he Thailand Futures Exchange (TFEX) plans to launch US dollar futures as another effective tool for investment this year.
With the fluctuating exchange rate affecting the Thai economy in both the real and the financial sector, dollar futures will served as a hedging tool against foreign-exchange (FX) risk. This tool stands to benefit not only exporters and importers but also investors who want to diversify their portfolios in foreign assets.
Dollar futures is a contract to exchange dollars for baht at a specified future date and at a rate fixed on day of purchase. Each contract has a value of $1,000, which is considered a small contract for an exporter or importer seeking to hedge risk.
Initially, the maximum position for each client will be $5 million, or 5,000 contracts. Dollar future contracts offer four different lengths of maturity: the three nearest consecutive months and the next quarterly month.
The price is quoted in terms of baht per one US dollar, with minimum price movement at Bt0.01 (Bt10 per contract). The contract is cash-settled, which means no physical dollars delivered on the expiration date. Moreover, investors receive or have to pay (depending on gain or loss) in cash. On the last trading day, expiring contracts will be settled at 11am. The final settlement price is based on the $/Bt rate recorded by Thomson Reuters at 11am. The rate is derived from the best bid and offer quoted by about 20 Thai and foreign contributing banks.
Dollar future contracts will be available to every Thailand resident. The trading method is as simple as stock trading – a trading account with a TFEX broker is all that is needed. Investors can submit their orders by telephone or online. Up-to-date online trading prices and data are easily accessed via smart phones, laptops and other Net-friendly devices.
Business owners will find dollar futures a simple way to hedge against FX movement. Importers worried about possible depreciation of the baht can take a long position and effectively freeze the exchange rate at the current futures price. On the other hand, exporters can “short” dollar futures to hedge against risk of baht appreciation.
Dollar futures provide a two-sided trading opportunity, for both weak and strong exchange rates. With a low level of capital, investors gain a large degree of trading leverage. Those who invest in gold futures, silver futures, oil futures or foreign mutual funds can also use dollar futures to hedge their exposure to exchange rate risk.
We believe that exchange-rate risk will become an important factor in our foreign trading and investment. Dollar futures will be launched this year as one of the instruments enabling Thailand residents to manage their exchange risk. For more information, visit www.tfex.co.th www.tfex.co.th
TFEX presently offers equities products comprising SET50 Index futures/Options and single stock futures, as well as commodities products including futures in gold, silver and oil, and the interest rate products THBFIX/BIBOR/five-year govt bond futures.
Kesara Manchusree is managing director of the Thailand Futures Exchange.