question about currency futures contracts on CME

[chibiks]

ok before speculating, I thought I would first check who actually uses the futures market for hedging/ risk control. So I downloaded the annual reports of 3 semiconductor companies and checked for their strategies; including Intel corporation and a large UK firm (GBP) with US operations, it seemed they all explicitly specfied that they use forward contracts.

So if the currency futures markets were that good, why arent the very large companies like intel not using it? Are we then speculating against fellow speculators or against companies.

 

[DionysusToast]

Well - these companies are hedging future future price risks. Makes sense that they would be looking further into the future than the next few months...

 

[chibiks]

Well - these companies are hedging future future price risks. Makes sense that they would be looking further into the future than the next few months...

Thanks for clarifying, I never thought of that.

so in what kind of commercial situation and precisely what kind of companies would use futures over forward contracts. Thanks! as I am new to the area.

 

[Rhody Trader]

Futures are, of course, forward contracts, so by saying they use forwards the companies could be including futures in there. The big reason they may not be doing so is flexibility. They can customize a forward contract done via a bank to their specific needs. Futures contracts are relatively small, so annual reports of large multinationals probably isn't where you should be looking.

 

[DionysusToast]

Thanks for clarifying, I never thought of that.

so in what kind of commercial situation and precisely what kind of companies would use futures over forward contracts. Thanks! as I am new to the area.

Well - take your example, Intel. A US company with a huge plant in Penang. They have both ringgit & dollar expenses.

They sell to Dell. Or rather, they make stuff, put it in a warehouse at Dell and then Dell officially buy it when they pick it off the shelf to put it into a PC. Plenty of currency risk for Intel there.

Dell fly a 747 full of laptops from Penang to the US every day. Again, they have a lot of Ringgit costs and they also have contracts for logistics services in many currencies. This is all done on paper-thin margins.

Both companies have a lot of currency exposure but you'd really have to be inside their finance depts to figure out what those exposures really are. I'm not sure how you'd go about trying to figure out how/when they hedge.

 

[chibiks]

I think futures contracts were originally made so that commodity producers could guarantee the prices that they would receive from their produce which would allow them to plan and get loans etc... Likewise, the consumers of the commodities could also guarantee the price they would be able to buy at.

These days these contracts are basically just for speculators to speculate. I personally prefer CFDs Best Broker For Trading Futures at least with CFDs there is no expiry date, you can exit a trade when you like and there is no risk of every having to take delivery. Sure CFDs are just for speculative purposes too, but the futures market is pretty much that these days too. You do get slightly cheaper trading costs with the actually Futures Market though, but that's about it.

I think you have a good point Davidee. The US and London cocoa futures really helps companies in the chocolate value chain hedge cocoa beans prices and fix selling prices given that cocoa takes about 5 years to produce fruit. So that makes sense. If someone were to speculate in cocoa, he will be looking to take money away from hedgers and other speculators. Mars, Cadbury, Kraft, etc all have vested interest in these markets and Glencore.

But from my research I cant see any company using the currency futures market, maybe i have to look in the commitments of traders report? And why not just use forward contracts, why futures? Forward contracts also cater for the short term.

 

[Oskeewow]

I would add two things: counterparty risk and arbitrage. As we've learned all too well in recent years banks can fail, and when you need your counterparty commitment most is probably when they are least able to comply. CME guarantees you will get your money, and they will make sure they get it from the other side.

And the markets are pretty tightly arbed, so just because the immediate opposite end of your futures trade may be another speculator, it may just as well be a MM who is simultaneously trading against a commercial player in the spot. There may be a few forward points difference between spot and futures price, but when one moves, so does the other.