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SPreAD TrADINg IN CUrreNCY FUTUreS
Thus, the equal dollar value spread would consist of 1.6 BP contracts per euro contract, or 8 BP to 
5 euro.
equity fluctuations in an equal-dollar-value intercurrency spread position will mirror the price 
ratio (or exchange rate) between currencies. It should be emphasized that price ratios (as opposed to 
price spreads) are the only meaningful means of representing intercurrency spreads. For example, if 
the BP = $1.50 and SF = $1.00, an increase of $0.50 in both the currencies will leave the price spread 
between the BP and SF unchanged, even though it would drastically alter the relative values of the two 
currencies: a decline of the BP vis-à-vis the SF from 1.5 SF to 1.33 SF.
 ■ Intracurrency Spreads
An intracurrency spread—the price difference between two futures contracts for the same  currency—
directly reflects the implied forward interest rate differential between dollar-denominated accounts 
and accounts denominated in the given currency. For example, the June/December euro spread 
indicates the expected relationship between six-month eurodollar and euro rates in June.
1
T o demonstrate the connection between intracurrency spreads and interest rate differentials, we 
compare the alternatives of investing in dollar-denominated versus euro-denominated accounts:
S = spot exchange rate ($/euro)
F = current forward exchange rate for date at end of investment period ($/euro)
r
1 = simple rate of return on dollar-denominated account for investment period (nonannualized)
r2 = simple rate of return on euro-denominated account for investment period (nonannualized)
alternative a:
Invest in Dollar-Denominated account
alternative B:
Invest in euro-Denominated account
1. Invest $1 in dollar-denominated account. 1. Convert $1 to euro at spot.
2. Funds at end of period = $1 (1 + r1) exchange rate is S, which yields 1/S euro. (By definition, if S equals dollars 
per euro, 1/S = euro per dollar.)
2. Invest 1/S euro in euro-denominated account at r
2.
3. Lock in forward exchange rate by selling the anticipated euro proceeds 
at end of investment period at current forward rate F.2
4. Funds at end of period = 1/S (1 + r2) euro.
5. Converted to dollars at rate F, funds at end of period = $F/S (1 + r2) 
(since F = dollars per euro).
1 The eurocurrency rates are interest rates on time deposits for funds outside the country of issue and hence free 
of government controls. For example, interest rates on dollar-denominated deposits in London are eurodollar 
rates, while rates on sterling-denominated deposits in Frankfurt are eurosterling rates. The quoted eurocurrency 
rates represent the rates on transactions between major international banks.
2 A short forward position can be established in one of two ways: (1) selling futures that are available for forward 
dates at three-month intervals; and (2) initiating a long spot/short forward position in the foreign exchange (FX) 
swap market and simultaneously selling spot.