What it means
Before the IMM opened, there was no widely available exchange market for trading currency futures. The market was created in 1972, and it offered standard contracts with fixed sizes and fixed settlement dates.
A company could buy or sell currency for future delivery at a price agreed today. The standardisation is the key idea.
Each contract covers a set amount of a currency and settles on a set date, so buyers and sellers can trade anonymously through a clearing house, which guarantees the deal. This removes the worry about whether the other party will pay.
IMM dates are the third Wednesday of March, June, September and December. Many currency forward contracts, interest rate futures and swaps use these dates as standard settlement or expiry days.
Using the same dates across the market makes contracts easy to compare, trade and close out. A business uses the IMM mainly to hedge.
An exporter who will receive euros in three months can sell euro futures to lock in an exchange rate now. A borrower worried about rising interest rates can use interest rate contracts to fix the cost of future borrowing.
The IMM is also where speculators trade, which gives the market liquidity. Positioning data published by regulators is widely followed because it shows whether large traders expect a currency to rise or fall.
For a non-specialist, the market is best understood as a public, regulated meeting place for managing currency and rate risk. One caution is that futures are settled daily through margin accounts.
A hedger can therefore face cash calls when the market moves against the futures position, even though the underlying business exposure is gaining value, and treasury teams must keep enough liquidity to meet them.
In practice
Real-world examples.
Example
A US furniture importer must pay a supplier 2,000,000 euros in six months. Fearing that the euro will strengthen, the treasurer buys euro futures through the IMM. If the euro rises, the gain on the futures offsets the higher cost of the payment.
Example
A hedge fund believes the Japanese yen will weaken. It sells yen futures, which are traded on the IMM, to profit from the expected fall. The trade requires only a margin deposit rather than the full contract value, which magnifies both gains and losses.
Example
A corporate treasurer looks at the quarterly IMM dates when arranging a currency swap. By choosing a standard date, the swap is easier to price and later close out, and banks are more willing to quote tight prices for it.
Formula
Calculation
Contract value = Contract size x Futures price
Suppose a euro currency future covers an illustrative 125,000 euros, and the futures price is $1.10 per euro. The value of one contract is 125,000 x $1.10 = $137,500.
An exporter expecting to receive 500,000 euros in three months would need 500,000 / 125,000 = 4 contracts to hedge fully. If the euro then falls to $1.05, the exporter loses 500,000 x ($1.10 - $1.05) = $25,000 on the actual receipt, but gains the same amount on the sold futures, which leaves the effective rate at about $1.10.Case study
Seen in the real world.
Pinewood Apparel is a fictional company that sells clothing in Europe and expects to receive 2,500,000 euros in three months. Its finance manager is worried that the euro will fall before the money arrives.
She sells 20 euro futures contracts of 125,000 euros each, covering 2,500,000 euros. At a futures price of $1.10 the position protects revenue of 2,500,000 x $1.10 = $2,750,000.
In this illustrative case the euro fell to $1.04. The company received $2,600,000 for its euros in the market, a shortfall of $150,000, but earned $150,000 on the futures, so the net result was $2,750,000 as planned. She also kept spare cash in the account in case of margin calls along the way.
Watch out
Common mistakes.
- Assuming a futures hedge removes all risk, when basis differences and mismatched amounts can leave some exposure.
- Forgetting that futures need margin deposits and daily settlement, which can create cash needs.
- Confusing IMM dates, which are quarterly standard days, with the actual trading hours of the exchange or with the date a company's own payment is due.
Questions
People also ask.
What is the IMM?
It is the International Monetary Market, a division of the Chicago Mercantile Exchange that trades currency and interest rate futures, founded to give businesses a regulated place to manage these risks.
What are IMM dates?
They are the third Wednesday of March, June, September and December, widely used as settlement days.
Who uses it?
Corporate treasurers, banks, investment funds and speculators all use it to hedge or take positions, which is what keeps the market liquid.
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