Forex Future Market Contracts: Interest Rate Forecasts - Essay Sample

Introduction

A future market contract is based on the exchange-trade instrument designed with the standardized features stipulating contract delivery date and time. They are formed to reflect the marked-to-market daily changes in the settlement price. In the forex future marker contract, A prediction that one currency, the strengthening of one is the weakening of the other, and vice versa because the currencies are traded as pairs (Chen, 2019).

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In this study, the forecast in the interest rates is between the Japanese Yen and US dollars. The future markets apply high leverage. As can be seen from the data collected, when the trader enters into the trade, it is not mandatory to put up to 100% of the contract's value amount. Rather, the broker will use the initial margin amount in the 5 contracts which are made up of the fractions of the total contract value.

The opening prices gives the rice for the security at the start of the trading day for the Japanese yen while closing denotes to the price of a given security at the end of the same trading day. The settlement prices are based on the price averages for a particular period. And the prices are evaluated based on the activity across the whole trading day or on the activity that occurs on a given window of time within the trading day (Simpson, 2019).

The beginning balance is what the previous price of the commodity and the evaluation is provided by the difference in the beginning price and the ending price to provide the change in price which can either be a profit or lose. The changing in price provides the deficit in the trade. Based on the trend in the Japanese Yen, the reading on margin gives a much larger position compared to the amount held by the brokerage account. Therefore, in this case, the margin investing can strengthen the gains, but at the same time magnify the losses (Chen, 2019).

Given in the case of Tuesday, July 2, 2019, the trader expects the interest rates to rise in the U.S against the Japanese Yen, whereas the exchange rate between the two currencies, (which is shown in the change in price) was trading in 0.009221 (1 JPY= 0.009221USD). it is attributed that the higher interest rate will increase the demand of the Japanese Yen, making the JPY/USD exchange rate to fall since it needed stronger, fewer JPY to buy USD.

On the other hand, in the case where there will be a decrease in the exchange rate like on Thursday, July 11, 2019, from 0.009220 to 0.009217, making a difference of -0.000003. It is anticipated that the interest rates of JPY/USD will rise. This means that it will require I USD to buy 0.009217 JPY. If the investor had gone long the USD and shorted JPY, there would have been profit from the change in value.

The price of the commodity rose for future contacts in most of the trades conducted in the mid-week, especially between Tuesday and Thursday. The trade between these days was above the original contract price at expiration, which gave profit. Prior t the expiration, the buy trade, long position, would be unwound or offset with the sell trade for a similar amount at the current price successfully closing the long position (Barone, 2019). The change between the prices of the two contracts will be affirmed as the cash-settled in the investor's brokerage account.

References

Barone, A. (2019). Learn About Trading FX with This Beginner's Guide to Forex Trading. Retrieved 5 August 2019, from https://www.investopedia.com/articles/forex/11/why-trade-forex.asp

Chen, J. (2019). How Futures are Traded. Retrieved 5 August 2019, from https://www.investopedia.com/terms/f/futures.asp

Chen, J. (2019). Settlement Price Definition. Retrieved 5 August 2019, from https://www.investopedia.com/terms/s/settlementprice.asp

Simpson, S. (2019). What forex traders need to know about the yen. Retrieved 5 August 2019, from https://www.investopedia.com/articles/forex/japanese-yen-what-fx-traders-should-know.asp