4 ms·
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 be
by 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 agoExample: 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 agoWhat 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 agoI 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 ago1. 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 agoWhat 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 agoI 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.