InvestorQ : What are cross currency futures and what is their utility?
Crowny Pinto made post

What are cross currency futures and what is their utility?

Answer
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2 years ago


If you are importing or exporting to one country then you just have a single point risk. But what if you are importing from the US and exporting to Europe. You will be worried about the Indian rupee movement against the dollar and the Euro. If you take individual hedges against dollar and Euro then it becomes sub optimal and also entails a higher cost. A better way to do it would be to opt for cross currency futures. In a cross currency futures you directly go for a pair between two global currencies like the dollar and pound or dollar and Euro or the dollar and the Yen. You are essentially, betting long on the dollar and short on the other currency when you buy a pair like the USDEUR future.

Symbol

EURUSD

GBPUSD

USDJPY

Market Type

N

N

N

Instrument Type

FUTCUR

FUTCUR

FUTCUR

Unit of trading

1 - 1 unit denotes 1000 EURO.

1 - 1 unit denotes 1000 GBP.

1 - 1 unit denotes 1000 USD.

Underlying / Order Quotation

The contract would be quote in USD. The outstanding positions would be in EURO terms

The contract would be quote in USD. The outstanding positions would be in GBP terms

The contract would be quote in JPY. The outstanding positions would be in USD terms

Tick size

0.0001

0.0001

0.01

Trading hours

Monday to Friday 9:00 a.m. to 7:30 p.m. IST

Contract trading cycle

12 serial monthly contracts.

Calendar spreads

Spread Combinations available for trading would be M1 - M2, M1 - M3, M1 - M4, M2 - M3, M2- M4, M3 - M4 All spread orders shall be placed in terms of price difference only.

Expiry/Last trading day

Two working days prior to the last business day of the expiry month at 12:30 pm. If last trading day is a trading holiday, then the last trading day shall be the previous trading day

Quantity Freeze

10,001 or greater

Price operating range

Tenure up to 6 months

+/-3 % of base price.

Tenure greater than 6 months

+/- 5% of base price.

Base price

Theoretical price on the 1st day of the contract. On all other days, DSP of the contract.

Position limits

Mode of settlement

Cash settled in Indian Rupees

As can be seen above the cross currency futures can be a very smart and economical method of managing your risk of two different currency exposures. This can be done in a more methodical way by using cross currency pairs. Currently, the cross currency pairs are yet to pick up volumes but it is expected that they should pick on shortly.