The global currency market (commonly referred to as the Foreign Exchange markets or the FX markets) is the largest asset class in the world in terms of value of transactions. The average daily turnover across all FX markets worldwide increased to USD 4.15 trillion in 2010, as compared to USD 3.40 trillion in 2007. The spot market transactions (USD 1.49 trillion), outright forwards (USD 0.475 trillion) and FX swaps (USD 1.765 trillion) constitute over 93% (USD 3.73 trillion) of the global FX markets' average daily turnover (Source: BIS).
The FX markets can be broadly classified into the Over-the-Counter markets (OTC) and the exchange markets. The OTC market refers to the cash, spot, forward contracts, swaps and other financial instruments (derivatives such as options, currency swaps, etc.) that are customised and transacted directly between two or more counterparties (outside the exchange environment). Alternatively, currency futures contracts are traded on exchange platforms, such as the BFX. The BFX Clearing and Depository Corporation (BCDC) ensures the outstanding profits and losses (referred to as the mark-to-market profits and losses or MTM) are settled on the following business day (T+1 day basis). Novation reduces the risk of default for the market participants. The price discovery in an electronic exchange trading platform is more effective, thereby providing efficient risk management for market participants. Exchange markets also provide a smaller futures contract lot-size enabling the micro, small and medium scale enterprises to mitigate currency price risk.
According to a report published by the Futures Industry Association (Mar 2011), the growth rate of the currency futures and options trading on the leading global exchange markets has increased by 142% in 2010 (2.40 billion contracts) as compared to the same period in 2009 (0.99 billion contracts). The increasing volatility in the FX markets since 2008, due to the global economic recession, has resulted in greater risk for market participants. Exchange markets provide an ideal platform for risk mitigation.
In the initial phase, the BFX is scheduled to launch the futures contracts on the Euro US dollar (EURUSD) currency pair. The Euro versus the US dollar futures contracts is the largest traded currency futures contract in the world (in terms of the value of transactions). The Euro is the second most traded currency in the world after the US dollar and is the common currency of the Euro zone region. The EURUSD is the barometer for the indication of the strength of the US dollar and has a huge impact on the value of global commodity prices. When the EURUSD exchange rate decreases, it implies that the Euro has depreciated and the US dollar has appreciated, and vice versa when the EURUSD exchange rate increases. With the Euro zone countries contributing to one-fifth (over USD 12 trillion) of the global GDP, the Euro currency has gained recognition in terms of acceptance for international trade. Increasing volatility in the EURUSD exchange rate has necessitated exporters, importers and banks to hedge against currency risk using futures contracts, where the transaction costs are much lower as compared to the OTC markets.
The BFX EURUSD currency futures contract has a lot size of EUR 25,000 and is quoted in US dollars and cents per one Euro. The final settlement price is based on EURUSD futures contracts trading in Chicago, USA.
For more information on the BFX EURUSD Futures product booklet, please click here
For more information on the BFX EURUSD Futures contract specifications, please click here