Stocks & Commodities V. 31:12 (36): Futures For You by Carley Garner

Futures For You by Carley Garner

FOREIGN FUTURES

I’m interested in trading foreign futures in an account held at a US brokerage firm; what should I be aware of?

Most US brokerage firms offer their clients access to foreign futures and options. If your broker doesn’t, you should reconsider where you house your commodity trading account. Even if you don’t intend to trade foreign markets, that they are offering you limited product access is a telltale sign of a brokerage that simply isn’t equipped to specialize in commodity trading. Perhaps their focus is in stocks or FX, but it isn’t futures.

Some of the most popular foreign futures contracts are the German DAX (a stock index futures contract), the German bunds (sovereign debt futures), and canola oil (a.k.a. rape seed traded on the ICE Canada exchange).

Trading in foreign products can complicate the accounting on your brokerage statements because such products are not traded in US dollars, as contracts on domestic exchanges are. Instead, they are valued and traded in the designated currency in which the exchange is located. For instance, those buying or selling the DAX futures are not making or losing US dollars on each trade; instead, they are accumulating profits and losses in euros. Similarly, if you buy and sell a canola futures contract, your profit & loss will be calculated in Canadian dollars. In other words, upon exit of the position, your account will either be credited or debited in “loonies.”

Brokerage firms will typically give you the green light to trade foreign products in your account even though you are holding US dollars on deposit for margin. Once you do, your account will no longer be valued in a single currency. Your brokerage statement will display the current US dollar balance along with the balance of any other currency resulting from trades executed in foreign markets.

For instance, if a trader started with $10,000 and netted a profit of 200 euro on a DAX trade, his statement would display $10,000 and a separate account balance of 200 euro. The net is then figured by considering the current exchange rate (typically the 5 pm reading of the spot FX price on the statement date) and displayed on a third line of the brokerage statement. Assuming a value of $1.35 for the euro, the client account statement would read a “combined currency balance” of $10,270 ($10,000 + (200 euro × 1.35)). For simplicity, this example ignores transaction costs associated with the trade.