Indian currency futures enable individuals and companies in
India to hedge and trade their Indian Rupee risk. Most international exchanges
offer contracts denominated in other currencies.
Why exchange-traded futures? What's wrong with the currency forward market that has been existing in India for a long time?
The exchange-traded futures,
as compared to OTC forwards, serve the same economic purpose, yet differ in
fundamental ways. Exchange-traded contracts are standardised. In an
exchange-traded scenario where the market lot is fixed at a much lesser size
than the OTC market, equitable opportunity is provided to all classes of
investors whether large or small to participate in the futures market. The other
advantages of an Exchange traded market would be greater transparency,
efficiency and accessibility. The counterparty risk (credit risk) in a futures
contract is eliminated by the presence of a clearing house/ corporation, which
by assuming counterparty guarantee, eliminates default risk. Thus, introduction
of exchange-traded futures help in overall development of the forex market in
the country
Who trades Foreign Exchanges?
There are two main groups that trade
currencies. About 5 - 10 percent of daily volume is from companies and
governments that buy or sell products and services in a foreign country and must
subsequently convert profits made in foreign currencies into their own domestic
currency in the course of doing business. This is primarily hedging activity.
The other 90 - 95 percent consists of investors trading for profit, or
speculation. Speculators range from large banks trading 10,000,000 million
currency units or more and the home-based operator trading perhaps 10,000 units
or less. Today, importers and exporters, international portfolio managers,
multinational corporations, speculators, day traders, long-term holders, and
hedge funds all use the FOREX market to pay for goods and services, to transact
in financial assets, or to reduce the risk of currency movements by hedging
their exposure in other markets. The speculator trades to make a profit by
purchasing one currency and simultaneously selling another. The hedger trades to
protect his or her margin on an international sale from adverse currency
fluctuations. The hedger has an intrinsic interest in one side of the market or
the other. The speculator does not.
Who is eligible to trade in Currency Derivatives?
All Resident Indians as
defined in section 2(v) of the Foreign Exchange Management Act, 1999 (FEMA, Act
42 of 1999) are eligible to trade in the Currency Derivatives segment. For
participation by regulated entities, concurrence from respective regulators
should be obtained. Currently, trading facility in Currency Futures at I-Sec
will be offered to all Resident Individuals / HUFs / eligible Corporates
fulfilling the FEMA criteria.
Who can trade in Currency futures markets in India?
Any resident Indian
or company including banks and financial institutions can participate in the
futures market. However, at present, Foreign Institutional Investors (FIIs) and
Non-Resident Indians (NRIs) are not permitted to participate in currency futures
market.
Who can participate in a currency futures market?
Any resident Indian or
company including Banks and financial institutions can participate in the
futures market. However, at present, Foreign Institutional Investors (FIIs) and
Non-Resident Indians (NRIs) are not permitted to participate in currency futures
market.
Which are the global exchanges that provide trading in currency futures?
Internationally, exchanges such as Chicago Mercantile Exchange
(CME), Johannesburg Stock Exchange, Euronext.liffe, BM&FBOVESPA and Tokyo
Financial Exchange provide trading in currency futures
What is the need of currency futures?
Currency futures are needed if your
business is influenced by fluctuations in currency exchange rates. If you are in
India and are importing something, you have done the costing of your imports on
the basis of a certain exchange rate between the Indian Rupee and the relevant
foreign currency. By the time you actually import, the value of the Indian Rupee
may have gone down and you may lose out on your income in terms of Indian Rupees
by paying higher. On the contrary, if you are exporting something and the value
of the Indian Rupee has gone up, you earn less in terms of Rupees than you had
anticipated. Currency futures help you hedge against these exchange rate risks.
What is the minimum trading unit (i.e. contract size) and tenure of the USDINR, EURINR, GBPINR and JPYINR futures contract?
The contract size of the
USDINR futures contract is USD 1,000, EURINR future contract is EURO 1,000,
GBPINR future contract is GBP 1,000 and JPYINR future contract is YEN 1,00,000.
The contracts shall have a maximum maturity of twelve months. All monthly
maturities from 1 to 12 months are available.
What is the last trading day of these currency futures contract?
The last
trading day of a futures contract on MCX-SX shall be two working days prior to
the last working day (excluding Saturdays) of the month. The settlement price is
the Reserve Bank of India's reference rate on the last trading day
What is Forex?
Foreign exchange is the simultaneous buying of one
currency and selling of another. Currencies are traded through a broker or
dealer and are executed in currency pairs; for example, the Euro and the US
dollar ( EUR / USD ) or the British pound and the Japanese yen ( GBP / JPY ).
The Foreign Exchange Market ( FOREX ) is the largest financial market in the
world, with a daily volume of over $4 trillion. This is more than three times
the total amount of the stocks and futures markets combined. Unlike other
financial markets, the FOREX spot market has neither a physical location nor a
central exchange. It operates through an electronic network of banks,
corporations, and individuals trading one currency for another. The lack of a
physical exchange enables the FOREX market to operate on a 24 - hour basis,
spanning from one time zone to another across the major financial centers. This
fact - that there is no centralized exchange - is important to keep in mind as
it permeates all aspects of the FOREX experience.
What is currency trading?
"While trade is international, currencies are
national. As international transactions are settled in global currencies,
usually they are brought/sold for one another and this constitutes 'currency
trading'."
What is Currency Derivatives?
The term 'Derivatives' indicates it derives
its value from some underlying i.e. it has no independent value. Underlying can
be securities, stock market index, commodities, bullion, currency or anything
else. From Currency Derivatives market point of view, underlying would be the
Currency Exchange rate. To put it simply an example of Derivatives is curd which
is derived from Milk. Derivatives are unique product, which helps in hedging the
portfolio against the future risk. At the same time, derivatives are used
constructively for arbitrage and speculation too.
What is a Spot Market?
A spot market is any market that deals in the
current price of a financial instrument. Futures markets, such as the Chicago
Mercantile Exchange ( CME ), National Stock Exchange (NSE), MCX' SX, BSE offer
currency futures contracts whose delivery dates may span several months into the
future. Settlement of FOREX spot transactions usually occurs within two business
days.
What is a currency futures contract?
A currency futures contract is a
standardized version of a forward contract that is traded on a regulated
exchange. It is an agreement to buy or sell a specified quantity of an
underlying currency on a specified date in future at a specified rate (e.g., USD
1 = INR 46.00). (Note: USD is abbreviation for the US Dollar, and INR for the
Indian Rupee)."
What are the various types of margins that are levied to manage the risk?
The trading of currency futures is subject to maintenance of
initial, extreme loss, and calendar spread margins with the clearing house /
corporation. The details of the margins levied are mentioned in the respective
product specifications.
What are the trading hours on MCX-SX?
Trading in currency futures is on
all working days from Monday to Friday and is between 9.00 am to 5.00 pm.
What are the terms and conditions set by RBI for Banks to participate in exchange traded fx futures?
RBI has allowed Banks to participate in
currency futures market. The AD Category I Banks which fulfill stipulated
prudential requirements are eligible to become a clearing member and / or
trading member of the currency derivatives segment of MCX-SX. AD Category I
Banks which are urban co-operative banks or state co-operative banks can
participate in the currency futures 09 market only as a client, subject to
approval thereof, from the respective regulatory department of RBI.
What are the risks involved in currency futures market?
Risks in currency
futures pertain to movements in the currency exchange rate. There is no rule of
thumb to determine whether a currency rate will rise or fall or remain
unchanged. A judgement on this will depend on the knowledge and understanding of
the variables that affect currency rates
What are the major fundamental factors that affect currency movements?
•Trade Balance - This refers to imports and exports, and is
probably the most important determinant of a currency's value. When imports are
greater than exports, you have a trade deficit. When exports are greater than
imports, you have a surplus. A shift in the trade balance between two countries
tends to weaken the currency of the country with greater deficit
•Wealth - Wealth is a country's reserves, in the form of gold, cash, natural resources, and so on. Basically any factor that affects a country's ability to repay loans, finance imports, and affect investments impacts the market's perception of its currency and the currency's value.
•Internal budget deficit or surplus - A country running a current account deficit has, on balance, a weaker currency than one that runs a budget surplus. This is tricky, however, in that the direction of the surplus or deficit affects perceptions and currency valuations too.
•Interest Rates - Funds move around the world electronically in response to changes in short-term interest rates. If three-month interest rates in Germany are running 1% less than three-month rates in the United States, then all other things being equal, "hot money" flows out of Euro into the Dollar.
•Inflation - Inflation in each country, and inflationary expectations, affect currency values. What good is a 10% short-term return in some country if inflation is running 15%?
•Political factors - Taxes, stability, whatever affects the international trade of a country, or the perception of "soundness" of the currency affect its valuation
•Wealth - Wealth is a country's reserves, in the form of gold, cash, natural resources, and so on. Basically any factor that affects a country's ability to repay loans, finance imports, and affect investments impacts the market's perception of its currency and the currency's value.
•Internal budget deficit or surplus - A country running a current account deficit has, on balance, a weaker currency than one that runs a budget surplus. This is tricky, however, in that the direction of the surplus or deficit affects perceptions and currency valuations too.
•Interest Rates - Funds move around the world electronically in response to changes in short-term interest rates. If three-month interest rates in Germany are running 1% less than three-month rates in the United States, then all other things being equal, "hot money" flows out of Euro into the Dollar.
•Inflation - Inflation in each country, and inflationary expectations, affect currency values. What good is a 10% short-term return in some country if inflation is running 15%?
•Political factors - Taxes, stability, whatever affects the international trade of a country, or the perception of "soundness" of the currency affect its valuation
What are the factors that affect the exchange rate of a currency?
"A
country's currency exchange rate is typically affected by the supply and demand
for the country's currency in the international foreign exchange market. The
demand and supply dynamics is principally influenced by factors like interest
rates, inflation, trade balance and economic & political scenarios in the
country. The level of confidence in the economy of a particular country also
influences the currency of that country."
What are the currencies traded on MCX-SX?
In the first phase of
operations, only the USDINR currency pair was traded on MCX-SX. With the
changing need of the participants, the regulators have allowed MCX-SX to
facilitate trading in other major currency pairs as EURINR, GBPINR and JPYINR
future contracts
What are the benefits of trading in Currency Derivatives
Currency
Derivatives are very efficient risk management instruments and you can derive
the below benefits:
i. Hedging: You can protect your foreign exchange exposure in business and hedge potential losses by taking appropriate positions in the same. For e.g. If you are an importer, and have USD payments to make at a future date, you can hedge your foreign exchange exposure by buying USDINR and fixing your pay out rate today. You would hedge if you were of the view that USDINR was going to depreciate. Similarly it would give hedging opportunities to Exporters to hedge thier future receivables, Borrowers to hedge foreign currency (FCY) loans for interest and principal payments, Resident Indians, who can hedge their offshore investments.
ii. Speculation: You can speculate on the short term movement of the markets by using Currency Futures. For e.g. If you expect oil prices to rise and impact India's import bill, you would buy USDINR in expectation that the INR would depreciate. Alternatively if you believed that strong exports from the IT sector, combined with strong FII flows will translate to INR appreciation you would sell USDINR.
iii. Arbitrage: You can make profits by taking advantage of the exchange rates of the currency in different markets and different exchanges.
iv. Leverage: You can trade in the currency derivatives by just paying a % value called the margin amount instead of the full traded value.
i. Hedging: You can protect your foreign exchange exposure in business and hedge potential losses by taking appropriate positions in the same. For e.g. If you are an importer, and have USD payments to make at a future date, you can hedge your foreign exchange exposure by buying USDINR and fixing your pay out rate today. You would hedge if you were of the view that USDINR was going to depreciate. Similarly it would give hedging opportunities to Exporters to hedge thier future receivables, Borrowers to hedge foreign currency (FCY) loans for interest and principal payments, Resident Indians, who can hedge their offshore investments.
ii. Speculation: You can speculate on the short term movement of the markets by using Currency Futures. For e.g. If you expect oil prices to rise and impact India's import bill, you would buy USDINR in expectation that the INR would depreciate. Alternatively if you believed that strong exports from the IT sector, combined with strong FII flows will translate to INR appreciation you would sell USDINR.
iii. Arbitrage: You can make profits by taking advantage of the exchange rates of the currency in different markets and different exchanges.
iv. Leverage: You can trade in the currency derivatives by just paying a % value called the margin amount instead of the full traded value.
What are Currency Futures Contracts?
Currency Futures contracts are
legally binding agreement to buy or sell a financial instrument sometime in
future at an agreed price. Currency Future contracts are standardized in terms
of lots and delivery time. The only variable is the price, which is discovered
by the market. Currency Futures contracts have different expiry validity and
will expire after the completion of the specified tenure
What are benefits of spread contract?
Spread contract give users the
benefit to enter two calendar contracts simultaneously without the risk of
partial (one leg) execution and at a lower impact cost.
In which currency are the currency futures contracts settled?
They are
settled in cash in Indian Rupees.
If I am an individual with no exposure to foreign exchange risks, does a currency futures exchange mean anything to me?
Yes, it does, if you want
to invest purely as an investor. You can benefit from exchange rate fluctuations
just as you can benefit by investing in equities in the stockmarket. However, as
in the stockmarkets, you also stand to lose money if the price movements are not
in keeping with what you had anticipated. Participating in a currency futures
exchange is risky, just as the stockmarket is. You should therefore be
knowledgeable about the currency market if you want to participate as an
investor.
If I am an AD Category I Bank, why should I become a member of a currency futures exchange? I have the interbank market, anyway.
"The interbank
market is a market for Banks. Small and mediumsized clients of Banks cannot
directly participate in the interbank market. If a Bank is a member of a
currency futures exchange, it can trade on behalf of its small and medium-sized
clients, who otherwise would not have been able to benefit from fluctuations in
currency exchange rates. Thus, Banks can increase their customer base if they
become a member of a currency futures exchange. Banks themselves can also
benefit from a currency futures exchange by arbitraging between the existing
interbank market and the currency futures exchange. Larger participation in a
currency futures exchange gives the exchange platform a greater vibrancy than
the interbank market, which is limited to Banks."
How do exchange-traded currency futures enable hedging against currency risk?
On a currency exchange platform, you can buy or sell currency
futures. If you are an importer, you can buy futures to "lock in" a price for
your purchase of actual foreign currency at a future 10 date. You thus avoid
exchange rate risk that you would otherwise have faced. On the other hand, if
you are an exporter, you sell currency futures on the exchange platform and
"lock in" a sale price at a future date. However, it may be noted that the
contract will be marked to market at the daily settlement price and profit or
loss will be paid / collected on a daily basis.
How are currency prices determined?
Currency prices are affected by a
variety of economic and political conditions, but probably the most important
are interest rates, international trade, inflation, and political stability.
Sometimes governments actually participate in the foreign exchange market to
influence the value of their currencies. They do this either by flooding the
market with their domestic currency in an attempt to lower the price or,
conversely, buying in order to raise the price. This is known as central bank
intervention. Any of these factors, as well as large market orders, can cause
high volatility in currency prices. However, the size and volume of the FOREX
market make it impossible for any one entity to drive the market for any length
of time.
How and why does the demand and supply of a currency increase and decrease?
There are several reasons. A rise in export earnings of a
country increases foreign exchange supply. A rise in imports increases demand.
These are the objective reasons, but there are many subjective reasons too. Some
of the subjective reasons are: directional viewpoints of market participants,
expectations of national economic performance, confidence in a country's economy
and so on
Does the national economy of India need currency futures?
Every business
exposed to foreign exchange risk needs to have a facility to hedge against such
risk. Exchange-traded currency futures, as on MCX-SX, are a superior tool for
such hedging because of greater transparency, liquidity, counterparty guarantee
and accessibility. Since the economy is made up of businesses of all sizes,
anything that is good for business is also good for the national economy.
Can currency futures help small traders?
Yes. The minimum size of the
USDINR futures contract is USD 1,000. Similarly EURINR future contract is EURO
1000, GBPINR future contract is GBP 1000 and JPYINR future contract is YEN
1,00,000. These are well within the reach of most small traders. All
transactions on the Exchange are anonymous and are executed on a price time
priority ensuring that the best price is available to all categories of market
participants irrespective of their size. As the profits or losses in the futures
market are also paid / collected on a daily basis, the scope of accumulation of
losses for participants gets limited
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