Trade is an international business and for any trade payments are settled in Currencies, which are specific to the countries/regions involved. Whenever any Currency is bought or sold for another, the transaction is known as 'Currency trading'. Currency trading is the largest financial market globally, followed by Commodities and Equities. Investors, speculators and corporates are involved in cross-border Currency trade.
Exchange Traded Currency Derivatives provide greater access for market participants, be it investors, speculators or corporates who may want to trade Currencies to hedge their Currency risk. Exchange Traded Currency Derivatives offer efficient risk management mechanisms and provide a transparent trading platform, with no chance of anybody dealing with insider information.
Currency Derivatives are known for their efficiency in price discoveries providing immunity from counter-party credit risks. They also provide access to all types of market participants and make it an easy-to-use financial instrument by offering standardised products and settlement cycles. In Currency Derivatives, even small orders, ie up to one contract or USD1,000, can be executed.
The Exchange Traded Currency Futures contract is an agreement to buy or sell the underlying Currency on a specified date in the future and at a specified rate. The underlying asset for a Currency Futures contract is a Currency. The Exchange’s clearing house acts as a central counter-party for all trades and thus, takes on a performance guarantee.
A Currency Futures contract is a standardised 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 the future at a specified rate.
OTC is short for ‘over-the-counter’. The OTC market has no central marketplace and is linked to a network of dealers/traders who do not physically meet but, instead, communicate through phone and computer networks. OTC contracts are customised contracts, based on negotiations between the counter-parties. In the case of OTC markets, the counter-party default risk depends on the counter-party creditworthiness, among other factors.
Any Indian resident or company, including banks and financial institutions, can participate in the Currency Futures market. At present, Foreign Institutional Investors (FIIs) and Non-Resident Indians (NRIs) are not permitted to participate in the Currency Futures market in India. Participants in the Currency Derivatives segment can be classified in three broad categories:
Foreign Currency markets have been volatile in recent times due to various geo-political uncertainties. In order to ensure that profits for any business are not depleted due to fluctuations in the Currency exchange rate, hedging Currency risk can be an excellent tool.
Large corporates, small and medium enterprises (SMEs) and individual businessmen, apart from the general investing public, are increasingly exposed to the global markets. Hence, protecting against Forex risk is becoming more significant.
(B) View-based traders
Currency Futures provide view-based traders with an efficient platform to observe the movements of the local Currency (INR) against other Currencies. These traders can trade based on various technical indicators, fundamental factors, economic and policy-based news and developments on the global stage.
Currency Futures provide an opportunity for arbitrage trading by taking advantage of price differences between similar products and/or markets by choosing a combination of matching deals and capitalising on the imbalance without any additional market risk.
Yes. The minimum size of a USD/INR Futures contract is USD1,000 (about INR50,000). All transactions on the Exchanges are anonymous and are executed on a price-time priority. This means that the best price is available to all categories of market participants irrespective of their trading size. Another interesting aspect is the fact that the profits/losses in the Futures market are collected/paid on a daily basis, which limits the scope for losses for participants.
Yes. You can benefit from the exchange rate fluctuations just as you can benefit by investing in Commodities and/or Equities. However, you also stand to lose money if price movements are not in line with your expectations. Trading Currency Futures is risky, just as Commodities and/or Equities. You should, therefore, be knowledgeable about the Currency market if you want to participate in it.
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 purchases at a future date. You thus avoid exchange rate risk. If you are an exporter, you sell Currency Futures on an exchange platform and 'lock in' a sale price at a future date.
Risks in Currency Futures relate to movements in Currency exchange rates. There is no standard rule to determine whether the Currency exchange rate will rise or fall or remain unchanged in the future. A judgment on this is the domain of experts with deep knowledge and understanding of the variables that affect Currency rates.
A country’s exchange rate is typically affected by the supply of and demand for the country’s Currency in the international Forex market. The demand-and-supply dynamics is principally influenced by factors such as interest rates, inflation, trade balance and political and economic scenarios in the country. The level of confidence in the economy of a particular country also influences the Currency of that country.
In India, currently only USD/INR, EUR/INR, GBP/INR and JPY/INR are available for trading on various Exchanges.
As per KYC (Know Your Customer) norms, it is mandatory to have a PAN Number, proof of residence and an identification proof, in order to register as a client with Alpari (India).
Once you register with Alpari (India), your trading account is opened. The process of registration and activation of your trading account takes roughly seven working days (after completion of the KYC check).
The client is then required to make a deposit to update our database and activate the account. A welcome communication document is sent to you for your detailed understanding of the terms and conditions, rules and regulations and fees and charges.
Currency Futures allow investors to take a view on the movement of the Indian Rupee against other Currencies. This can be used to protect one’s business from Currency risks due to fluctuation of the exchange rates.
A Currency Forward contract is traded in the over-the-counter (OTC) market, usually between two financial institutions or between a financial institution and its client.
Let’s assume that the current exchange rate of the USD to the INR is INR45. When the value of the Rupee moves up to INR44/USD, we would say that the Rupee has appreciated in value against the USD. It means we can buy USD100 for INR4,400 instead of INR4,500.
Similarly, when the value of the Rupee moves down to INR46/USD, we would say that the Rupee has depreciated in value against the USD. It means we can buy USD100 for INR4,600 instead of INR4,500.
The Indian Forex market is very much influenced by the global markets. Post the global financial crisis of 2007/2008, the Indian Rupee has become much more volatile. It happens regularly that you can see the Indian Rupee moving 50-70 paise in intra-day trading.
The clearing house gives an unconditional guarantee for the net settlement obligations of all clearing members in the Currency Derivatives segment.
As per established norms, the Reserve Bank Reference Rate, on the date of expiry, will be the settlement price.
A Currency Futures contract expires on the last working day (excluding Saturdays and FEDAI holidays) of any given month.
There are four types of margins mandated by SEBI and they are as follows:
• Initial Margin,
• Extreme Loss Margin,
• Calendar Spread Margin and
• Mark-to-Market Margin.
The Initial Margin is 1.75% on the first day of Currency Futures trading and 1% thereafter.
The Extreme Loss Margin is 1% of the Mark-to-Market value of the gross open positions.
The Calendar Spread Margin is INR250 for all months of the spread. The benefit for a Calendar Spread will continue until the contract expires.
Mark-to-Market is an accounting calculation tracking the current market value of an asset. The calculations are done daily. Mark-to-Market is based on the current market value of the assets in question (ie Commodities, Securities, Derivatives, etc). It reflects how much such assets would be sold for if they were put on the market today.