While there is no central marketplace for the foreign exchange (forex) market, foreign exchange futures are one way to trade forex through exchange-traded contracts. Forex futures are similar to other futures contracts in that the currency pairs' exchange rates act as the underlying commodity in the exchange. In 2009, the Chicago Mercantile Exchange (CME) introduced a smaller version of currency futures contracts – the E-micro forex futures suite. These six currency pairs trade at one-10th the size of the corresponding forex futures contracts and make forex futures trading more accessible to a wider variety of traders and investors, including active individual traders, small commodity trading advisors (CTAs) and small and medium enterprises (SMEs). Here we'll take a look at these forex futures and show you how you can incorporate them into your trading.
TUTORIAL: The Forex Market
What Are E-micro Forex Futures?
E-micro forex futures contracts include six exchange-traded currency futures contracts that are one-tenth the size of the traditional currency futures contracts. For the trader or investor, this equates to reduced margin requirements and less risks than are associated with the E-micro's big brothers. The E-micro forex futures contracts are traded exclusively on CME Globex, which is the Chicago Mercantile Exchange's electronic trading platform and the world's largest regulated forex marketplace. Figure 1 shows a comparison of contract specifications between the standard currency futures contracts and their corresponding E-micro contracts. These three smaller contracts are fully fungible with the full-size forex futures contracts.
|Figure 1: A comparison of contract specifications between the standard currency futures contracts and their corresponding E-micro contracts|
Three of the contracts are fully fungible with the CME group's full-sized forex futures contracts: EUR/USD, GBP/USD and AUD/USD. Margins and exchange fees are scaled down proportionately to the full-size contract. For example, if the full-size EUR/USD contract had a $4,050 margin requirement per contract, the E-micro EUR/USD contract would have one-10th the margin requirement, or in this example, $405 per contract. Regularly updated margin requirements for the E-micro contracts can be found by contacting the CME. (For related reading on margin, take a look at Forex Leverage: A Double-Edged Sword.)
E-micro Forex Futures Contract Specifications
The CME offers six currency pairs as E-micro forex futures contracts as seen in Figure 2: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF and USD/CAD. Like other futures products, each contract has specifications regarding the size of the contract, the minimum price increment and the corresponding tick value. These specifications allow traders to understand the dynamics of each contract and determine the potential profit or loss for particular price movements.
|Figure 2: The contract specifications for each of the six E-micro forex futures contracts.|
The EUR/USD contract, for example, has a minimum tick size of 0.0001; each price tick up or down will result in a corresponding US$1.25 increase or decrease in value. If a long trade is entered at $1.3957, for instance, and price moves to $1.3967, the 10-tick price increase would be worth 10 X $1.25, or $12.50.
Figure 2 also shows each contract's ticker symbol. As futures contracts, each symbol must also be followed by the contract month and year to define the particular contract. The E-micro forex futures contracts trade with set expiration dates on a quarterly cycle, with contract months falling in March (designated as "H"), June ("M"), September ("U") and December ("Z"). The EUR/USD contract for December 2010, then, would be referred to as M6EZ10:
Safety and Security of the E-micros
As futures contracts, E-micro products are part of an exchange-traded, regulated market. The E-micros market is regulated by the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA). Unlike the cash forex market, where different participants see different prices (depending on the broker), pricing is centralized and all market participants have access to the same wholesale bid and ask prices with E-micro forex futures contracts. (Forex futures operate differently from traditional futures. To better understand forex futures, read Getting Started In Foreign Exchange Futures.)
CME Clearing acts as the counterparty to every trade. In other words, CME Clearing is the buyer to each seller, and the seller to each buyer, virtually eliminating any counterparty credit risk. All trades are matched and settled by CME Clearing. In addition, customer funds are kept completely segregated.
The Bottom Line
When the CME launched the E-micro forex futures contracts in 2009, six products were introduced. At one-tenth the size of the full-size contracts, the E-micros offer traders the opportunity to trade forex in a regulated marketplace and with reduced margin and risk exposure. In addition, for traders interested in the full-size contracts, the E-micros provide a practical introduction to their big brothers. (Learn how to enhance your forex trading system with a strategic schedule. Read How To Set A Forex Trading Schedule.)