US$ futures on TFEX: a new hedging tool
A currency future (FX future) is a contract to exchange one currency for another at a future date at a price fixed on the purchase date.
This type of futures contract was introduced by the Chicago Mercantile Exchange (CME) in 1972 and quickly revolutionised what had long been an agricultural futures exchange. The CME currently offers 56 futures contracts and 31 options contracts based on more than 20 major currencies. Thanks to a liberalisation of capital control policy, more and more exchanges in Asia and Latin America are offering these FX products. The most popular contracts are the US$/local currency futures. India, Russia and Brazil have shown strong growth in this type of FX future, with trading volume in 2011 reaching 1,846, 206 million and 112 million contracts, respectively.
Trading in currency futures will soon become an option for residents of Thailand. The Bank of Thailand and the Thai Securities Exchange Commission have recently granted approval for the trade of US$ futures on the Thailand Futures Exchange (TFEX). This product will be beneficial to business owners as well as individual investors.
US$ futures will help those small and medium-size business operators whose businesses involve transactions in foreign currency, to manage their currency risks. The launch of US$ futures will give them an accessible hedging tool with the flexibility to hedge either large or small amounts of exposure, as desired. US$ futures will also benefit retail investors who have revenue or expenses in dollars and prefer to lock their exchange rate in advance. Such users include individuals who invest abroad, invest in un-hedged foreign investment funds (FIFs) or have families planning to spend money abroad – either for buying assets, or for their children’s education.
Unlike spot trading, FX futures offers a level playing field for FX traders. No matter how big or small, whether you’re an individual trader, a fund or an institution, you see and have access to the same tradable prices with complete anonymity in all bids and offers. Fees are transparent and fully disclosed. The clearing house is the guarantor of all trading transactions.
Another important advantage is the real-time quotation of five bids and dollar/baht offers. Live trading information is also broadcast publicly via various channels.
US$ futures are contracts to buy or sell one dollar against baht at a specified price and date in the future. The contract size of US$ futures is set at $1,000, meaning that if the futures price is Bt31/dollar, the contract size will be Bt31,000 per contract, which is not too large for a small hedger. The term of contracts is the three nearest consecutive months plus the next quarterly month.
Initially, each Thailand trader will be permitted to trade a maximum 5,000 US$ futures contracts.
For more information, visit www.TFEX.co.th.
Kesara Munchusree is group head of product development at the Stock Exchange of Thailand, and managing director of the Thailand Futures Exchange (TFEX), a subsidiary of the SET Group.
