Specialized Markets
Specialized Markets
Certain specialized institutions and markets deal in futures and options and offer some variety from the banking sector: the International Monetary Market (IMM) in Chicago, the London International Financial Futures Exchange (LIFFE), and the Philadelphia Stock Exchange (PSE). As noted in Fig. 7.4, a customer operates in these three markets through a broker.
The International Monetary Market
The International Monetary Market (IMM) was opened in 1972 by the Chicago Mercantile Exchange to deal primarily in futures contracts for the British pound, the Canadian dollar, the West German mark, the Swiss franc, the Japanese yen, and the Australian dollar. These contracts are for specific amounts and have a specific maturity date. For example, a futures contract in Japanese yen is set by the IMM at 12.5 million yen. If you wanted to buy futures for 100 million yen, you would have to buy eight yen contracts from a broker. The contract sizes for the other currencies are 125,000 deutsche marks, 100,000 Canadian dollars, 62,500 British pounds, 125,000 Swiss francs, and 100,000 Australian dollars. The "Futures Prices" section of the Wall Street Journal provides quotes of the contracts each day.
Although the contracts have a fixed maturity date, there is a ready market for the contracts at the IMM. Brokers make deals on the trading floor rather than over the telephone as is the case with the forward markets for banks. Futures contracts at the IMM also tend to be small relative to the transactions normally encountered in the interbank market. The IMM limits how much the futures prices can vary from one day to the next, whereas there are no such restrictions in the banking market. Finally, the IMM requires a margin, or deposit, equal to about 4 percent of the contract to be made by the purchaser of a contract.
The London International Financial Futures Exchange
The London International Financial Futures Exchange (LIFFE), which opened in September 1982, deals in futures contracts in British pounds, German marks, Swiss
francs, and Japanese yen in fixed contract sizes. The market also deals in Eurodollars, which are dollars banked outside of the United States, and should provide an alternative to the interbank market in Europe for foreign-exchange risk protection.
The Philadelphia Stock Exchange
The Philadelphia Stock Exchange
(PSE) represents a fairly recent concept in foreign-exchange trading, that of
options. As described above, an option is a contract specifying the right to buy or sell foreign exchange within a specific period (American option) or at
a specific date (European option).
Each option is for a specific value of currency. For example, each Australian dollar option is for 50,000 Australian dollars. The PSE offers foreign-exchange options for the Australian dollar (50,000 Australian dollars), the British pound (31,250 pounds), the Canadian dollar (50,000 Canadian dollars), the German mark (62,500 marks), the Japanese yen (6,250,000 yen), and the Swiss franc (62,500 francs). Many foreign-exchange experts feel that the options market in foreign exchange will expand and become more important as transactions costs decrease. As noted earlier, options provide more flexibility than do futures or forwards, but at a relatively high cost.
Certain specialized institutions and markets deal in futures and options and offer some variety from the banking sector: the International Monetary Market (IMM) in Chicago, the London International Financial Futures Exchange (LIFFE), and the Philadelphia Stock Exchange (PSE). As noted in Fig. 7.4, a customer operates in these three markets through a broker.
The International Monetary Market
The International Monetary Market (IMM) was opened in 1972 by the Chicago Mercantile Exchange to deal primarily in futures contracts for the British pound, the Canadian dollar, the West German mark, the Swiss franc, the Japanese yen, and the Australian dollar. These contracts are for specific amounts and have a specific maturity date. For example, a futures contract in Japanese yen is set by the IMM at 12.5 million yen. If you wanted to buy futures for 100 million yen, you would have to buy eight yen contracts from a broker. The contract sizes for the other currencies are 125,000 deutsche marks, 100,000 Canadian dollars, 62,500 British pounds, 125,000 Swiss francs, and 100,000 Australian dollars. The "Futures Prices" section of the Wall Street Journal provides quotes of the contracts each day.
Although the contracts have a fixed maturity date, there is a ready market for the contracts at the IMM. Brokers make deals on the trading floor rather than over the telephone as is the case with the forward markets for banks. Futures contracts at the IMM also tend to be small relative to the transactions normally encountered in the interbank market. The IMM limits how much the futures prices can vary from one day to the next, whereas there are no such restrictions in the banking market. Finally, the IMM requires a margin, or deposit, equal to about 4 percent of the contract to be made by the purchaser of a contract.
The London International Financial Futures Exchange
The London International Financial Futures Exchange (LIFFE), which opened in September 1982, deals in futures contracts in British pounds, German marks, Swiss
francs, and Japanese yen in fixed contract sizes. The market also deals in Eurodollars, which are dollars banked outside of the United States, and should provide an alternative to the interbank market in Europe for foreign-exchange risk protection.
The Philadelphia Stock Exchange
The Philadelphia Stock Exchange
(PSE) represents a fairly recent concept in foreign-exchange trading, that of
options. As described above, an option is a contract specifying the right to buy or sell foreign exchange within a specific period (American option) or at
a specific date (European option).
Each option is for a specific value of currency. For example, each Australian dollar option is for 50,000 Australian dollars. The PSE offers foreign-exchange options for the Australian dollar (50,000 Australian dollars), the British pound (31,250 pounds), the Canadian dollar (50,000 Canadian dollars), the German mark (62,500 marks), the Japanese yen (6,250,000 yen), and the Swiss franc (62,500 francs). Many foreign-exchange experts feel that the options market in foreign exchange will expand and become more important as transactions costs decrease. As noted earlier, options provide more flexibility than do futures or forwards, but at a relatively high cost.
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