final forex
TRANSCRIPT
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 1/28
PREFACE
THE ASSETS & LIABILITIES OF INTERNATIONAL
COMPANIES, by DEFINATION are HELD & THEIR INCOME
STREAM ACHIEVED in a VARIETY OF CURRENCIES.CHANGES IN THE EXCHANGE RATE OF THESE
CURRENCIES, MAY ADVERSLY AFFECT THE
REPORTED PROFITS & NETWORTH OF COMPANY.
EXAMPLE:-
IF THE COMPANY OWN’S ASSETSDENOMINATED IN INDIAN RUPEES (INR), & RUPEE GETS
STRONGER RELATIVE TO $ THAN PROFITABLITY &
NETWORTH MAXIMIZIES.
AMONG THE RISK INHERENT INTERNATIONAL
BUSINESS OPERATIONS, the EXCHANGE RATE RISK
REPRESENTS ONE of the IMPORTANTCONSIDERATIONS for MANAGERS of MNC’s. FOREIGN
EXPOSURE MANAGEMENT HAS BECOME
INCREASINGLY IMPORTANT TO COMPANIES
OPREATING INTERNATIONALLY DUE TO SERIES OF
RECENT EXCHANGE CRISES. SIZABLE FORTUNES
HAVE BEEN MADE & LOST DUE TO WHIMSICAL
BEHAVIOUR OF THE FOREIGN EXCHANGE MARKETS.
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 2/28
FOREIGN EXCHANGE EXPOSURE:-
OFTEN, THERE IS LACK OF COORDINATION OF
FOREIGN EXCHANGE MANAGEMENT AMONG
COMPANIES SUBSIDIARIES & ABSENCE OF ADEQUATEREPORTING SYSTEM. FOREIGN EXCHANGE
MANAGEMENT REQUIRES A CENTRAL GROUP THAT
CAN CONTROL FOREX ACTIVITIES & IMPLEMENT A
REPOPRTING SYSTEM TO GATHER & DISSEMINATE
INFORMATION THROUGH-OUT THE ORGANISATION.
TYPES OF FOREIGN EXCHANGE EXPOSURES:-
THERE ARE BASICALLY TWO CATEGORIES OF
FOREIGN EXCHANGE EXPOSURE:-
1. ACCOUNTING EXPOSURE
2. ECONOMIC EXPOSURE.
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 3/28
ACCOUNTING EXPOSURE:-
ACCOUNTING OR BALANCE-SHEET EXPOSURE
STEMS FROM THE MAINTAINANCE OF ASSETS &LIABILITIES IN FOREIGN CURRENCIES. THESE ITEMS
DENOMINATED IN FOREIGN CURRENCIES MUST BE
TRANSLATED INTO DOMESTIC CURRENCY FOR
FINANCIAL STATEMENT PREPARATION & STOCK
HOLDER REPORTING.
ACCOUNTING EXPOSURE CONCENTRATES ON HOWCHANGES IN THE EXCHANGE RATE AFFECT THE
BOOK-VALUE OF COMPANY.
SINCE THE ADAPTION OF FASB NO. 8, CORPORATION
ARE FORCED TO REPORT ALL EXCHANGE GAINS &
LOSSES INTO QUATERLY EARNINGS STATEMENT.
BECAUSE OF THE VOLATILITY OF CURRENCY
MARKETS THESE EARNING STATEMENTS HAVE
SHOWN BIG SWINGS.
ALTHOUGH THESE ARE ONLY PURE ACCOUNTING
LOSSES, THEY SHOW UP IN PRICE EARNINGS RATIO
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 4/28
FOR ALL MNC’s & CAN INFLUENCE INVESTORS
TOWARDS THE STOCK & ULTIMATELY THE PRICE OF
CAPITAL FOR THE COMPANY.
IT’S IMPORTANT TO NOTE THAT NO GENERALLY
ENFORCED TRANSACTION RULES, SUCH AS FASB NO.
8. IN THE U.S.A. EXISTS IN OTHER COUNTRIES.THE
LACK OF ANY TRANSACTION RULES IS OFTEN AN
INCENTIVE TO IGNORE THE IMPORTANCE OF
FOREIGN EXCHANGE MANAGEMENT
FOREIGN EXCHANGE RESERVES ARE USUALLY
ESTABLISHED TO MEET SWINGS IN EARNIGS CAUSED
BY EXCHANGE RATE FLUCTUATIONS.
ECONOMIC EXPOSURE:-
ANALYSIS OF BALANCE-SHEET DOES NOT PROVIDE
ANY ANSWER TO QUESTION:-
“WHAT IS ACTUALLY EXPOSED IN ANY ONE
COMPANY?”
ACCOUNTING EXPOSURE DOES NOT SHOW ALL OF
THE EFFECTS WHICH CURRENCY RATE CHANGES
HAVE ON COMPANY, BUT ONLY THOSE WHICH
CHANGE CURRENT PERIOD VALUE OF its ASSETS &
LIABILITIES.
THE WHOLE RANGE OF RISKS IMPINGING
UPON THE TRUE ECONOMIC VALUE OF YHE
FIRM IS CALLED ECONOMIC EXPOSURE.
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 5/28
SO, ECONOMIC EXPOSURE EXPLICITLY CONSIDERS
THE FUTURE EFFECT OF EXCHANGE RATE
MOVEMENTS ON INVESTMENTS OR PROFIT STREAMS,
RATHER THAN SHORT-TERM BOOKKEEPING EFFECTS.
EXAMPLE:-A U.S. MNC COMPANY LENDS it’s
FRENCH SUBSIDIARY DOLLARS.
THIS LOAN WILL NOT BE INCLUDED IN COMPANY’S
ACCOUNTING EXPOSURE AS:
1. SUCH INTERCOMPANY ACCOUNTS AREEXCLUDED UPON CONSOLIDATIONS.
2. THE LOAN IS DENOMINATED IN CURRENCY IN
WHICH BALANCE-SHEET IS CONSOLIDATED.
HOWEVER, FRENCH SUBSIDIARY THIS REPRESENT
AN ECONOMIC EXPOSURE WHICH COULD HAVE
SERIOUS OPREATING EFFECTS IF FRENCH FRANC
DEPRICIATES AGAINST DOLLAR. CASH LOSSES COULDIMPAIR ITS LIQUIDITY & RESTRICTS ITS BORROWING
CAPACITY.
TRADITIONAL POLICIES OF FOREX EXPOSURE.
1. DETERMINING & CONSOLIDATING THE NET
EXPOSURE BY CURRENCY.
2. ESTIMATING FUTURE MOVEMENTS IN CURRENCY
& IMPACT ON COMPANY’S FINANCIAL POSITION.
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 6/28
3. CONSIDERING HEDGING ALTERNATIVE’S &
RELATIVE COSTS TO MINIMIZE NET EXPOSURE OF
COMPANY.
FOR EXAMPLE:-
SUPPOSE A COMPANY HAS AN EQUIVALENT DOLLAR-
VALUE LONG POSITION (i.e. ASSETS & LIABILITIES) IN
DM & IL. IN MOST CASES COMPANY ONLY COVER,
ITALIAN LIRA (I.L.)
EXPOSURE BECAUSE THEY CONSIDER its
DEVALUATION & LEAVE DM EXPOSURE UNHEDGEDHOPING TO REAP POTENTIAL BENEFITS FROM A
REVALUATION OF DM vis-à-vis U.S. DOLLAR.
HOW TO HEDGE FOR DEVALUATION?
1. SELL AMOUNT OF FOREX EXPOSURE FORWARD
ON FOREX MARKET.
2. BORROW THE REQUIRED AMOUNT IN
DEVALUATING CURRENCY & CONVERT THESE
FUNDS INTO DOLLAR & PAY BACK LOAN IN
DEVALUED CURRENCY.
3. DECREASE FINANCIAL
ASSETS(CASH,TIMEDEPOSITS etc)
LEADING & LAGGING OF A/C’s RECEIVABLE &
PAYABLE ARE WELL-KNOWN TECHNIQUES FOR
THAT PURPOSE.
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 7/28
FOREIGN EXCHANGE RISK MANAGEMENT
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 8/28
A. PURPOSE
This document sets out the minimum policies andprocedures that each financial institution needs to
have in place and apply within its foreign exchangerisk management programme, and the minimumcriteria it should use to prudently manage andcontrol its exposure to foreign exchange risk.Foreign exchange risk management must beconducted in the context of a comprehensivebusiness plan. Although this document focuses onthe responsibility of an institution for managing
foreign exchange risk, it is not meant to imply thatforeign exchange risk management can beconducted in isolation from other risks orasset/liability management considerations, such asthe paramount need to maintain adequate liquidity
B. DEFINITION
Foreign exchange risk is the exposure of aninstitution to the potential impact of movements inforeign exchange rates. The risk is that adversefluctuations in exchange rates.Foreign exchange risk arises from two factors:currency mismatches in an institution’s assets andliabilities (both on- and off-balance sheet) that are
not subject to a fixed exchange rate and currencycash flow mismatches. Such risk continues until theforeign exchange position is covered. This risk mayarise from a variety of sources such as foreigncurrency retail accounts and retail cash transactionsand services, foreign exchange trading, investments
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 9/28
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 10/28
The frequency and direction of rate changes, theextent of the foreign currency exposure and theability of counterparts to honor their obligations tothe institution are significant factors in foreign
exchange risk management.Although the particulars of foreign exchange riskmanagement will differ among institutions dependingupon the nature and complexity of their foreignexchange activities, a comprehensive foreignexchange risk management programme requires: establishing and implementing sound and
prudent foreign exchange risk management
policies; and
developing and implementing appropriateand effective foreign exchange riskmanagement and control procedures.
Foreign Exchange Risk Management PoliciesWell articulated policies, setting forth the objectives
of the institution’s foreign exchange riskmanagement strategy and the parameters withinwhich this strategy is to be controlled, are the focalpoint of effective and prudent foreign exchange riskmanagement. These policies need to include: a statement of risk principles and objectives
governing the extent to which the institutionis willing to assume foreign exchange risk;
explicit and prudent limits on the institutions’exposure to foreign exchange risk; and
clearly defined levels of delegation of tradingauthorities.
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 11/28
i) Statement of Foreign Exchange Risk Principles and Objectives
Before foreign exchange risk limits and managementcontrols can be set it is necessary for an institution todecide the objectives of its foreign exchange riskmanagement programme and in particular itswillingness to assume risk.
The tolerance of each institution to assume foreignexchange risk will vary with the extent of other risks(e.g. liquidity, credit risk, interest rate risk,
investment risk) and the institution’s ability toabsorb potential losses. As with other aspects of financial management, a trade-off exists betweenrisk and return. Although the avoidance of foreigncurrency exposure or the hedging of such exposuremay eliminate foreign exchange risk, such a positionmay not be desirable for other sound businessreasons. Accordingly, the objective of foreign
exchange risk management need not necessarily
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 12/28
complete elimination of exposure to changes inexchange rates. Rather, it should be to manage theimpact of exchange rate changes within self imposedlimits after careful consideration of a range of
possible foreign exchange rate scenarios.ii) Foreign Exchange Risk Limits
Each institution needs to establish explicit andprudent foreign exchange limits, and ensure that thelevel of its foreign exchange risk exposure does notexceed these limits. Where applicable, these limitsneed to cover, at a minimum:
the currencies in which the institution ispermitted to incur exposure; and
the level of foreign currency exposure thatthe institution is prepared to assume.
Foreign exchange risk limits need to be set within aninstitution’s overall risk profile, which reflects factors
such as its capital adequacy, liquidity, credit quality,investment risk and interest rate risk. Foreignexchange positions should be managed within aninstitution’s ability to quickly cover such positions if necessary. Moreover, foreign exchange risk limitsneeds to be reassessed on a regular basis to reflectpotential changes in exchange rate volatility, theinstitution’s overall risk philosophy and risk profile.
Authorized currencies will normally includecurrencies in which the institution may be called onto settle foreign exchange transactions. These areusually the currencies in which the institution or itscustomers conduct business.
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 13/28
Limits on an institution’s foreign exchange exposureshould reflect both the specific foreign currencyexposures that arise from daily foreign currencydealing or trading activities (transactional positions)
and those exposures that arise from an institution’soverall asset/liability infrastructure, both on- and off-balance sheet (structural or translational positions).
The establishment of aggregate foreign exchangelimits that reflect both foreign currency dealing andstructural positions helps to ensure that the size andcomposition of both positions are appropriately andprudently managed and controlled and do not
overextend an institution’s overall foreign exchangeexposure.Usually, risk limits are established in terms of arelationship between the foreign exchange positionand earnings or capital, or in terms of foreignexchange volume, such as total dollars or numbers of transactions.Although the overall assessment of foreign exchange
counterparties is an integral component of anyforeign exchange operation, this may be conductedby an institution’s credit risk management function,thus obviating the need for separate counterpartyassessment within the institution’s foreign exchangeoperations.
iii) Delegation of Authority
Clearly defined levels of delegated authority help toensure that an institution’s foreign exchangepositions do not exceed the limits established underits foreign exchange risk management policies.Authorities may be absolute, incremental or a
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 14/28
combination thereof, and may also be individual,pooled, or shared within a committee.
The delegation of authority needs to be clearlydocumented, and must include at a minimum,
the absolute and/or incremental authoritybeing delegated;
the units, individuals, positions or committeesto whom authority is being delegated;
the ability of recipients to further delegateauthority; and
the restrictions, if any, placed on the use of delegated authority.
The extent to which authority is delegated will varyamong institutions according to a number of factorsincluding: the institution’s foreign exchange risk
philosophy;
the size and nature of an institution’s foreignexchange operations; and
the experience and ability of the individualsfor carrying out the foreign exchange riskmanagement activities.
Foreign Exchange Risk Management andControl ProceduresEach institution engaged in foreign exchangeactivities is responsible for developing, implementingand overseeing procedures to manage and control
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 15/28
foreign exchange risk in accordance with its foreignexchange risk management policies. Theseprocedures must be at a level of sophisticationcommensurate with the size, frequency and
complexity of the institution’s foreign exchangeactivities.Foreign exchange risk management procedures needto include, at a minimum: accounting and management information
systems to measure and monitor foreignexchange positions, foreign exchange riskand foreign exchange gains or losses;
controls governing the management of foreign currency activities; and
independent inspections or audits.
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 16/28
i) Measurement of Foreign Exchange Risk
Managing foreign exchange risk requires a clear
understanding of the amount at risk and the impactof changes in exchange rates on this foreigncurrency exposure. To make these determinations,sufficient information must be readily available topermit appropriate action to be taken withinacceptable, often very short, time periods.It is only through the accurate and timely recordingand reporting of information on exchange
transactions and currency transfers that foreigncurrency exposure can be measured and foreignexchange risk controlled. Accordingly, eachinstitution engaged in foreign exchange activitiesneeds to have an effective accounting andmanagement information system in place thataccurately and frequently records and measures: its foreign exchange exposure; and
the impact of potential exchange ratechanges on the institution.
At a minimum, each institution should have in placemonitoring and reporting techniques that measure: the net spot and forward positions in each
currency or pairings of currencies in which
the institution is authorized to haveexposure;
the aggregate net spot and forward positionsin all currencies; and
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 17/28
transactional and translational gains andlosses relating to trading and structuralforeign exchange activities and exposures.
ii) Control of Foreign Exchange Activities
Although the controls over foreign activities will varyamong institutions depending upon the nature andextent of their foreign exchange activities, the keyelements of any foreign exchange controlprogramme are well-defined procedures governing: organizational controls to ensure that there
exists a clear and effective segregation of duties between those persons who;
~ initiate foreign exchange transactions; and~ are responsible for operational functions
such as arranging prompt and accuratesettlement, and timely exchanging andreconciliation of confirmations, or account
for foreign exchange activities.
procedural controls to ensure that:
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 18/28
~ Transactions are fully recorded in therecords and accounts of the institution;
~ Transactions are promptly and correctlysettled; and
~ Unauthorized dealing is promptly identifiedand reported to management; and
controls to ensure that foreign exchangeactivities are monitored frequently against
the institution’s foreign exchange risk,counterparty and other limits and thatexcesses are reported.
Moreover, each institution needs to ensure thatemployees conducting foreign exchange tradingactivities on behalf of the institution do so within awritten code of conduct governing foreign exchange
dealing. Such a code of conduct should includeguidance respecting trading with related parties andtransactions in which potential conflicts of interestexists. These should include trading with affiliatedentities, personal foreign exchange trading activitiesof foreign exchange traders, and foreign exchangetrading relationships with foreign exchange andmoney market brokers with whom the institution
deals. Each institution should ensure that theseguidelines are periodically reviewed with all foreignexchange traders.
The use of hedging techniques is one means of managing and controlling foreign exchange risk. Inthis regard, many different financial instruments can
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 19/28
be used for hedging purposes, the most commonlyused, being derivative instruments. Examples includeforward foreign exchange contracts, foreign currencyfutures contracts, foreign currency options, and
foreign currency swaps.Generally, few institutions will need to use the fullrange of hedging techniques or instruments. Eachinstitution should consider which ones areappropriate for the nature and extent of its foreignexchange activities, the skills and experience of trading staff and management, and the capacity of foreign exchange rate risk reporting and control
systems.Financial instruments used for hedging are notdistinguishable in form from instruments that may beused to take risk positions. Before using hedgingproducts, institutions must ensure that theyunderstand the hedging techniques and that they aresatisfied that the instrument meets their specificneeds in a cost-effective manner.
Further, the effectiveness of hedging activitiesshould be assessed not only on the basis of thetechnical attributes of individual transactions butalso in the context of the overall risk exposure of theinstitution resulting from a potential change inasset/liability mix and other risk exposures such ascredit, interest rate and position risk.
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 20/28
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 21/28
iii) Independent Inspections/Audits
Independent inspections/audits are a key element in
managing and controlling an institution’s foreignexchange risk management programme. Eachinstitution should use them to ensure compliancewith, and the integrity of, the foreign exchangepolicies and procedures. Independentinspections/audits should, at a minimum, and over areasonable period of time, test the institution’sforeign exchange risk management activities in order
to: ensure foreign exchange managementpolicies and procedures are being adhered to;
ensure effective management controls overforeign exchange positions;
verify the adequacy and accuracy of
management information reports regardingthe institution’s foreign exchange riskmanagement activities;
ensure that foreign exchange hedgingactivities are consistent with the institution’sforeign exchange risk management policies,strategies and procedures; and
ensure that personnel involved in foreignexchange risk management are provided withaccurate and complete information about theinstitution’s foreign exchange risk policiesand risk limits and positions and have the
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 22/28
expertise required to make effectivedecisions consistent with the foreignexchange risk management policies.
Assessments of the foreign exchange risk operationsshould be presented to the institution’s Board of Directors on a timely basis for review.
D. ROLE OF THE BOARD OF DIRECTORS The Board of Directors of each institution isultimately responsible for its exposure to foreignexchange risk and the level of risk assumed. In
discharging this responsibility, a
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 23/28
Board of Directors usually charges management withdeveloping foreign exchange risk managementpolicies for the board’s approval, and developing andimplementing procedures to measure, manage and
control foreign exchange risk within these policies.A Board of Directors needs to have a means of ensuring compliance with the foreign exchange riskmanagement programme. A Board of Directorsgenerally ensures compliance through periodicreporting by management and independentinspectors/auditors. The reports must providesufficient information to satisfy the Board of
Directors that the institution is complying with itsforeign exchange risk management programme.At a minimum, a Board of Directors should: review and approve foreign exchange risk
management policies based onrecommendations by the institution’smanagement;
review periodically, but at least once a year,the foreign exchange risk managementprogramme;
ensure that an independent inspection/auditfunction reviews the foreign exchangeoperations to ensure that the institution’sforeign exchange risk management policies
and procedures are appropriate and are beingadhered to;
ensure the selection and appointment of qualified and competent management toadminister the foreign exchange function; and
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 24/28
outline the content and frequency of foreignexchange risk reports to the board.
D. ROLE OF MANAGEMENT
The management of each institution is responsiblefor managing and controlling the institution’sexposure to foreign exchange risk in accordance withthe foreign exchange risk management programme.Although specific foreign exchange risk managementresponsibilities will vary from one institution to
another, management is responsible for: developing and recommending foreignexchange risk management policies forapproval by the Board of Directors;
implementing the foreign exchange riskmanagement policies;
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 25/28
ensuring that foreign exchange risk ismanaged and controlled within the foreignexchange risk management programme;
ensuring the development and implementingof an appropriate management reportingsystem with respect to the content, formatand frequency of information concerning theinstitution’s foreign exchange risk position, inorder to permit the effective analysis andsound and prudent management and control
of existing and potential foreign exchangeexposure;
establishing and utilizing a method foraccurately measuring the institution’s foreignexchange risk;
establishing procedures for accurately
measuring realized and unrealized foreignexchange trading gains and losses;
ensuring that an independentinspection/audit function reviews andassesses the foreign exchange riskmanagement programme;
establishing and implementing proceduresgoverning the conduct and practices of foreign exchange traders;
developing lines of communication to ensurethe timely dissemination of the foreign
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 26/28
exchange policies and procedures to allindividuals involved in foreign exchangeactivities and the foreign exchange riskmanagement process;
reporting comprehensively on foreignexchange risk activities to the Board of Directors at least once a year.
recommending counterparty limits.
FUTURE OF FOREX
Over the past 15 years or so, the foreign exchange currencymarket – otherwise known as forex or fx – has been gainingin both momentum and popularity. Many investors who seekviable alternatives to the traditional markets are also jumpingon board to supplement existing portfolios or simply to trysomething new. One major reason for this upswing involume is the potential for large profit.
The enormous gains – and losses – by beginner and experttraders alike are largely due to these factors:
• The shear volume – literally trillions of dollars incurrency traded each day
• An extremely volatile market• Round-the-clock accessibility in trading by way of 3
major forex markets: U.S., Europe and Asia
However, even the potential for major losses has not slowedthis speeding train. This rush of new investors has led to thecreation of countless forex day trading systems and other
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 27/28
tools. Some are tested; some are not – but all are hoping tocash in on the almost 3.2 trillion dollars traded each day.
This phenomenal growth is a double-edged sword. The more
popular forex becomes, the more regulations and guidelinesthe National Futures Association (NFA) enacts. This sparksa great deal of debate. Some feel that more regulation willprotect traders from incurring sizeable losses and offer thebest forex trading experience. Others claim that it will onlyinhibit the spirit of the free-flowing market. Market leverage(the amount of money fronted by the broker compared to theamount the trader has invested) has been reduced, withfurther reductions being considered. Some speculate that
this will force traders to open accounts with brokers outsidethe United States – beyond the reach of the NFA.
The future of forex is shrouded in speculation. Howregulation will change the process of an Fx trade in thefuture is unknown. Innovations in forex trading software hasprofoundly affected the market and enables users to tradeforex online. This may accelerate offshore trading if theNFA’s influence becomes unreasonable to traders. The forexmarket has captivated hundreds of thousands of new traderseach year and continues to grow exponentially on a dailybasis. Not unlike the Gold rush of the 1800s, more and morepeople each year are willing to risk all in order to cash in onthe unrivaled income potential the forex market has to offer.
Futures and Options the Future of ForexThe Chicago Mercantile Exchange (CME for short) first
introduced currency futures contracts back in 1972. These "full-
size" contracts were traded using the venerable open outcry
8/6/2019 Final Forex
http://slidepdf.com/reader/full/final-forex 28/28
method, which involved traders gesticulating and shouting at each
other across a trading pit.
In 1992 the CME introduced its Globex electronic trading platform
which led to the introduction of the "E-mini" electronically tradedcontract. An "E-mini" currency futures contract is 1/2 the size of a
full contract. Then, earlier this year, the CME introduced a new
"E-micro" contract only 1/10 the size of a full contract, specifically
designed to appeal to the retail investor.
Bear in mind the rather confusing terminology here. In OTC forex
a mini-lot is 1/10 the size of a full lot. In OTC forex a micro-lot is
1/100 the size of a full lot. An E-micro is therefore roughly
equivalent to a mini-lot. I trust that's clear!
Here's a presentation in which the CME's global head of FX Derek
Sammann tries to sell us the benefits of the new contract.
Note some of the points Mr. Sammann is trying to ram home.
Counterparty risk, transparency, risk mitigation and hedging!
Hedging is a good thing, it seems. While Derek thinks the new E-
micro contract will primarily be used by retail customers as atrading vehicle, he also expects smaller companies to use it for
hedging to mitigate risk. He also hints that options on the new
futures contracts will be available at some point in the not too
distant future. Options are another tool in a trader's toolbox that
can be used for good or evil, for trading or for hedging (or should
that be the other way around?).
.