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Currency risk management

Currency Futures

7.1 Features

 Standardised contracts to buy or sell standardised amounts of an underlying
asset at a pre-determined price in the future.

 In some respects futures sound similar to forward contracts except futures
contracts are rarely used to deliver. Instead a futures position is opened and,
later, closed out to leave a net gain or loss.

 The idea is that any gain or loss in the market is matched by a corresponding
loss or gain on the futures position, thus reducing the risk.

 Standard expiry dates – the last day of March, June, September and
December.

 All buyers and sellers are required to pay an initial margin (deposit) to the
exchange when they set up a position.

 Gains and losses are 'marked to market' on a daily basis and the initial margin
adjusted if necessary.

7.2 Advantages and disadvantages

ADVANT DISADVANTAGES

 Effectively fix’ the exchange rate  Foreign futures market must be
used for £ futures
 No transaction costs
 Require up front margin payments
 Tradable
 Not for precise tailored amounts

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