Futures

The Dollar Index – It Makes Sense Until it Closes

dondawson
Don Dawson
Instructor

Have you watched the US Dollar Index (USDX) Futures contract trade during the day? Do you notice that with each price change the intervals are always a minimum tick of .005? And then at the end of the day when you look at your daily candle of the USDX you see a closing price like 97.197. I want to shed some light on this topic of how the Intercontinental Exchange (ICE) settles the USDX each day.

Free WorkshopWith each Futures contract traded on any Futures Exchange, they each have their own unique contract specifications. One of the standardized specifications is something called a minimum tick increment. Unlike a Stock, all Futures contracts trade at their minimum tick increments as the smallest possible price change. No trading is allowed between the bid/ask price. This will make the bid/ask spread at a minimum .005 wide at any point during the trading session.

When the ICE settles the USDX daily they use a different minimum tick for the settlement time of .001 instead of the usual .005. This is why you see your daily candles with closes like 97.197 instead of 97.195 as one would expect with a minimum tick of .005.

But why do they do this?

First let’s describe what the USDX is. Simply put, the USDX is a weighted basket of six currency markets. The table shows the six currency markets and the individual weight they carry in the USDX.

Currency Weight
Euro .576
Japanese Yen .136
British Pound .119
Canadian Dollar .091
Swedish Krona .042
Swiss Franc .036

The USDX is a physically deliverable Futures contract meaning a trader must be aware of First Notice and Last Trading days of the contract. Each point in the USDX is worth US $1,000.00. The minimum tick interval of .005 is worth US $5.00. To trade one USDX Futures contract overnight would currently require an initial margin (collateral given to broker to cover any losses while in the trade) of US $2,145 as of the recent increase March 26, 2015.

To find out the value of the USDX you simply take the last price on your screen and multiply it by the point value. For example, 97.135 X US$1,000 = US$97,135

Using leverage in the Futures markets allows you to control this US$97,135 contract for only US$2,145 per contract.

During the trading session the USDX can be rounded to the nearest .005 with each tick. Between 14:59 ET & 15:00 ET Monday – Friday the USDX has a closing range established during the last 1 minute before 15:00 ET. During this time a volume weighted average price (VWAP) is created. For each tick increment traded during this closing range the price that traded the most volume during this one minute period becomes the settlement price for the day.

Since this is a weighted basket of currencies each currency will have its individual settlement price from its respective Exchange it trades on. This settlement price is then multiplied by the percentage of weight it carries in the USDX. Then all six currencies are averaged into the USDX and in this averaging the ICE Exchange uses the .001 tick increment to get as close to the actual value of the weighted currencies in the USDX basket.

For this reason you will usually see your net change on the USDX each day looking like +/- .172 (or some value thereof coming off the previous settlement using .001) and not the usual +/- .015 (where each tick is .005).

I would invite you to visit the ICE Exchange and read more about the contract specifications for the USDX and become familiar with some of the different specifications you may not find in other popularly traded Futures markets.

“There are two ways of being rich. One is to have all you want, the other is to be satisfied with what you have”

Don Dawson

Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.