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As I promised to my readers, I am returning with an article about the "new" currency futures contracts introduced by the non-NFA regulated brokers. Together with arbitrageable commodities, currency futures prove to be some of the most valuable contracts to be found in a broker's datafeed. 1. Basics of Currency Futures ====================== Currency futures are the standardized, transferrable version of currency forwards. Currency forward contracts lock in the price at which an entity can buy or sell a currency on a future date. But how is a currency futures priced? A spot forex rate is the rate at which two currency amounts are equal : for example, 10000 USD are (at a moment, "spot") equal to 1.230.000 JPY at 123 JPY/USD rate. Since the time value of a currency is given by the interest, the currency futures rate which equalizes them incorporates the differential rate. Suppose we have two currencies, A and B, both equal now, as A/B = 1 spot rate. A interest in 20%, while B interest is 5% so there is a rate which equalizes 1.20 with 1.05 , and that rate is 0.875 , as 1.20 x 0.875 = 1.05 Hence the futures formula: http://img514.imageshack.us/img514/6458/futuresformulaax8.jpg In our case, the spot rate didn't had any effect, since it was 1. We must know 2 elements: 1. The interest rates 2. Futures expiry dates 1. The interest rates That's an easy one. A reliable source for this can be found here on FXStreet . 2. Futures expiry dates This can be done in a few ways: a. Download WHC's MetaTrader. Then point to Market Watch, right click, (Show All if they are not already) , Show All, then Properties, then expand the Currencies top folder. b. Directly from CME website (see below) Of course, when you use the formula you must calculate the time to expiry as precise as possible , because it influences the interests put inside the formula. For example, if we have 90 days to expiry, that 1+C2 Interest Rate % from the formula transforms in 1 + (0.5/100) / 365 x 90 = 1.001232876 Almost forgot: depending on the strategy you'll decide to use, it may be useful to check when the next meetings of the central banks officials will take place and also what's the expectation about the interest rates. 2. Spot-to-Futures Arbitrage ===================== Since the futures are linked to the spot by the interest to expiry, and futures at expiry equalizes the spot (this equalization is a feature of all futures contracts that have a spot counterpart) there are two possible spot-to-futures arbitrages: http://img128.imageshack.us/img128/4825/eurusdarbitragebigfa2.jpg a. exploiting the difference between spot and futures (often called basis) and cashing it in while paying interest on spot position (the "Covered Interest Arbitrage" in finance books) ; or, depending on the broker's feed , the reverse : paying the basis and getting interest on spot position (which is ockward and not likely to happen for real, but never say never) b. exploiting missalignments of the converted futures to the spot (or of the real futures to the calculated futures , which is the same thing) using interest rates. However, type b. arbitrage is not as seldom as that picture lets to be understood. You don't have to be a genius to see that a misprice happens not only when futures is on the wrong side, but also when futures is not where it should be: We could also discount (let's call it like that the conversion of futures to spot, even if some futures are discounted, e.g. USDJPY) the futures and see how far is from the real spot. We should also have a neat time conversion on hand to have a continuous time, not a jumpy one (e.g. not the time that decreases by one day when a day passes, but a time in real number format). The discounted futures is calculated using the reversed upper formula (get the spot from the equation to find it out). Discounted futures to spot basis fluctuation http://img517.imageshack.us/img517/2136/eurusdarbitrage2te3.jpg The overlay indicator : DiscountedFutures The window indicator : DiscountedBasis As you can see, with 5-6 pips in magnitude of arbitrage windows, you could cover the 4 pip costs of arbitrage (2 pips on EURUSD, 2 pips 6E equivalent commission in pips). But is MetaTrader fast enough? However, with a pretty superior account trading at 1 pip spread it might work smoothly... With a regular case of EURUSD - 6E you could, for example, when DiscountedBasis has a higher value, sell the futures and buy the spot, and close when it reaches a lower than regular value... Now let's return to the a. arbitrage type ("Covered Interest Arbitrage") The picture below depicts the basis and swaps consuming reciprocally (in the normal swap rate regime), while the new, swap-free accounts based on brokers arrangements with islamic banks provide new, outstanding arbitrage opportunities: Parameters : Account equity about 450 USD; Account leverage about 200 ; Margin usage = 90% ; http://img524.imageshack.us/img524/7725/spottofuturesarbitrageme1.jpg from Futures.mq4 script This example was run on WHC (although WHC doesn't offer swap free accounts). How are the calculations done? Below is a picture with the implementation made by Beaverhea Financial. Although it's an untrustable broker, the implementation is useful for calculus and demo. http://img166.imageshack.us/img166/9504/beaverheadfuturesyf1.jpg The real currency futures implementations on CME The ones that can be found with brokers are: CME Euro FX CME Australian Dollar CME Canadian Dollar CME British Pound CME Japanese Yen CME Swiss Franc WHC comes also with these two, but they don't seem to work properly: CME EC/JY Cross Rate CME EC/SF Cross Rate Now the arbitrage is pretty simple to understand if it's about EURUSD and 6E. Provided that EURUSD's lotsize is 100K and 6E's lotsize is 125K, the ratio : EURUSD traded lots / 6E traded lots = 5/4, as 5 x 100K = 4 x 125K to equalize pip movements. But what if it's a reversed futures, such as USDJPY to 6J ? This is a calculus example, using the Impeccable Hedge algorithm that powers FPI, Intercross Arbitrage and Swap Arbitrage We consider: USD - 5.25% JPY - 0.25% USDJPY right before old futures expiry: 123.00 6J right before old futures expiry = 100/123.00 = 0.8130 New futures, in the first moments, with expiry in 3 months: http://img64.imageshack.us/img64/6761/futurescalculation6jcd5.jpg Actually tested the formula on june 15 data and it was accurate on a range of 6 pips (of course I used 92 days period instead of dividing to 4) Prepairing the hedge : USDJPY spot > transformed USDJPY futures : Sell USDJPY, Sell 6J Sold 100000 (1 lot) USDJPY @ 123 Sold 100000 USD Bought 12300000 JPY Sold 12300000 (0.98 lots) JPYUSD (6J) @ 0.8232 (/100) Sold 12300000 JPY Bought = 101253.6 USD That 1253.6 must be the embedded interest in the futures. Supposing now USDJPY=127 on expiry ; 6J is right reversed = 0.7874 Sell 100000 USDJPY @ 123 -> (1 pip = 10*100/127 = 7.87 USD) : -400 pips x 7.87 = -3148 USD Sell 1230000 6J @ 0.8232 -> (1 pip = 12.3 USD) : 358 pips x 12.3 = 4403.40 USD Result = 1255.40 Supposing now USDJPY=119 on expiry ; 6J is right reversed = 0.8403 Sell 100000 USDJPY @ 123 -> (1 pip = 10*100/119 = 8.40 USD) : 400 pips x 8.40 = 3360 USD Sell 1230000 6J @ 0.8232 -> (1 pip = 12.3 USD) : -171 pips x 12.3 = -2103.30 USD Result = 1256.70 As you see, arbitrage holds no matter the direction. And if the regime is swap free, pocket all of it... about 200K USD in traded volume, this would be tradable with a 500 USD account at about 450 leverage! This means more than double! Of course it is advisable to review articles on central banks monetary policies especially if their meetings happen close to the beginning of futures. Create scenarios about what might happen if interest differential enlarges. Calculate the damage done to the equity, add 20-30 pips or more of market "missalignments" and see at what leverage it is sustainable (also include here the issues about not trading microlots - see the Intercross Arbitrage article). If you're heavy leveraged and faint hearted, better close positions before central bank meetings, and , most important, don't EVER forget to close positions before expiry or your account will likely be blown up due to violent futures shift on expiry change (or hopefully you'll just lose the profit!) . You could even test broker's vigilance by reversing positions with a day before expiry in order to make the entire profit on the expiry shift moment... Whatever, the method is a great progress from leaving the forex madness for a slow paced and profitable trading with controllable risks! 3. Warnings about Attachments ======================== Be very careful about how you set up DiscountedFutures and DiscountedBasis, especially with the interest rates and the expiries! Look close at the SwapFree parameter when running Futures.mq4 script! And be extremely careful when running on real accounts! Measure ten times and cut once! The script supposes all margin requirements are the same, however with some brokers margins for futures are bigger. Experiment first on demo.

The explosion of brokerage firms on the Internet leads to an ever increasing competition among them ; one of the ways to have a better offer than the competitors is offering more markets to the trader , broadening his trading horizons from the narrowness of random forex; and since we're talking about MetaTrader, the most easy to automate and yet free platform of this kind, this is done by non-NFA regulated brokers, since NFA forbids the implementation of other contracts as CFDs (futures , stocks and bonds can't be implemented on MetaTrader the way they are). Ultimately, this is what traders wanted from the beginning: a single automated platform usable for trading many markets , in order to deploy logical and profitable strategies, not only indicator-hunting strategies... Perhaps NFA has its reasons for banning CFDs, however, if technical solutions are not found to this problem, US brokers will be effectively wiped out by the competition abroad on the retail segment where MetaTrader is the backbone of traders strategies. There must be a way to solve the fractional trading of futures. Thirty years ago when forex was Zurich centered and trades made by phone minilots and microlots were considered science fiction and these are a reality today. Futures must follow the same path and become sizable for very small accounts... Traders consider NFA no longer to be a "trademark". Exactly how "wireless broadband" grew more important than "Intel inside", the same way "futures inside" has become more important than "NFA-regulated". Think about how much cash the forex retail traders lost just because they couldn't access the contracts they really wanted and were forced to trade markets they didn't understood well... If NFA considers as its duty to protect the traders from fraudulent brokers it should have banned retail forex too : misleading advertising to cover up a casino-like trading environment (no arbitrageable assets). Among the "new" assets introduced by non-NFA regulated brokers (that's the irony of the fate, we must use russian or Middle East brokers to trade american assets) there are the currency futures (I will speak about them in another article), but also commodities. Similar commodities are traded on different markets, so arbitrage opportunities appear. Real and frequent, and not so easy to be manipulated by the broker (as FPI / Intercross Arbitrage with forex , where arbitrage opportunities are so easy to remove as slapping the fingers). Many brokers offer, of course, many have seen this already, Gold and Silver. However, since there are not at least two gold contracts and two silver contracts it's easy to understand these are not arbitrageable. The single broker supporting the commodities below: WHC forex (the most extensive datafeed) . Since it's not too regulated, you'd better wait for others to follow them! A brief look at the commodities contracts possibly to be used for arbitrage: Oil contracts: WTI = West Texas Intermediate (InterContinentalExchange) ; download contract specification: WTI Contract Specifications on ICE CL = Crude Light oil (New York Mercantile EXchange) CL Contract Specifications on NYMEX BRN = BReNt oil (InterContinentalExchange) ; download contract specification: BRN Contract Specifications on ICE (ICE acquired IPE - International Petroleum Exchange) QM = miNY Light Sweet Crude Oil (New York Mercantile EXchange) QM Contract Specifications on NYMEX Natural gas contracts: NG = Henry Hub Natural Gas Futures (New York Mercantile Exchange) NG Contract Specifications on NYMEX QG = Natural Gas (New York Mercantile Exchange) QG Contract Specifications on NYMEX Gold contracts: ZG = 100 oz Gold Futures (Chicago Board of Trade) ZG Contract Specifications on CBOT GC = Gold Futures (COMEX) GC Contract Specifications on COMEX (division of NYMEX) Silver contracts: ZI = Silver 5000 oz (Chicago Board of Trade) ZI Contract Specifications on CBOT SI = Silver Futures (COMEX) SI Contract Specifications on COMEX (division of NYMEX) Wheat contracts: KW = Kansas Wheat (Kansas City Board of Trade , open outcry) KE = Kansas Wheat (Kansas City Board of Trade , electronic) KW Contract Specification on KBOT Cocoa: C = Cocoa (Euronext) C Contract Specifications on Euronext CC = Cocoa (New York Board Of Trade) CC Contract Specifications on NYBOT I did not make an extensive analysis of this arbitrage, but I looked upon a few assets and strategies: 1. Cocoa ======= Most time I'd tried to trade them I got "Trade is disabled". They move in a similar way, however, their values are way different. A statistical arbitrage strategy may be deployed, however, a version of Intercross could be applied, since CC is quoted in USD while C is quoted in GBP. 2. Wheat ======= http://img441.imageshack.us/img441/8058/keandkwik6.jpg The two versions of the Kansas Wheat are very closely correlated, moving almost parallel. However, commissions drain out the arbitrage possibilities. 3. Oil ==== The variety of oil contracts make possible a large variety of arbitrage strategies. 3.a. CL to QM =========== Almost impossible to work out. It's necessary to trade a volume of QM 20 times more than CL to equal pip value. At this ratio, commissions are so high, that breakthru is somewhere at 70-80 CL pips (cents/barrel) difference... 3.b. BRN to CL =========== Brent and Crude Light have different fundamentals behind. On a range of 500 daily bars, BRN / CL fluctuates +/- 500 pips. Statistical arbitrage may be deployed. However, a normal arbitrage strategy aiming to pyramidize positions at each 100 pips difference may, or not, work. It may work if both BRN and CL are implemented as continuous futures, the trader having unlimited time to wait for them to come together (this point is where they are not equal, but BRN quoted 100 pips above CL). Otherwise, arbitrage is impossible. Futures have too close expiries compared to the BRN - CL divergence - convergence cycle. An expiry in loss damages account equity and reduces available funds. Even worse, the positions can't be reconstructed from the place they were before expiry because prices are jumpy (new expiry, new interest to expiry embedded). Difference in USD trading Short BRN , Long CL one lot each (for pips, divide by 10) courtesy Matt Trigwell (comprises ~500 daily bars) http://img178.imageshack.us/img178/2497/oilspreadtradebr7.jpg 3.c. BRN to WTI ============ It's almost the same as BRN to CL, as WTI floats very close to CL. Which is very useful in the next arbitrage strategy, 3.d. CL to WTI =========== This is the most interesting arbitrage strategy with oil. It is quite fast, the strategy could trade one time a day. Usually WTI and CL are on a close range, however arbitrage opportunities appear pretty often. Both trade with 10 pip spread and 1 pip commission. If you would consider mid prices (between bid and ask), trade them when the difference is about 15 pips between mid prices and close when it's reversed. Results are pretty amazing, however execution errors may criple it a little. http://img212.imageshack.us/img212/8590/wtitoclarbitrageaq9.jpg Probably the Gold and Silver contracts hide also other "golden" arbitrage opportunities. My source proposed for this article is WTI2CLsimpleArbitrageScript (see attachment). Please run it a while and report here problems encountered (the initial version was pyramiding trades, but I removed this because I considered it not necessary).