Sizing Yen–Peso Futures Legs for a Currency Pairs Trade

Summary

The document considers how to express a long Mexican peso versus Japanese yen position using separate currency futures. It compares the dollar-equivalent notionals of two yen contracts and one peso contract, then asks whether the proposed direction is to short the yen futures and buy the peso futures. The example highlights that contract counts should be considered alongside each contract's currency denomination and notional exposure.

It also asks whether the combined trade's volatility would resemble the historical volatility of the yen–peso exchange rate. No answer or calculation is included, so the proposed hedge ratio and expected risk are not established. Matching approximate dollar notionals alone may not produce a precise cross-currency exposure: contract specifications, quote conventions, currency conversion, correlation between legs, and changing exposures can affect the result. The passage offers a setup question rather than evidence that the trade is properly hedged or that its realized volatility will track the cross rate.

Key ideas

• The example compares the dollar-equivalent notionals of yen and peso futures contracts.
• The proposed position is short yen futures and long peso futures to express long peso versus yen.
• Approximate notional matching is the starting point for choosing leg sizes.
• The document does not confirm the hedge ratio or calculate the combined position's volatility.
• Cross-rate risk depends on both legs and their relationship, not only their separate notionals.

Tags

# Fx futures pairs


# Fx futures pairs












I want to setup a pairs trade with the Japanese yen as the quote currency and Mexican peso as the basis currency. (long MXP vs JPY)

2 /M6J contracts, notional is 1,250,000 JPY = 10966.5*2 = 21933 USD equivalent

1 /6M contract notional is 500,000 MXP = 23934.75 USD equivalent

Would I be short 2 /M6J and long 1 /6M? Would the volatility of this trade be roughly around the historical volatility of the japanese yen versus the mexican peso?

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.