Currency options expiration question (Globex)

Discussion in 'Forex' started by nravo, May 21, 2007.

  1. nravo


    On Globex, let's say I am short June Yen futures -- and sold the futures @ 82.50 -- and also sold a June Yen futures put at the 82 strike. And the Yen on expiration day closes at 81.50. Ok, what happens to my two positions? Do they just wipe each other out? (And I keep my premium plus the 50 pips between 82.50 and the 82 strike.) Or does the fact that currency futures are cash-settled make this more potentially problematic?

    Btw, should currency futures questions be posted in Forex or in Futures forums?
  2. MrAngry


    I assume (only assume as I don't know the answer), that because the option expires weeks before the future (talk about a screwed up contract), that they can't cancel each other. Clearly the buyer of the option will exercise it and cover it and I guess you'd have to.

    Think unless someone used them regularly, you'd be best to get in touch with CME.
  3. HOBO


  4. nravo


    For currency futures wouldn't cash-settled and physical delivery be the same thing?
  5. HOBO


    Cash-settled contracts use the trading currency for settlement. (e.g. Futures on Brazilian Real settle in USD).

    Physical delivery contracts settle by delivering the underlying. (e.g. Futures on Japanese Yen settle by delivering JPY. If you shorted JPY futures you have an obligation to deliver 12,500,000 JPY per contract and receive USD).

    If your puts are assigned, you will be obligated to accept delivery of JPY futures at 82. So this would offset your current short position in the futures.
  6. nravo


    But let's say you had $25,000 US in your account and were long 1 GBP contract and at settlement the price had declined. What would happen, would you simply be debited the amount you lost or would you have to buy the full cash amount of the contract? And if so, would it convert to a Forex trade where you would only need to have a small percentage of hat cash in your account, or would you suddenly need the whole amount and your account is frozen and you have a lien against your for the balance or whatnot? Sounds like accidentally taking delivery of a currency futures contract is as risky as other physical settlement futures contracts, no?
  7. HOBO


    If your broker facilitates physical delivery of currencies, you would buy 62,500 GBP for approximately 125,000 USD (62,500*settlement price).

    The remaining questions are broker specific. So, I can only guess:
    Probably you would be receiving credit interes on +65,000 GBP and pay debit interest on -100,000 USD. As long as the foreign exchange rate does not move, your account equity should remain at an equivalent to $25,000. I see no reason why the broker would freeze the account. The broker should be happy (because they profit from debit/credit interest differential).

    With commodities there is no risk of physical delivery. Your broker will close your future positions prior to settlement date.