Jump to content
  • 0

Do forward FX spread bets expire at the spot price?


Guest RollingTape

Question

Guest RollingTape

Hi,

I understand that forward FX spread bets will rollover by default and my preference to have them expire has to be communicated in advance. Assuming that I do so, I want to ask what price will be used to settle them. I understand that right now the forward GBP/USD market is a bet on what the rate will be in, say, March 2019 and so it trades at a price that incorporates a discount/premium. However, as we approach March 2019 (and the settling date of this bet) I would expect the price to converge to the actual spot rate, and on the date of settling I would expect there to be no discount/premium anymore as the forces of arbitrage would lead the price to be almost exactly equal to the spot rate on that day. 

Are my expectations correct or is there something I should know?

Thanks!

Link to comment

6 answers to this question

Recommended Posts

Hi @Rolling Tape, I'm not totally up on futures and forwards but I think it is the other way round, they will expire by default unless you have checked the rollover option the the settings section from the My IG page. Also I think that they have their own 'settlement' price on expiry and don't use the spot close price. If anyone knows different and/or can add to the above please do.

Link to comment
Guest RollingTape
4 hours ago, Caseynotes said:

Hi @Rolling Tape, I'm not totally up on futures and forwards but I think it is the other way round, they will expire by default unless you have checked the rollover option the the settings section from the My IG page. Also I think that they have their own 'settlement' price on expiry and don't use the spot close price. If anyone knows different and/or can add to the above please do.

 

Hi @Caseynotes thank you for the response. Thanks for clarifying expiry/rollover default actions. My main focus here is the price at which they close out at. If they don't close out on the spot price then what do they use? I thought the main point of the Forwards market was to bet on what the price would be in March 2019. If the GBP/USD spot price in March 19 is 1.2808 then I assume there is some mechanism preventing the forwards market from closing out at, say, 1.3011 or something significantly difference, else what's the point of the market? I hope someone else can elaborate further. Thanks again.

Link to comment

Hi @RollingTape, If you were looking to take physical delivery of an asset at a certain price at a certain time in the future you could find a futures contract that would do that but it would be at futures market prices not the spot market prices.

If you look at the spot DFB chart next to the forwards chart below you can see they are the same, price doesn't converge. To trade either as a retail trader you are simply speculating that price will either go up or down, if you are planning a short term position the DFB is more cost effective because the spread is very tight, if you are planning to hold for the longer term the forwards option is more cost effective because there are no overnight charges. When you exit or at expiry it is at the futures market price, if you rollover you are closing and re-opening so you pay the spread over again (though there is a discount).

ft1.thumb.PNG.2220b12d2cdf8245b1dd4197f76621c2.PNG

 

 

Link to comment
Guest RollingTape
On 25/09/2018 at 20:18, Caseynotes said:

If you look at the spot DFB chart next to the forwards chart below you can see they are the same, price doesn't converge.

ft1.thumb.PNG.2220b12d2cdf8245b1dd4197f76621c2.PNG

 

 

 

Thanks for the advice @Caseynotes but I'm not sure if I made myself fully clear. I'm talking about convergence on the date that the forward contract is due to expire/rollover. For example the graph that you posted shows the Dec 18 forwards bet, which would expire on the second Friday in December - so I would expect convergence by then, not right now. 

Basically: I expect that the forwards bet set to expire on X date (say December 18) is a bet about what the currency will be in December 18. So right now of course there is a gap between that and the actual currency rate right now (the spot rate graph on the left in your post), because people expect the currency to change in a given direction. But once we get to December 18, that gap should narrow and eventually on X date itself I would expect no gap.

Otherwise - what are we even betting on in the Forwards market? If the March 18 forwards market is a bet about what level the exchange rate will be at on March 15th 2018 (random date), then surely the bet should be settled on March 15th 2018 based on what the rate is at that time - otherwise what drives the settling price?

Thanks again

Link to comment

this is pretty easy to answer. Your bet closes at the prevailing price at the point of closure. If the bet closes in your favour you are credited the gain, however the bet could of course move against you and the loss debited from your account. You can of course close anytime beforehand.

By buying the forward you pay a bit more spread up front but avoid the overnight financing charges, which is different if you bought at stop (DFB) and you incur finance interest each day the bet rolls.

 

So for instance lets say forexX is trading at 1200 to sell and 1205 to buy at spot. On a forward contract this may be, say 1220 to sell and 1225 to buy. 

In three months time the currency may either move upward or downward, and be up or down at the point the bet expires. If it is above the 1205 when you purcased (1300, say) then your gain is the difference.

If it is below the 1205 you bought, say 1180, you are debited the difference (1205-1180)

 

Link to comment

Hi @Rolling Tape, it's an interesting topic not least because most of the educational stuff on futures is about contracts that require physical delivery on a set date rather than leveraged trading through a broker but there are important differences.

The spread difference will always exist between the forwards and spot so the forwards buy/sell price will never converge to the spot price but one component of the forwards pricing is a interest differential between the two currencies and that aspect of the buy/sell price will reduce as the forwards contract nears expiry.

The reason for forwards is simply to provide a more cost efficient market for the long term holders, how long term a trade needs to be will depend on size and expected holding duration in relation to the different costs between spot and forwards. 

 

Link to comment

Archived

This topic is now archived and is closed to further replies.

  • image.png

  • Posts

    • Thank you for the reply. This may not be the case, the market clearly says it is closed when I try to place a trade. Effectively meaning I am unable to trade outside of the hours specified!
    • Apple’s recent stock weakness marks a divergence with other members of the Magnificent 7 and the broader Nasdaq 100. Source: Bloomberg   Indices Shares Apple Inc. Artificial intelligence Price iPhone Written by: Chris Beauchamp | Chief Market Analyst, London   Publication date: Friday 01 March 2024 13:26 AI Efforts in Question Apple's stock fell below $180 on Thursday for the first time since early-November, underperforming the broader market. While the S&P 500 and tech-heavy Nasdaq indices posted solid gains, Apple shares slipped around 1%. Source: Google Finance The decline comes as doubts loom about Apple's artificial intelligence (AI) initiatives. Rivals like Microsoft are delivering strong earnings growth tied to burgeoning AI technology. This was highlighted by Tuesday's report that Apple is discontinuing its decade-long electric vehicle project. Back in 2017, Apple CEO Tim Cook called the autonomous car endeavour the "mother of all AI projects." Stock Underperforms Broader Market So far in 2024, Apple shares have dropped 3%, trailing the S&P 500's 7% gain and the Nasdaq's 9% climb. Despite its long-term market-beating returns, Apple has recently lagged the S&P 500 on 6-month, 1-year, and 2-year timeframes, according to FactSet data. After spending most of 2021 to 2023 as the world's most valuable public company by market capitalization, Apple surrendered that crown to Microsoft in January. Microsoft's sales and profit growth have far outpaced Apple's, which posted negative growth in its 2022 fiscal year ending last September. AI Investment Hints but Details Lacking At Wednesday's shareholder meeting, Cook suggested Apple is "investing significantly" in generative AI. He said more specifics will be announced later this year. UBS analyst David Vogt predicts Apple's first major AI launch will come in June at its annual Worldwide Developers Conference. iPhone Sales Weakness Looms In addition to AI uncertainties, expectations for weak iPhone sales growth continue to weigh on Apple. iPhones accounted for 58% of Apple's total revenue last quarter. Some See Positives in Car Project Halt Some analysts see a silver lining in the halt of Apple's electric car plans. It enables the company to refocus AI talent on nearer-term products with greater market potential. To Morgan Stanley, it also shows Apple's "cost discipline." Apple analyst rating LSEG (formerly known as Refinitiv) data shows a consensus analyst rating of ‘buy’ for Apple with 10 strong buy, 17 buy, 13 hold and 2 sell – and a mean of estimates suggesting a long-term price target of $201.41 for the share, roughly 16% higher than the current price (as of 1 March 2024). Source: LSEG Technical outlook on the Apple share price The Apple share price continues to precariously weigh on its $180.30 to $179.25 support zone which consists of the January-to-February lows. A fall through and daily chart close below this area looks increasingly likely and would lead to levels being reached which were last traded in early-November with the 3 November low at $176.65 representing the first downside target. Apple Daily Candlestick Chart Source: TradingView Further down sits the $174.49 August low below which key support can be spotted between the September and October lows at $167.62 to $165.67. Were the $180.30 to $179.25 support zone to hold, though, a rise and daily chart close above last week’s high at $185.04 would need to occur, for a recovery off the support area to gain traction. In this scenario the Apple share price would trade back above its 200-day simple moving average (SMA) at $183.90 and target the 55-day SMA at $188.50. This will continue to favour a fall through support at $179.25 to take place as long as the Apple share price continues to trade below last week’s high at $185.04.     This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
    • PG Elliott Wave Analysis Trading Lounge Daily Chart, 1 March 24 The Procter & Gamble Company, (PG) Daily Chart PG Elliott Wave Technical Analysis FUNCTION: Trend MODE: Impulse STRUCTURE: Motive POSITION: Minuette wave (ii) of {iii}. DIRECTION: Bottom in wave (ii).   DETAILS: As we are approaching ATH at 165$, we are expecting either an acceleration higher into wave (3) or else we could have topped in wave (C) to then fall back lower and continue the major correction.         PG Elliott Wave Analysis Trading Lounge 4Hr Chart, 1 March 24 The Procter & Gamble Company, (PG) 4Hr Chart PG Elliott Wave Technical Analysis FUNCTION: Counter Trend MODE: Corrective STRUCTURE: Zigzag   POSITION: Wave a of (ii).   DIRECTION: Downside into wave (ii). DETAILS: Looking for a clear three wave move into wave (ii) to finding support around the 155$ mark.   Welcome to our PG Elliott Wave Analysis Trading Lounge, your ultimate destination for detailed insights into The Procter & Gamble Company (PG) using Elliott Wave Technical Analysis. As of the Daily Chart on 1 March 24, we dive into crucial trends shaping the market.         *PG Elliott Wave Technical Analysis – Daily Chart* In terms of wave dynamics, we identify a trend function with an impulse structure, specifically a motive pattern. The current position is in Minuette wave (ii) of {iii}, indicating a potential bottom in wave (ii). With the approaching all-time high (ATH) at $165, we anticipate either an upward acceleration into wave (3) or a potential top in wave (C), followed by a downward movement to continue the major correction. *PG Elliott Wave Technical Analysis – 4Hr Chart* Here, we explore a counter trend mode with a corrective structure, specifically a zigzag pattern. The present position is in Wave a of (ii), suggesting downside movement into wave (ii). We anticipate a clear three-wave move into wave (ii), aiming to find support around the $155 mark.  
×
×
  • Create New...
us