Currency futures

Looking at old CFA test from 2008 and got mad confused on currency futures from AM question 11.

Could someone explain the very basic mechanics of a currency future transaction? Ie let’s say you have a “dollar futures contract, size = 100,000 USD, JPY/USD”. What does long/short and buy/sell mean in terms of what exchanges hands at expiration to/from each side?

Sometimes the most basic things trip me up, and the book doesn’t spell out things like you’re a 5 yr old!

if you long a dollar currency future

you will receive dollar and deliver Yen at a preset contract exchange rate when future expires.

the short position of that dollar future will

-deliver you the dollars and get in return from you the Yen at the same rate.

someone gonna gain the other’s loss. but who?

Long position payoff: (Spot exchange rate at expiration - contract rate)x notional

tricky thing here is the exchange rate can be flipped, meaning it can be in USD/Yen or Yen/USD.

you have to use the correct exchange rate. in this case, we use the rate in “Yen/USD”.

Got it. So, if the quoted rate was USD/Yen, would it be a Yen futures contract then, and being long means you’re receiving Yen? Or is the currency you’re receiving independent on how the exchange rate is quoted for the contract?

you are right.

the denominator of the quote is the contract curreny, i think

In other words, if you are long a dollar futures contract quoted: JPY/USD say = 100.5, you want that number to increase, to say 101.5 (appreciating dollar, depreciating yen) in order for that futures contract to make money.

Am I right?

That’s how I see it