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Currency Futures

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  #2284 (permalink)

Lima Peru
Trading Experience: Advanced
Platform: Sierra Multicharts TT CQG
Favorite Futures: ES CL
Posts: 51 since May 2012
Thanks: 312 given, 78 received

aaaaaa225 View Post
Simple question really I'm wondering if anyone knows what is making them follow eachother.

as someone already mentioned-what makes any liquidly traded futures contract follow its underlying cash market is simply the buying & selling of the arb traders. The futures is the exact equivalent of the cash with the additional premium of the time value of money until the expiry (plus the value of dividends in an equity index, or the cost of warehousing & transport for a commodity). If you can capture the mispricing between fair value of the futures & the current spot rate - thats pure arbitrage = free money. You buy one sell the other & either hold the position to expiry, or trade out of it when the basis flips the other way. There are a ton of prop desks around the world with automated systems tracking & trading this 24 hours a day. Back in the day the mispricing was huge. Nowadays it gets whacked back into line before you'd ever notice it, except in situations of extreme volatility.

So as was mentioned, pure arbitrage is the reason the futures "follows" the spot.

Hope this helps,

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