U.S. Dollar Index (USDX) futures and options can be cost-effective instruments for managing the foreign exchange exposures that arise from investments in international stock and bond portfolios, or multilateral trade in goods and services.
The USDX is a basket or composite currency index, capturing the movements of the U.S. dollar against ten major currencies. In currency risk management applications, the benefits of USDX currency basket futures and options include:
* Efficiency. One USDX transaction creates exposures in ten major currencies, greatly reducing the number of transactions and associated brokerage fees needed to establish and maintain a multi-currency hedge.
* Close tracking with the foreign exchange exposures of leading international portfolio benchmarks. The USDX is highly correlated with the currency exposures of the Morgan Stanley Capital International and the Salomon Brothers Non-U.S. Dollar World Government Bond Index.
* USDX options can be significantly less expensive than a corresponding basket of individual currency options. These premium savings arise from the diversification of the USDX, which has the direct benefit of reducing risk, and facilitate low cost option hedges.
* Direct exposures to minor European currencies. This exposure can improve hedging performance and provide a margin of safety in the event of devaluations or other changes within Europe's Exchange Rate Mechanism.
* Large contract size. The USDX futures contract has a value of approximately $100,000. The contract size was doubled in 1992 to enable greater savings in transactions and associated brokerage fees for institutional traders and hedgers.
* Block order execution through FILLS. FILLS, the FINEX Large Lot System, enables large orders (minimum 100 lots) to be executed at one price. FILLS provides an important element of liquidity by circumventing the price slippage that can occur when large orders have to be broken into smaller parts for execution.
* Extended open-outcry trading hours. FINEX extended its trading hours in March 1992 to include an evening and night session, so USDX positions can be adjusted almost around the clock.