Spread Trading in Currency Futures

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

—John Maynard Keynes

Intercurrency Spreads

Conceptually, intercurrency spreads are identical to outright currency trades. After all, a net long or short currency futures position is also a spread in that it implies an opposite position in the dollar. For example, a net long Japanese yen (JY) position means that one is long the JY versus the U.S. dollar (USD). If the JY strengthens against the USD, the long JY position will gain. If the JY strengthens against the Swiss franc (SF) and euro but remains unchanged against the USD, the long JY position will also remain unchanged.

In an intercurrency spread, the implied counterposing short in the USD is replaced by another currency. For example, in a long JY/short euro spread, the position will gain when the JY strengthens relative to the euro, but will be unaffected by fluctuations of the JY relative to the dollar. The long JY/short euro spread is merely the combination of a long JY/short USD and a long USD short euro position, in which the opposite USD positions offset each other. (To be precise, the implied USD positions will only be completely offset if the dollar values of the JY and ...

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