INTERNATIONAL MONETARY MARKET
(IMM)

The International Monetary Market (IMM) was opened in May 1972 by the Chicago Mercantile Exchange and provides a forum for trading in foreign currency futures. The Chicago Mercantile Exchange began in 1919 as a nonprofit organization providing a marketplace for trading in agricultural commodity spot and forward contracts. Other commodity exchanges, however, had been operating since the mid-1800s in various large American cities. Trading in these early commodity exchanges was based largely on spot and forward contracts. Spot contracts call for immediate delivery of a commodity at an agreed-upon price. A forward contract calls for the delivery of a commodity at a future date but at a price and quantity determined when the contract is agreed upon. As commodity trading increased over the decades, forward contracts became more and more standardized and incorporated commonly used dates and quantities for delivery. These standardized contracts soon became known as futures contracts. Present-day futures contracts are also characterized by financial obligations, margin requirements, federal and state regulations, and commodity exchange rules that structure and guarantee the contract. The Chicago Mercantile Exchange, like other commodity exchanges, is regulated in part by the Commodity Futures Trading Commission, a federal agency. The purpose of a futures contract is to provide, at a predetermined future date, a set amount of a commodity at a guaranteed price. Such guarantees provide a hedge against an uncertain and potentially catastrophic future which may be caused by drought, floods, political uncertainty, fluctuations in foreign exchange rates, or a host of other reasons.

There are three basic reasons for dealing in futures contracts: price discovery, which helps predict future spot prices; hedging, which protects against future price declines and anticipates future rising prices; and speculation. The Chicago Mercantile Exchange and other commodity exchanges, such as the Chicago Board of Trade and the New York Mercantile Exchange, bring together speculators, hedgers, and "scalpers." A speculator does not own or take possession of the commodity, he or she only hopes to profit from the rise or fall of the price of the contract. Hedgers are traders that actually own the underlying commodity. Hedgers use future contracts to protect themselves against price changes that could represent a loss. A farmer guaranteeing to deliver a predetermined number of bushels of wheat on a particular date at a particular price can be considered a hedger. A flour manufacturer who agrees to buy a predetermined number of bushels of wheat on a particular date at a particular price is also a hedger. "Scalpers" are those floor traders who buy and sell contracts and thus hope to profit from their trades. Commodity exchanges bring these people together—but not necessarily face-to-face.

Impetus for the creation of the IMM was fueled by world events and many of the Nixon administration's monetary and fiscal policies, including the devaluation of the dollar, price and wage controls, the discontinuation of converting dollars to gold on demand, and the withdrawal of the United States from the Bretton Woods agreement which sought to stabilize and maintain foreign exchange rates. Another factor was the general turmoil of monetary systems worldwide. This disarray created a need for hedge services among financial institutions, other borrowers and lenders, and businesspeople dependent on a guaranteed future exchange rate. In essence, foreign currency was assuming the characteristics of more familiar commodities such as grain, lumber, and precious metals. The 1970s and 1980s also ushered in futures contracts for stock indexes and bonds. Collectively these three "commodities" are known as financial futures.

Currency futures markets, such as the IMM, quote the number of U.S. currency units (dollars and/or cents) that must be paid to purchase a unit of a foreign currency. This is more a reflection of the value of one currency in relation to another, not necessarily the absolute value of either currency. There are a number of determinants that affect the relationship between two currencies including balance of payments, interest rates, economic strength, inflation, and political stability.

When the IMM opened for trading it allowed 500 charter members; this number was increased in 1976 to a maximum of 750. The membership fee at that time was $10,000. Currencies traded on the IMM and contract sizes are: British pound sterling (62,500), Canadian dollar (100,000), German deutsche mark (125,000), Japanese yen (12,500,000), Swiss franc (125,000), and the euro (1,000,000). Delivery or trading months are March, June, September, and December and delivery is on the third Wednesday of the contract month. If for whatever reason the third Wednesday is not a business day, then delivery is made on the next business day. All price quotes are in U.S. dollars except the yen and the euro. The yen is quoted in U.S. cents while the euro price quote is based on an IMM index.