PAGE 122-126

Slide 1

Contract Specifications

Currency futures are commonly traded at the Chicago Mercantile Exchange (CME), which is part of CME
Group. Currency futures are available for 19 currencies at the CME. Each contract specifies a
standardized number of units. Standardized contracts allow for more frequent trading per contract, and
therefore greater liquidity.

The typical currency futures contract is based on a currency value in terms of U.S. dollars. However,
futures contracts are also available on some cross-rates, such as the exchange rate between the
Australian dollar and the Canadian dollar.

Slide 2

Trading Currency Futures

Firms or individuals can execute orders for currency futures contracts by calling broker- age firms that
serve as intermediaries. The order to buy or sell a currency futures contract for a specific currency and a
specific settlement date is communicated to the brokerage firm, which in turn communicates the order
to the CME.

Slide 3

Trading Platforms for Currency Futures

There are electronic trading platforms that facilitate the trading of currency futures. These platforms
serve as a broker, as they execute the trades desired. The platform typically sets quotes for currency
futures based on an ask price at which one can buy a specified currency for a specified settlement date
and a bid price at which one can sell a specified currency.

Slide 4

Comparison to Forward Contracts

Currency futures contracts are similar to forward contracts in that they allow a customer to lock in the
exchange rate at which a specific currency is purchased or sold for a specific date in the future.
Slide 5

Pricing Currency Futures

The price of currency futures normally will be similar to the forward rate for a given currency and
settlement date. This relationship is enforced by the potential arbitrage activity that would occur if there
were significant discrepancies.

Slide 6

Credit Risk of Currency Futures Contracts

Each currency futures contract represents an agreement between a client and the exchange
clearinghouse, even though the exchange has not taken a position.

To minimize its risk in such a guarantee, the CME imposes margin requirements to cover fluctuations in
the value of a contract, meaning that the participants must make a deposit with their respective
brokerage firms when they take a position.

Slide 7

How Firms Use Currency Futures

Corporations that have open positions in foreign currencies can consider purchasing or selling futures
contracts to offset their positions.

Purchasing Futures to Hedge Payables.

The purchase of futures contracts locks in the price at which a firm can purchase a currency.

Selling Futures to Hedge Receivables.

The sale of futures contracts locks in the price at which a firm can sell a currency.

Slide 8

Closing Out a Futures Position

If a firm that buys a currency futures contract decides before the settlement date that it no longer wants
to maintain its position, it can close out the position by selling an identical futures contract. The gain or
loss to the firm from its previous futures position is dependent on the price of purchasing futures versus
selling futures.

Speculation with Currency Futures

Currency futures contracts are sometimes purchased by speculators who are simply attempting to
capitalize on their expectation of a currency’s future movement.

Currency futures are often sold by speculators who expect that the spot rate of a currency will be less
than the rate at which they would be obligated to sell it.