The Learn About Futures Insider: British Pound

June 3, 2011

According to the Triennial survey, the British Pound is likely the fourth most-traded currency after the U.S. dollar, the Euro, and the Yen. Official currency of the United Kingdom - as well as a few Crown dependencies - the Pound can trace its origins back to Anglo-Saxon times. The following contract specifications will refer to the British Pound/US Dollar contract from the foreign exchange futures listings from the CME Group.

Contract Size: 62,500 British pounds

Tick Size: $.0001 per British pound increments ($6.25/contract).

Contract Months: March, June, September, December

Trading Specs: Open outcry is 7:20 a.m.-2:00 p.m. and Globex hours are Sundays: 5:00 p.m. - 4:00 p.m. Central Time (CT) next day. Monday - Friday: 5:00 p.m. - 4:00 p.m. CT the next day, except on Friday - closes at 4:00 p.m. and reopens Sunday at 5:00 p.m. CT.

Daily Price Limit: Consult exchange.

Trading Symbols: BP, 6B on Globex

Past performance is not indicative of future results.

***chart courtesy of Gecko Software

British Pound Facts

The British Pound, or Pound Sterling, is represented by the symbol £ which originated from the Latin word for pound - libra. The pound used to represent twenty shillings. Each shilling was worth twelve pence, so a pound would be two hundred and forty pence. In 1971, system of decimalization was adopted whereby one pound was equal to one hundred new pennies.

The Bank of England - the central bank for the United Kingdom - was established in 1694. Its functions include policies aimed at maintaining price stability and promoting the economic policies of the British Government. When the Labor Party took the majority in the House of Commons in 1997, they worked to give power to the bank to set interest rates. The bank also issues banknotes for England and Wales. Scottish and Northern Irish banks may issue their own banknotes, but they must be backed by deposits in the Bank of England. Information on the bank - including current rates and news releases - may be found on their official website.

Although the United Kingdom is a member country of the European Union, it has not elected to adopt the euro currency. The annual deficit to GDP may currently be above the defined threshold to allow for the adoption of the euro.

The economic history of the British Empire has undergone many changes over the centuries. From the Age of Mercantilism to the Industrial Revolution and the New Imperialism, England and the empire had periods of distinct development. The late 20th century was marked by politics which likely provided the catalyst to Black Wednesday - a day in which the pound was withdrawn from the European Exchange Rate Mechanism after it fell below its agreed limit.

Currently, the United Kingdom is a major financial center for international business. The service sector claims the largest share of jobs, but other sectors are present. Around 16 percent of the national output is from manufacturing, with engineering topping the largest sector within. Agriculture only accounts for around 1 percent of the workforce, nearly the same amount as the energy sector. In 2004, just over 74 percent of the electricity production in the United Kingdom came from fossil fuels; however, an initiative to build nuclear generators may boost energy reserves.

The United Kingdom produces around 60 percent of its overall food requirements; therefore foodstuffs are an important key when discussing imports. Other items imported to the Isles include: machinery, fuels, and manufactured goods. Tourism also plays a large role in the economy of the United Kingdom.

Trade values can be illustrated per the following chart:

Key terms for this market include:

Quid - a slang term for the British Pound.

GBP - abbreviation for Great British Pound, or pound sterling.

Chancellor of the Exchequer - the government minister responsible for the financial and economic issues in the UK, including setting the Bank of England's inflation target.

Key Uses

Besides the obvious implications and uses for currency, the British Pound has investing applications as well. As a financial instrument, British Pound futures are often used as a means to hedge currency exchange risk. The British Pound plays a large part in international trade.

Key Concerns

Several factors within a nation can have a significant effect on the currency exchange rates and the relative importance of each is the subject of debate, however, it is important to be aware of some of the key fundamentals.

Inflation: It is generally believed that countries with consistently lower inflation exhibit a rising currency value while countries with higher inflation may see currency depreciation.

Interest Rates: High interest rates may attract foreign investors and that can lead to an exchange rate increase while the opposite scenario is possible in a country with low interest rates.

Overall Economic Conditions: Everything from a country's balance of trade to the size of their deficit or surplus can serve as a barometer of the condition of the country and the likelihood of default. Investors look for countries with stronger economic foundations and the better the economic foundation of one country versus another may increase the value of the country's currency. Sovereign credit ratings from places like Moody's or S&P can impact the perception of a nation's growth and stability.

Perception: The so called "flight to quality" exists within foreign currencies as investors will often seek what they perceive as "safe haven" currencies during times of political or economical instability.

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