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FOREX VERSUS FUTURES MARKET
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The futures market through the International Monetary Market (IMM) of the Chicago Mercantile Exchange has many benefits as well. Founded in 1898, CME is the leader in the FX futures arena, accounting for 96 percent of all currency futures contracts traded on a worldwide basis. The Chicago Mercantile Exchange pioneered this segment by offering the world's first fi nancial futures contracts on seven foreign currencies in May 1972. Since that time, it has continued to expand its reach in FX by introducing new products, expanding its customer base and leveraging the market leading technology found in CME Globex ® , its proprietary electronic trading plat form. The exchange handles over a billion contracts valued at more than $638 trillion on an annual basis. It is a public company; and as of August 18, 2006 , the stock (CME) was trading at 461.35. Amazing, considering that when this stock was first released in its initial public offering (IPO) in De cember 2002, it was trading at under 40 per share! The history of the ex change and the innovator of the IMM, Leo Melamed, who brought foreign currency trading to life, is legendary. It has allowed investors, large and small, to trade foreign currencies exclusively for nearly 25 years before the explosive growth of spot forex was available. As with any product, there are strengths and weaknesses. I wish to share with you the facts so you can determine which investment vehicle suits your taste and trading style.

First, you should know the symbols for the individual futures currencies as quoted against the U.S. dollar. There are just minor differences be tween spot forex and futures symbols, as shown in Table 1.1.

Note that futures trade in quarterly cycles; and to differentiate between the various contract months, futures have universal symbols for each of the different contract months. December is “Z,” March is “H,” June is “M,” and September is “U.” Here is what you would use with a charting or quote ven

TABLE 1.1 Symbols for Futures and Forex Quoted against the U.S. Dollar

Currency Futures Symbol Forex Symbol—Nickname

Euro currency EC EUR/USD—Euro

British pound BP GBP/USD—Cable

Japanese yen JY USD/JPY—Yen

Australian dollar AD AUD/USD—Aussie

Canadian dollar CD USD/CAS—Loonie

Swiss franc SF USD/CHF—Swissy

dor to get a futures contract quote on a June 2007 euro currency—ECM7. On some quote and charting services, the current year or the next contract month going forward would be assumed and understood. The quotes sym bols for the different expiration months and various contract sizes of the futures markets are confusing, but you can quickly learn these variables.

At times, the futures arguably have tighter “spreads” between the bid and the asking prices; plus there is no interest charge or rollover fee every other day. In addition, the futures markets offer options for longer-term traders. There are transactions costs that apply per round turn; but if the brokerage commission exchange, regulatory, and transaction charges are less than the PIP spread in forex, an active speculator would be given a bet ter cost advantage using the futures markets instead of the forex spot mar ket. For example, let's compare a trade in forex on a contract value similar in size to one on the futures exchange. Use the example of a euro futures contract on the CME with a contract size of USD125,000 worth of euros, where each tick or PIP would be 12.50 in value. If the commissions and re lated fees are $10, which is the average charge by most brokerage firms, that is your transaction cost per round turn. That is $5 to buy and $5 to sell out of the position. Keep in mind that the contract value is 25 percent higher than a full-size forex position, too. If a day trader in forex trading in a 100,000 full-lot-size contract pays two PIPs on every transaction of a po sition, this trader would be charged $20 per round turn transaction. The fu tures arena also has other interesting features and products; one is the U.S. Dollar Index ® contract traded on the New York Board of Trade. It is com puted using a trade-weighted geometric average of six currencies. It trades virtually around the clock; the trading hours are from 7:00 P . M . to 10:00 P . M . , then from 3:00 A . M . to 8:05 A . M . , and then from 8: 05 A . M . to 3:00 P . M . Unlike the forex, there are daily limits on the price movement, with 200 ticks above and below the prior day's settlement, except during the last 30 minutes of any trading session, when no limit applies. Should the price reach the limit and remain within 100 ticks of the limit for 15 minutes, new limits will be established 200 ticks above and below the previous price limit. The chart in Figure 1.4 shows a breakdown of the six currencies and their respective weights on the average. The top four include the euro, which is the heavi est weight with 57.6 percent; then the Japanese yen with 13.6 percent; then the British pound with 11.9 percent; and the Canadian dollar with 9.1 percent. The Swedish krona is only 4.2 percent and the Swiss franc 3.6 percent.

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