Compound Futures

__NOTOC__
== Contract Authors ==
First Author: John J. Lothian
== Summary of Contract ==
Type of contract (i.e. futures, options, equities, OTC): futures
Compound futures allow U.S. dollar denominated futures contracts to be priced in different currencies, but settled in U.S. dollars.
== Contract Details ==
Compound Futures; New Contract Idea for Contract Challenge
Newsletter Archive
By John J. Lothian
When the USFE announced their new dollar denominated Mini DAX futures and the CME Group countered with plans for a Euro denominated E-Mini S&P, it started me thinking about the value of those various contracts and what were the possibilities for other denominations for contracts.
I liked the DAX announcement, because as a U.S. citizen it would be an easy way to invest in this foreign index, but not have the exposure to multiple foreign currency transactions in my futures account. I liked the E-Mini S&P announcement because it game me exposure to a U.S. index, but with a foreign currency component.
The problem with the latter idea though is that my broker, or any broker, will make a number of small foreign currency transactions in my accounts, assuming the position makes negative moves and there is not an adequate number of Euros in the account. I hate the nickel and dime FX transaction costs to buy more Euros. 
That made me start thinking. What if we had a Euro denominated Russell 2000 contract at ICE, but the contract was settled in dollars? Take the Russell 2000 price; multiply it times the price of the front month ICE Euro contract price; and come up with a dollar value for that compound index. Priced in Euros, but traded in dollars. I get the exposure I want to Euros, reducing my concentration of dollar holdings, but my open trade equity moves up and down in U.S. dollars. Call this a Compound Equity Index futures contract.
Actually, this type of compounding could be used for any liquid futures contract. How about a Yen denominated gold futures contract, or a Euro denominated Crude Oil futures? Priced in Yen, but traded in dollars.
It is often said, your opinion about something depends on which side of the table you sit. Same can be true of what currency you value holding.
As a U.S. citizen I don’t directly realize the lost value of the U.S. dollar unless I travel abroad. Buy a couple of Ventis from Starbucks in London for $5 a cup and you get the idea. Take my 430,000 Yen expense, about $430, for a private car ride from my Tokyo hotel to the airport in Narita and it drove it home.
Markets we trade can look completely different when priced in Yen or Euros instead of U.S. Dollars. How about creating an easy way to participate in these markets, in those currencies, while still keeping my account in dollars? How about creating new markets that lean on our most liquid markets, but provide more opportunities for our arbitrageurs and proprietary traders to use the algorithmic trading tools and auto-spreaders that are available to them?
What if FXMarketspace went after smaller trades that could be used to offset risk in trades like this? How about the USFE’s FX Spot Equivalent futures, or ICE’s or CME traditional futures contracts used as part of this. Keep it all in the same clearing house to maximize the efficiencies and safety. 
I have some other ideas to go with these, but this is the first and most important step. 
== Anything Else? ==
== References and External Links ==
Category:Contest Pages
Category:Contract Challenge Pages