Thanks to the CME (Chicago Mercantile Exchange); financial institutions along with investment managers, corporations and private entrepreneurs have a regulated and centralized forum in which they can manager their risk exposure to changes in currency valuations.  Naturally, where there are hedging opportunities there is also room for mass speculation and that is exactly what occurs every Sunday afternoon through Friday at the CME.   

While many argue that the cash currency market, often referred to as Forex, is a much larger arena, I believe that the CME offers a very competitive trading environment in terms of execution.  I also believe that the CME currency futures are superior in terms of transparency and credibility.  This particular article isn’t intended to clarify the differences between Forex and currency futures, however, if you are interested in illumination of the arguments for and against each trading forum, be sure to read “FX vs. Currency Futures” which was published by Trader’s Journal Magazine in 2007 and can be seen on www.CarleyGarnerTrading.com.

Calculating Profit and Loss in Currency Futures  

CME Currency Futures 

Currency futures are traded electronically on the CME's Globex platform and are, for the most part, traded in "American terms".  This simply means that the prices listed in the futures market represent the dollar price of each foreign currency or how much in U.S. dollars it would cost to purchase one unit of the foreign currency.  In order to understand the point of view of the futures price ask yourself; "How much of our currency does it take to buy one theirs?"  To illustrate, if the Euro is trading at 1.4639, it takes $1.46 39/100 U.S. greenbacks to purchase one Euro. 

All currency futures contracts are categorized as financials and therefore have a quarterly expiration cycle.  Similar to Treasury bonds and stock indices, currency futures contracts expire in the months of March, June, September and December.  Additionally, like the other financials, currency futures are traded nearly 24 hours per day.  The CME halts trading for 1 hour Monday through Thursday day between 4 and 5 PM Central time in order to maintain the electronic trading platform and of course trade is halted on Friday afternoon in observance of the weekend. 

Please note that the CME lists several currencies and even currency pairs, one foreign currency against another as opposed to being against the U.S. Dollar, that are not discussed within this article.  The omission of such contracts was intentional.  Many currency futures and pairs contracts are listed but do not have the ample liquidity necessary to make them a viable choice for speculators.

It is also important to realize that currency futures have no daily trading limits.  Unlike raw or agricultural commodities, there is no limit to the amount in which currencies can appreciate or depreciate in a single trading day.  There are arguments for and against price limits but in my opinion this is a positive characteristic because it prevents unnatural price floors and ceilings and avoids locked limit trade in which speculators are unable to exit a market.  Of course there is a flip side, without price limits the currency markets can make very substantial moves on a daily basis.  However, I will argue that in the long run a lack of price limits actually works to reduce market volatility. 

Euro Futures

The value of one futures contract is 125,000 Euro so each tick higher or lower changes the price of the contract by $12.50 and translates into a profit or loss to the trader in that amount. This is true of a majority of the currency futures.  The Swiss Franc and the Japanese Yen share the characteristic of a $12.50 tick value.

Once you know the tick value of any particular currency futures contract, it is easy to compute the dollar amount of risk, profit and loss.  For example, a trader that is long the Euro from 1.4239 and liquidates the position at 1.4432 would be profitable by 193 ticks or $2,412.50 (193 x $12.50).  This is calculated by subtracting the purchase price from the sale price (exit) and multiplying that figure by $12.50.

1.4432 – 1.4239 = 193 profit

193 x $12.50 = + $2,412.50 minus commissions and fees

Swiss Franc

The contract specifications of the Swiss Franc are identical to that of the Euro.  Accordingly, the contract size is 125,000 Swiss Franc and the tick value is $12.50.  With that said, calculating risk and reward is also the same.  The only significant difference between the Euro and the Franc are the price at which they trade. 

Therefore, a trader that is short the “Swissy” from .9750 (nearly at par with the U.S. Dollar) likely believes that the value of the Franc will diminish relative to the greenback.  However, the trader may also want to place a stop loss order to mitigate the risk of being wrong.  If the stop order is placed at .9840 the funds at risk would be $1,125 ignoring commissions and potential slippage in the stop fill.  This is figured by subtracting the entry price from the stop price and multiplying by $12.50. 

.9840 - .9750 = 90 risk

90 x $12.50 = $1,125 commissions and fees and ignoring potential slippage are not included in this assumption of risk.

At this price, it takes about 98 cents to purchase one Swiss Franc.  If the Franc were trading at $1 it would be described as being in parity with the Dollar or simply “at par”.  

Yen Futures

The Japanese Yen is the most unique of the major currency futures contracts traded on the CME.  The contract size is 12,500,000 Yen, yes that is right; twelve and a half million Yen.  Despite the incredible contract size, the Yen has a tick value of $12.50 along with the Euro and the Swiss Franc.  Thus, all calculations are treated in an identical manner.    

British Pound

The pound also differs from the Euro in terms of contract specifications.  A British Pound futures contract represents 62,500 Pounds Sterling (British Pounds).   Just as the contract size is half that of the typical currency, so is the point value.  Each point Pound of fluctuation represents a profit or loss of $6.25 to the trader. 

The numbers are different, but the process is the same.  A trader long the British Pound from 1.9732 but wanting to limit her risk to $1,000 would place a sell stop 160 points beneath the entry point at 1.9572.  The number of points at risk can be determined by dividing the desired risk of $1,000 by the tick value, $6.25.  Likewise, if the same trader later chooses to offset her long futures contract at 1.9643 (hopefully she remembered to cancel her stop), the realized profit would have been 71 points or $443.75.  This is figured by subtracting the sale price from the purchase price and multiplying by $6.25.

1.9643 – 1.9572 = 71 profit

71 x $6.25 = +$443.75

The Commodity Currencies 

Currencies in which their valuations are highly dependent on the exports of commodities are often dubbed as “commodity currencies”.  The Australian Dollar and the Canadian Dollar are perhaps the most commonly traded commodity currencies. For instance, the relentless rally in crude oil and other commodities have been highly supportive of the value of the Canadian Dollar.  This is because Canadian exporters will likely sell products in terms of their domestic currency.  The increased demand for their commodity products will have a direct impact on the demand for the Canadian currency and thus favor higher valuations of the “looney”.  In fact, for the first time in decades, the Canadian Dollar traded at par with the U.S. Dollar in 2007.  In other words, it would take one U.S. Dollar to buy one Canadian Dollar and vice versa. 

Aussie Dollar

The Australian Dollar, often referred to as the Aussie, has a contract size of 100,000 Aussie Dollars.  Consequently, the tick value of the contract is $10.  Like the others, The Aussie futures expiration months are quarterly and there are no set price limits on daily trading. 

Due to its convenient point value, risk and reward calculations can be figured by simply adding a zero or moving the decimal point one place to the right.  To illustrate, a profit of 1 tick is equivalent to a profit of $10; likewise, if the market rallies 200 points a futures trader would be making or losing $2,000. 

Canadian Dollar

The contract specifications for the Canadian Dollar are nearly identical to those of the Aussie Dollar.  The contract size is 100,000 Canadian Dollar and the tick value is $10.  Once again, working the math in this contract is as simple as adding a zero. 

A trader that is short a Canadian Dollar futures contract from .9940 and subsequently gets stopped out of the position at 1.0400, the realized loss would have been 460 points or $4,600.  Hopefully, you wouldn’t let your losses run to this extent but anything is possible.  The Canadian experienced an extremely swift rally in late 2007 and profits and losses of this magnitude were widespread. 

1.0400 - .9940 = 460 loss

460 x $10 = -$4,600 commissions and fees add to the loss

Mexican Peso

In the past the Mexican Peso futures contract offered questionable liquidity and few opportunities for speculators.  However, the Peso has recently become more popular for speculators and is worth taking a look at.  Like the British Pound and the “commodity currencies”, the contract specifications for the Peso differ greatly from the norm. 

If you have ever traveled to Mexico, you are aware that the valuation of the Peso is much lower than that of the dollar, typically about a 10th of a U.S. Dollar.  Thus, it takes a small percentage of a dollar to buy one Peso.  For this reason, the CME opted for a contract size of

500,000 which is a great deal bigger than those assigned to the Euro or the Swiss Franc.  Each point in the Peso is equivalent to a $5 gain or loss for any trader with an open futures position but there is a catch.  The minimum price fluctuation is 2.5 points or $12.50.  I have found that in the world of commodities it is better to simply accept differences between contracts for what they are rather than searching for the logic behind the reasoning.  Chances are you won’t find logic. 

Also unique to the Peso is the expiration months.  The Peso has a contract listed (that expires in) each month as far as 13 months in advance.  While this is the only currency that allows traders to trade contracts expiring in each and every month of the year, they typically have quarterly expiration months.  However, it takes more than an exchange simply listing a contract for speculators and hedgers to get involved.  In fact, there is often very little, if any, open interest in any of the non-quarterly contracts (January, February, April, etc.).

Despite all of the differences in the Peso relative to the other currencies, the calculations involved in trading it are very similar.  Like the others you would simply take the difference between the purchase price and the sale price and multiply it by the tick value to reach the total profit or loss on a trade. 

A trader that sells the Mexican Peso at .096425 and is forced to buy it back at a loss at .097385 would have realized a loss of 96 points or $480. 

.097385 - .096425 = 96 loss 

96 x $5 = - $480 commissions and fees add to the loss  

Carley Garner

1-866-790-TRADE

cgarner@decarleytrading.com

Carley is the author of "A Trader's First Book on Commodities" and “Commodity Options” published by FT Press, a division of Prentice Hall.  She is also a broker at http://www.DeCarleyTrading.com. Her e-newsletters, The Stock Index Report and the Bond Bulletin, are widely distributed by DeCarley Trading and have garnered a loyal following; she is also proactive in providing free trading education. 

***There is substantial risk in trading options and futures.  It is not suitable for everyone.