Page 126 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

Unit 8: Currency Futures and Currency Options

Cash settlement as in the case of stock index futures. Notes
Reversing trade. This trade effectively makes a trader’s net futures position
zero thus absolving him from further trading requirements. In futures markets,
99% of all futures positions are closed out via a reversing trade.
(v) Types of Orders: Besides placing a market order, the other types are:

(a) Limit Order: It stipulates to buy or sell at a specific price or better.
(b) Fill-or-kill Order: It instructs the commission broker to fill an order immediately at a
specified price.

(c) All-or-none-order: It allows the commission broker to fill part of an order at a specified
price and remainder at another price.

(d) On-the-open or on-the-close Order: This represents orders to trade within a few minutes
of operating or closing.
(e) Stop Order: Triggers a reversing trade when prices hit a prescribed limit.

(vi) Transaction Costs: The costs incurred are:
(a) Floor Trading and Clearing Fees: These are small fees charged by the exchange and its
associated clearing house.
(b) Commissions: A commission broker charges a commission fees to transact a public
order.

(c) Bid: Ask spreads.
(d) Delivery Costs: Those are incurred in case of actual delivery.
(vii) Tax Rules: The regulations include:
(a) Marketing-to-the-market: The gains/losses are considered at the end of the calendar
year where futures contracts are marked-to-the-market.
(b) Gains: The realised and unrealised gains are taxed at the ordinary personal income
tax rate.
(c) Losses: The realised and unrealised losses are made deductible by offsetting them
against any other investment gains.
(d) Commissions: Brokerage commissions are tax deductible.

Execution of Futures Trade

For a client who wants to assume a long position in, say, a July British pound futures contract,
the following steps are undertaken:
(i) Phone call to the agent.
(ii) The agent trades through an exchange member who may be a commission broker or a
local.
(iii) The actual trading is conducted in a past for the particular futures contract involved.
Trades are conducted through the use of sophisticated hand signals.
(iv) The commission broker confirms the trade with the agent who then notifies the client of
the completed transaction and price.

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