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FX spot future parity theorem correlation query
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FX spot future parity theorem correlation query

  #1 (permalink)
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FX spot future parity theorem correlation query

Hi,

Complete newbie to futures, not to FX spot, so I do apologise for the probably dull and infant nature of my question.

IF currency futures are priced using the spot-future parity theorem (so I have read in my research), why is it I am seeing a futures contract on the GBP decrease in price 1.3290 as the price of the GBP rises? This has been racking my head for days and I can't find a definitive answer anywhere, it all seems to conflict.

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  #2 (permalink)
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  #3 (permalink)
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I don't see the same thing : spot 1.3276, future 6B 09-16 1.3286

The theorem does't say the future MUST be higher than the spot, it simply says that
if it's lower an arbitrage opportunity exists.

At expiry spot and future price will converge to the same level

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  #4 (permalink)
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I don't know the theorem. But as Rleplae says, the future and spot will move in sync with each other because you have arbitrage traders fading divergence and bringing them in to line again. (But as said the exact prices will not match).
You don't say what time frame you are looking at or if you are looking at both markets live in the same platform.
If you have a live forex feed but are looking at the future data from quotes on the CME website fro example ( British Pound Futures (GBP/USD) Quotes - CME Group ), then remember that the CME data is delayed by ten minutes so that would explain why they seem to be moving out of step. Or if watching them 'live' through your platform maybe you have free delayed futures data but need to pay for an actual live data. Just a couple of suggestions. Hard to be sure without more info.

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  #5 (permalink)
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rleplae View Post
I don't see the same thing : spot 1.3276, future 6B 09-16 1.3286

The theorem does't say the future MUST be higher than the spot, it simply says that
if it's lower an arbitrage opportunity exists.

At expiry spot and future price will converge to the same level

If the theorem does not state it must be higher then why is it an arbitrage opportunity? The whole idea of arbitrage is that one product MUST be priced higher or lower than another by a certain formula and criteria.

The Futures currency prices are higher because they incorporate the interest rate into them during the holding period.
This also applies to the different months in futures where further months are priced higher than the current ones.
Just look at the settlements of GBP in future months (U,Z,H17, etc)

If the futures were lower, then we have an arbitrage because UK rates are positive (official bank rate is positive).

The only logical explanation is given by @matthew28 or the liquidity providers of the OP are lagging (?)

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  #6 (permalink)
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Hey guys,

Thanks for all the answers, all look great but not really answering my question. An example may help.

If a 6 month GBP (6 month so convergence wont be that substantial Im guessing) contract on the same platform as GBPUSD FX spot is going down, why is the GBPUSD currency moving up?

I watched 6 consecutive down candles on a 6 month GBP Futures contract and the GBPUSD spot moving in the completely opposite direction, that makes little sense to me on a contract with a few months to converge and a theorem that states it follows the spot price + cost of carry.

Thanks

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  #7 (permalink)
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Justwondering123 View Post
Hey guys,

Thanks for all the answers, all look great but not really answering my question. An example may help.

If a 6 month GBP (6 month so convergence wont be that substantial Im guessing) contract on the same platform as GBPUSD FX spot is going down, why is the GBPUSD currency moving up?

I watched 6 consecutive down candles on a 6 month GBP Futures contract and the GBPUSD spot moving in the completely opposite direction, that makes little sense to me on a contract with a few months to converge and a theorem that states it follows the spot price + cost of carry.

Thanks

Do you have a video / screenshot you can post showing the divergence?

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  #8 (permalink)
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yes ill post it shortly.

Thanks!

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  #9 (permalink)
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Justwondering123 View Post
Hey guys,

Thanks for all the answers, all look great but not really answering my question. An example may help.

If a 6 month GBP (6 month so convergence wont be that substantial Im guessing) contract on the same platform as GBPUSD FX spot is going down, why is the GBPUSD currency moving up?

I watched 6 consecutive down candles on a 6 month GBP Futures contract and the GBPUSD spot moving in the completely opposite direction, that makes little sense to me on a contract with a few months to converge and a theorem that states it follows the spot price + cost of carry.

Thanks

Futures are centrally cleared while FX is distributed. There is not a single FX market.
It is possible that the rate for the FX you are looking for is either out of sync with the Futures market or vice versa
but on deep liquidity, this should not be the case.. Temporarily situations of course always can occur and provide
trading opportunities...

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