The Pros And Cons Of Currency Futures

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Register to read the introduction… On the forward rate there will always be either a premium or a discount. The premium or discount is found by working out the difference between the forward rate and the spot rate (which is the rate the currency is trading for right now). If the foreign currency is higher in the forward market then there is a premium but if the forward rate is less than the spot rate then the number is negative and there is a discount. The market dictates whether it be a discount or a premium by supply and demand (Madura, 2006, p119).

Futures Trading
Currency futures are a special type of contract traded on the exchange. The main difference between futures and forward contracts is that the futures are standardised both in the size of the contract and the delivery dates – which allows for more of a ‘bulk buying’ arrangement. Forward contracts are tailored specifically to the needs of the firm that is buying the contract, usually to settle specific underlying transactions. The main use for both contracts is to hedge against fluctuating foreign exchange rates over time, however, futures contracts are widely used for speculative
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There have been growing concerns on Europe’s part since the war broke out in Iraq, they do not agree with the way that the U.S. had handled themselves. “The fear stems from America's overwhelming military superiority and willingness to use it in the world, and that frightens Europeans …There is a perception that America is quite reckless in the way it uses this military power,” (VOA News, 2005). President Bush was re-elected in January 2005 which could have had something to do with the depreciation of the U.S. Dollar.

It is interesting that these sort of perceptions or views could have such an effect on a key international exchange rate.

Since 1996 the U.S. have been trading at a deficit, this deficit has increased from a mere $120 billion (1.5% of GDP) in 1996 to $414 billion (4.2% of GDP) in 2000, finally to a total of $666 billion (5.75% of GDP) in 2004 (The Federal Reserve Board, 2005). This can be a turn off for investors as to rectify a deficit there may be a downward adjustment in the dollar, as speculators see that a fall in the dollar is inevitable they rush to get rid of any of the depreciating asset that they are holding.

It could well be the accumulation of all these factors that has produced exchange rate relationships

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