Are Futures and Options the Future of Forex?


Prompted by a comment from Michael to a post about the hedging ban, here's some more information about regulated alternatives to over the counter retail forex.

The Chicago Mercantile Exchange (CME for short) first introduced currency futures contracts back in 1972. These "full-size" contracts were traded using the venerable open outcry method, which involved traders gesticulating and shouting at each other across a trading pit.

In 1992 the CME introduced its Globex electronic trading platform which led to the introduction of the "E-mini" electronically traded contract. An "E-mini" currency futures contract is 1/2 the size of a full contract. Then, earlier this year, the CME introduced a new "E-micro" contract only 1/10 the size of a full contract, specifically designed to appeal to the retail investor.

Bear in mind the rather confusing terminology here. In OTC forex a mini-lot is 1/10 the size of a full lot. In OTC forex a micro-lot is 1/100 the size of a full lot. An E-micro is therefore roughly equivalent to a mini-lot. I trust that's clear!

Here's a presentation in which the CME's global head of FX Derek Sammann tries to sell us the benefits of the new contract.

Note some of the points Mr. Sammann is trying to ram home. Counterparty risk, transparency, risk mitigation and hedging! Hedging is a good thing, it seems. While Derek thinks the new E-micro contract will primarily be used by retail customers as a trading vehicle, he also expects smaller companies to use it for hedging to mitigate risk. He also hints that options on the new futures contracts will be available at some point in the not too distant future. Options are another tool in a trader's toolbox that can be used for good or evil, for trading or for hedging (or should that be the other way around?).

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