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The Journal of Derivatives

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Price Discovery in the Foreign Currency Futures and Spot Market

Joshua V Rosenberg and Leah G Traub
The Journal of Derivatives Winter 2009, 17 (2) 7-25; DOI: https://doi.org/10.3905/JOD.2009.17.2.007
Joshua V Rosenberg
is a vice president and head of risk analytics at the Federal Reserve Bank of New York in New York, NY.
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  • For correspondence: joshua.rosenberg@ny.frb.org
Leah G Traub
is director of currency management at Lord Abbett & Co LLC in Jersey City, NJ.
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  • For correspondence: ltraub@lordabbett.com
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Abstract

One of the perennial questions in derivatives research is how the derivatives market interacts with the market for its underlying instrument. Is the underlying dominant and its associated futures market just a satellite that follows along behind? Or does trading in the futures market push prices in the underlying around, maybe even driving both markets away from equilibrium at times? In this article, the authors examine the question of cash-futures interaction in foreign currency futures. Currency futures traded at the International Monetary Market division of the Chicago Mercantile Exchange have long been quite active, although still much smaller than the cash market. The relationship between intraday exchange rate movements in cash and futures is examined during 1996 and 2006. Interestingly, in 1996, futures price changes mostly led those in the cash market; while in 2006, the direction of influence was largely reversed. The authors believe this change primarily reflects increased transparency of the cash FX market.

TOPICS: Futures and forward contracts, exchanges/markets/clearinghouses, global

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The Journal of Derivatives: 17 (2)
The Journal of Derivatives
Vol. 17, Issue 2
Winter 2009
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Price Discovery in the Foreign Currency Futures and Spot Market
Joshua V Rosenberg, Leah G Traub
The Journal of Derivatives Nov 2009, 17 (2) 7-25; DOI: 10.3905/JOD.2009.17.2.007

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Price Discovery in the Foreign Currency Futures and Spot Market
Joshua V Rosenberg, Leah G Traub
The Journal of Derivatives Nov 2009, 17 (2) 7-25; DOI: 10.3905/JOD.2009.17.2.007
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  • Article
    • Abstract
    • DATA
    • PRICE DISCOVERY IN THE CURRENCY FUTURES AND SPOT MARKET
    • SIGNING CURRENCY FUTURES TRADES
    • ALTERNATIVE EXPLANATIONS FOR THE ORDER FLOW REGRESSION RESULTS
    • CONCLUSIONS
    • ENDNOTES
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