Currency Futures Price Sensitivity

Currency futures prices are sensitive to changes in each of the components in the pricing model. In other words, currency future prices are sensitive to changes in the underlying exchange rate and the interest rate differential between the two countries in question.

The Basis

The difference in price between the currency futures and the underlying exchange rate is called the ‘Basis’. The Basis reflects a number of factors, collectively called ‘Carrying Costs’ (e.g. interest differential). The Basis difference narrows as the currency future contract nears expiry this is known as basis convergence.

Minimum Contract Size

Currency futures have a minimum contract size of 1000 foreign underlying currency (e.g. $ 1000).

Expiry Months and Date

The expiry months specified for foreign currency futures contracts are March, June, September and December. All currency futures contracts expire two business days prior to the third Wednesday of the expiry month or, if that day is not a business day, then the previous business day.

Expiry Prices

The price at which the foreign currency futures contracts expire is calculated from an arithmetic average of the underlying spot taken every 60 seconds for 100 iterations between 12h01 and 13h40. If less than one hundred iterations have been accumulated by the expiry time for the computation of the expiry price, then the computation and publication of the expiry price shall be postponed until one hundred iterations have been accumulated.

Settlement

The foreign currency futures contracts are cash settled in Rand. In other words, no physical delivery of the underlying currency will ever take place.

Margining

Each trade is matched daily by Yield-X, i.e. the exchange ensures that there is a buyer and a seller to each contract traded. The JSE’s clearinghouse Safcom becomes the counterparty to each trade once each transaction has been matched and confirmed. The clearinghouse therefore ensures settlement takes place on each trade. To protect itself from non-performance, Safcom employs a process known as margining. This mechanism is two-fold.

Initial Margin

Firstly, when a position is opened (either long or short), the investor is required to pay an initial margin in cash with the broker who subsequently deposits it with the clearinghouse. This amount remains on deposit as long as the investor has an open position. The initial margin attracts a market related interest rate which is refunded to the investor once the position is closed out, or if the contract expires. The initial margin requirement varies between the different currency futures offered.