The foreign exchange market is an interbank market, in that there is no designated market-place; instead transactions are conducted over the telecommunications system using telephones and computer screens. As a consequence, the foreign exchange (or FX) market is truly global, with all the major commercial banks around the world and the treasury departments of many companies participating. In addition, central banks enter the market in the execution of their monetary and exchange rate policies. There is also a system of brokers who act as intermediaries to supplement the direct contact between participants. As the trading day progresses, the centre of activity moves from one time zone to another, making it possible t trade internationally 24 hours a day.

The transactions in the FX market emanate from international trade, international investment, the hedging of exchange risks, the establishment of speculative positions or arbitraging between mispriced sections of what is a vast market. Read more »

Posted: June 24th, 2008 under Currency Futures, Foreign Exchange Futures, Future Exchange, Future Trading.
Comments: 4

It was shown that it is possible to lock in a forward rate of interest. However, depositors will only lock in a forward deposit if the rate that results is at least as favourable as the rate that they expect to prevail at the future point in time. If the forward rate implied by the current rates was above investors’ expectations, theinvestors would increase their borrowing for 90 days, causing upward pressure on that rate, and increase their deposits for 180 days, causing downward pressure on that rate, thereby bringing the 90-day forward rate down to current expected levels.

Conversely, if the implied forward rate were below expectations, investors would borrow for the longer term, raising that rate, and deposit for the shorter term, lowering that rate, until the implied forward rate matched expectations. Read more »

Posted: June 20th, 2008 under Future Exchange, Futures Contracts, Futures Market, Futures Prices, Interest Rate Futures.
Comments: 6

A detailed analysis of the empirical testing of the term structure is beyond the scope of this post; however, in summary it should be stated that the empirical tests give a substantial role to expectations. However, forward rates are not unbiased estimators of future spot rates, and the bias is consistent with a liquidity premium. There is also some evidence that the premium increases with the term to maturity, but at a decreasing rate. There is less support for the segmentation hypothesis.

The dynamics of the term structure

Clearly the term structure is dynamic, but exactly what is the nature of this dynamic process? It has long been observed that long rates are less volatile than short rates; for further discussion see Kessel (1965), Malkiel (1966) and Brooks and Livingston (1990). Current long-rate volatilities are linked to current short-rate volatilities by the concept of mean reversion — i.e. where short rates have a tendency to be pulled back towards some long-term average value following a movement up or down. Read more »

Posted: June 15th, 2008 under Currency Futures, Future Exchange, Futures Contracts, Managed Futures, Swap Futures.
Comments: 4

However, this theory of the development of the swaps market assumes that the financial markets remain informationally inefficient and that the benefits of comparative advantage are not arbitraged away. There is no doubt that in the early days of the interest rate and currency swaps markets it was possible to locate such inefficiencies that resulted in generous benefits to both parties, but in the years since the market’s inception the benefits have to some extent been reduced by arbitrage, yet the market still grows dramatically.

Thus there must be some other reason, or reasons, for the existence of the swaps market as the comparative advantage theory assumes that some markets persistently underprice credit risk relative to other markets. Three alternative reasons for the market’s existence can be postulated. Read more »

Posted: June 14th, 2008 under Currency Futures, Foreign Exchange Futures, Future Exchange, Future Investing, Future Management, Future Trading, Interest Rate Futures, Managed Futures, Stock Futures, Stock Market Futures, Swap Futures.
Comments: 4

Currency swaps, which were developed before interest rate swaps, were derivations of the 1970s practice of establishing parallel loans between two parties whereby, for example, company A would lend its domestic currency to company B, in return for a loan of company B’s domestic currency. These parallel loans were often used to manage exchange risk or to circumvent exchange control regulations.

This system of mutual lending had two serious drawbacks. First, there was no automatic off-set of the cash flows between parties. Thus, if company A defaulted on its loan from B, company B would still have to honour its commitment to A. Secondly, although the two loans effectively cancelled each other out, they were still shown on the balance sheets of each company. Read more »

Posted: June 14th, 2008 under Commodities Futures, Crude Oil Futures, Equity Futures, Future Exchange, Future Fund, Future Investing, Future Management, Future Trading, Futures Contracts, Managed Futures, Swap Futures.
Comments: 3

Another new area of the swaps market is that of commodity swaps. The mechanics of these swaps are similar to interest rate swaps, in that the swap establishes a fixed commodity price and a floating commodity index, with which the fixed price can be compared. There is a notional principal physical quantity of the commodity which establishes the value of the periodic cash flows. To illustrate these mechanics and give some insight into the use of commodity swaps as risk management instruments, consider the following scenario regarding a manufacturer that is a substantial consumer of copper. Read more »

Posted: June 9th, 2008 under Commodities Futures, Future Broker, Future Exchange, Future Fund, Future Investing, Future Management, Future Trading, Futures Contracts, Futures Quotes, Futures Trader, Managed Futures, Swap Futures.
Comments: 5

The valuation of equity swaps may, at first sight, seem more complex than the pricing of interest rate swaps because the total return to the index is not known at the outset. However, as the equity index is a carryable asset, it is possible to develop an arbitrage-free value of the equity side of the swap in a manner analogous to the pricing a long-term futures contract.

For example, if a party were to pay the equity returns, it is effectively going short the equity market. This position could be hedged by buying the underlying index with the proceeds of a floating rate loan. The interest costs of the loan will be serviced from the LIBOR receipts under the swap. Read more »

Posted: June 8th, 2008 under Future Exchange, Future Fund, Future Investing, Future Management, Future Trading, Futures Contracts, Futures Market, Futures Quotes, Futures Trader, Managed Futures, Swap Futures.
Comments: 4

“My CTA is beating the world!” That naturally is our goal when we select and invest in a professional futures trader, be he our spouse’s favorite nephew or someone of the stature of George Soros.

In the securities market, measuring success appears to be reasonably easy. Most advisors evaluate their performance against the Dow Jones averages. Since beating the Dow has been the yardstick for trading success in the stock market just about from its first publication in 1884, let’s examine it briefly and then see if there are comparable indexes available for the futures markets. But first, we need to understand the composition of the Dow so we can evaluate futures indexes.

How the Dow Is Calculated

Originally, the Dow was computed as a simple average—total up the prices of the stocks included in the index and divide by the number of stocks. Naturally, this system gave more weight to the higher- priced stock. Therefore, a major advance in a low-priced stock is diluted by a modest loss in a high-priced issue. Read more »

Posted: March 10th, 2008 under Future Exchange, Future Trading, Futures Contracts, Futures Index, Futures Market, Futures Trader.
Comments: 4

For the uninitiated, Paul Tudor Jones has had, and is still having, a spectacular career as a futures trader. If you had invested $1,000 in the Tudor Future Fund at its inception in September 1984, you would have had $17,482 by October of 1988. He combined five consecutive years in a row of triple-digit annual returns. During the month no one on Wall Street forgets, October 1987, his fund registered a 62 percent gain.

Unfortunately, he is no longer accepting money. As a matter of fact, he’s making distributions. This is one of the important “catch 22s” of the managed futures industry. Once a money manager becomes famous, he or she is no longer accessible because his or her minimum investment is out of the reach of everyone but the largest investors. If the CTA is not famous, there is probably a good reason—untested or weak stats.

What happens in managed money is not unlike what happens in any high stakes, competitive undertaking, or sport. If there is skill and luck involved, all the money flows to the superstars. Equity pours down the sieve from the many to the few that outperform all others. At some point, the few become overloaded. Excess venture capital must search for new talent. Great new traders enter the competition and work their way to the top. Read more »

Posted: March 4th, 2008 under Future Exchange, Future Fund, Futures Market, Futures Trader, Managed Futures.
Comments: 4

Your choice of investment vehicles ranges from an individual account with unlimited risk to funds that guarantee the return of your principal. There is also a wide assortment of legal procedures you can take if you feel you have been treated unfairly.

On the most basic level, you can open a futures trading account and give your broker authority to trade your account. The first step is filling out what are known as account papers. The most important of these documents include:

1. Acknowledgment of Receipt of Risk Disclosure Statement—By signing this, you acknowledge you understand everything that could go wrong in your trading account and that you accept these risks. Key among the risks are that you could lose more than your original investment, at times market conditions may be such that you cannot liquidate a losing trade (limit up or down days), placing protective stop loss orders will not necessarily control losses, spreads may not be less risky than straight long or short positions, and the high degree of leverage in this investment can work against you, as well as for you.

Read more »

Posted: March 2nd, 2008 under Future Exchange, Future Investing, Future Management, Future Trading, Futures, Managed Futures.
Comments: 4