Dollars and Sense: Calculating Profit and Loss in Currency Futures

Thanks to the CME Group (Chicago Mercantile Exchange); financial institutions along with investment managers, corporations, futures brokers, and private entrepreneurs have a regulated and centralized forum in which they can manage 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 my book “Currency Trading in the FOREX and Futures Markets” published by FT Press Currency Trading in the FOREX and Futures Markets book by Carley Garner(www.CurrencyTradingtheBook.com).



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 1.1639, it takes $1.16 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 45 minutes Monday through Thursday day between 4:15 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 (cross currency pairs that involve two currencies other than the US 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. This is because a futures market that has gone “locked limit”, often accelerates panic felt by traders caught on the wrong side of the market and unable to exit their position.

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