The two key factors affecting a currency’s value are central bank monetary policy and the trade balance.
An easy monetary policy (low interest rates) is bearish for a currency because the central bank is aggressively pumping new currency reserves into the marketplace and because foreign investors are not attracted to the low interest rate returns available in the country. By contrast, a tight monetary policy (high interest rates) is bullish for a currency because of the tight supply of new currency reserves and attractive interest rate returns for foreign investors.
A current account surplus is bullish for a currency due to the net inflow of the currency, while a current account deficit is bearish for a currency due to the net outflow of the currency. Currency values are also affected by economic growth and investment opportunities in the country. A country with a strong economy and lucrative investment opportunities will typically have a strong currency because global companies and investors want to buy into that country’s investment opportunities.
The U.S. Dollar Index futures contract is a leading benchmark for the international value of the U.S. Dollar and the world’s most widely recognized traded currency index. In a single transaction the contract enables market participants to monitor moves in the value of the U.S. Dollar relative to a basket of world currencies, as well as hedge their portfolios against the risk of a move in the dollar.
The U.S. Dollar Index futures contract began trading on November 20, 1985 on the Financial Instruments Exchange, a division of the New York Cotton Exchange. The index was originally a geometrically weighted average of ten different currencies, with each currency representing a country that was a major trading partner with the United States. Currently, the index is a geometrically weighted average of six currencies: Euro, Yen, Pound, Canadian Dollar, Swedish Krona, and Swiss Franc.
The futures contract trades at the Intercontinental Exchange (ICE), after it acquired the New York Board of Trade (NYBOT) in 2007. The futures contract trades electronically from 8:00 PM ET to 5:00 PM ET, Monday through Friday.
One futures contract is $1,000 x the index value. The settlement price on October 8, 2012 was 79.622; therefore, one contract is $79,622.
One price increment or “tick” is .005 which is $5. Therefore, a price move from 79.622 to 80.622 is $1,000.
The performance bond or initial margin requirement to initiate one futures contract position is $2,310 (as of November 11, 2015). To control that futures position going forward the maintenance margin is $2,100 (as of November 11, 2015).
The futures contract month listings are March (H), June (M), September (U), and December (Z).
The futures contract’s Last Trading Day (LTD) is at 10:16 AM ET two days prior to settlement. The December 2012 U.S. Dollar Index contract LTD is December 17, 2012 for example.
The US Dollar Index is physically settled on the third Wednesday of the expiration month against six component currencies (Euro, Yen, Pound, Canadian Dollar, Swedish Krona, and Swiss Franc) in their respective percentage weights in the Index. Settlement rates may be quoted to three decimal places.
This particular market trades virtually around the clock (including while the European markets are trading from roughly 2:00 AM CT to 10:30 AM CT and Asian markets are trading from roughly 5:00 PM CT to 2:00 AM CT) and is susceptible to outside markets and fundamental influences.
THE RISK OF LOSS IN TRADING COMMODITY FUTURES AND OPTIONS CONTRACTS CAN BE SUBSTANTIAL. THERE IS A HIGH DEGREE OF LEVERAGE IN FUTURES TRADING BECAUSE OF SMALL MARGIN REQUIREMENTS. THIS LEVERAGE CAN WORK AGAINST YOU AS WELL AS FOR YOU AND CAN LEAD TO LARGE LOSSES AS WELL AS LARGE GAINS.
STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A "LIMIT MOVE", IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.
This material is conveyed as a solicitation for entering into a derivatives transaction.
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