Futures tend to be cheap to trade. Depends on your agreements. You have to pay interest on one side and receive it on the other side if you settle currency. And guess what, your prime broker gives you a crap rate on both!

dfabulich 9y ago

1) You may not be aware that there are futures markets for all fiat currencies, e.g. the USDX for dollars. 2) Currency futures markets exist to allow you to bet that the value of the currency will decrease, by offering to sell you the currency at price below the current market rate in the future. In markets where there's no easy/legal way to bet that prices will decrease, asset bubbles are common, as "bulls" bid up the price, and "bears" just sit on the outside waiting for the bubble to pop. If bears could bet that the value would decrease, this would lower the price of the asset today. In this way, price signaling can allow the market to reach an optimal shared opinion about the "true value" of an asset. There are a lot of cryptocurrency bears who think that the long-term value of Bitcoin and Ether are approximately zero, that cryptocurrencies are in an asset bubble, and that this is wasting valuable time and money that the economy should spend on other things. By betting against cryptocurrency, bears could help to end the bubble in a safer and slower way. (Or so they say. Sometimes future markets can exacerbate price instability when the whole market behaves irrationally.) (The other reason futures markets exist is to allow people holding the currency to reduce ("hedge") the risk that the value of the currency will decrease. Thus they can make small bets against the currency, and if it rises, they'll still make money, and if the value falls, well, at least they'll win their bet.)

kcanini 9y ago
Example: 1 USD is currently worth 0.79 GBP. If I wanted to bet that the USD would decrease in value against the GBP, I could enter into a futures contract (assuming the existence of a wiling counterparty) to purchase 0.75 GBP for 1 USD at a date 3 months in the future. If I was right, and the exchange rate drops to 1 USD = 0.7 GBP, then I profit 0.75 - 0.7 = 0.05 GBP. Instead, I could have just bought the 0.79 GBP immediately and then waited 3 months, and then I would have profited even more: 0.79 - 0.7 = 0.09 GBP. What does the existence of the futures market allow me to do that I can't already do in this scenario? My point was that in cases where production is cyclical or storage fees are nonzero, it might be difficult/impossible to trade on the spot market, or it might be prohibitively expensive to hold the item yourself. But currencies don't have either of these problems.
- asdfaoeu 9y ago
  What if you don't have any USD? You can also instead by 10 futures contracts and make 0.50 GBP. Additionally futures aren't just for "betting" they are also for offloading risk. For example a company might expect an sale in another currency and might want to "convert" that earlier to offload the risk of making another purchase in a different currency.
  - kcanini 9y ago
    I guess I'm assuming you can always borrow USD if you want to make this type of trade on the spot market without actually owning USD in the first place, or if you want leverage.
- nivertech 9y ago
  1. What you describing is a forward contract, not futures. 2. Holding spot currency position is not "zero storage cost", you need to pay daily interest - futures has this built-in in their price. 3. Futures are leveraged 4. Futures contracts are standardized - which makes finding counterparty much easier and allow market makers. 5. Futures traded on regulated exchanges (CFTC in US), unlike spot FX - which is more similar to how crypto exchanges operate.
  - joosters 9y ago
    What you describing is a forward contract, not futures. What's the point in splitting hairs. A future is a standardised form of a forward contract, generally so they can be traded more easily. It doesn't affect the underlying financial concepts.
    - jnordwick 9y ago
      I would love to do a real crypto FX futures market. Everything i read tonight seems so amateur hour. Do the calendar spreads, implieds, volatility, high performance matching engine, and market makers.

bradleyjg 9y ago

Suppose I have 1MM USD payment expected in six months and owe my vendor 1.3MM CAD the same day. If I have them, I could take other dollars and convert them to CAD at today's spot. I could wait six months and convert then. Either way I'm taking on currency risk. I can choose instead to offload that currency risk to a counterparty for a small fee. It's classic hedging.

kcanini 9y ago
> I could take other dollars and convert them to CAD at today's spot. I could wait six months and convert then. Either way I'm taking on currency risk. I see how the second case (waiting six months to convert USD to CAD) involves currency risk. But I don't understand how the first case involves currency risk. If I converted some USD into 1.3MM CAD today, and then held it for six months before paying my vendor, what currency risk did I incur that is eliminated by the futures contract?
- bboreham 9y ago
  If you exchange now, you risk the price could get better over six months and you missed out. An FX future has the same currency risk profile as exchanging now. What is different is you trade on margin, and you have interest rate risk in a different currency. People who actually want to fix an FX rate in the future would use a 'forward', simply a contract to exchange at a later date. Again no change in FX risk. The true hedge is an FX option, where you can lock in a price (for a fee) yet still back out if you want to.

lordnacho 9y ago

The futures market for anything (including FX) is a convenient way to get risk without doing daily settlements. You know what the cost of carry is up to the futures expiry date, so you use that (non arbitrage) to set the adjustment for the futures price. So then when you trade the future, you're not in need of settling some item (currency, bonds, cows) against some payment each day. Currencies are indeed available each day, and are easily settled each day, but there's a number of reasons why you might want the future: - If you settle each day, your account PnL depends on interest payments. With futures, it's just the difference between the prices traded. So easier to account for. - Futures tend to be cheap to trade. Depends on your agreements. You have to pay interest on one side and receive it on the other side if you settle currency. And guess what, your prime broker gives you a crap rate on both!