What are Currency Futures?

As long as there is global trade there will be global capital flows and countries will encroach into each other’s currencies. This necessitates the need for a vibrant currency market much like there is a commodity market. The currency futures market is a derivative of movement of exchange rate and interest rates.

A currency future contract thus is a legally binding agreement where one can buy or sell a financial instrument in the future at a price that has been agreed upon beforehand. Lots and delivery time of these currency futures are standardized.

Trading facility in currency futures is available to all resident individuals, HUFs and corporates who are eligible under the criteria mentioned under Foreign Exchange Management Act. Like other derivative markets, currency futures attract a margin and are subject to mark to market (MTM) and margin call.

The National Stock Exchange (NSE) introduced the currency futures segment in August 2008. Subsequently, BSE MCX SX joined the bandwagon and today it is a vibrant market witnessing a combined turnover of Rs 2000 crore daily as corporates throng into this market owing to easy access, liquidity and the opportunity to hedge their currency risks.

Now lets us see how the currency futures work

  • An Indian resident invests $200,000 abroad for a year at the current rate of exchange ($1= Rs 62)
  • Suppose his investments yield 20% returns in a year, he makes Rs 24.83 lakh rupees.
  • However if the value of the rupee appreciates to Rs 60 , he will make a mere Rs 12 lakhs
  • If he sells a 12 month futures contract at the spot price of Rs 62, amounting to $ 200,000, he could cover his losses by buying the dollar in the futures market.
  • On the other hand if the rupee depreciates to say Rs 65, he can make up his losses in the futures market by the profits in the international market.
  • Thus the investor is hedged against both a rise and fall in currency, therefore ensuring safe returns.

How can SMEs / MSMEs benefit from Currency Futures?

Most SMEs/MSMEs are exposed to considerable currency risk due to their exposure in FCCBs or foreign currency loans. In domestic markets banks consider SMEs/MSMEs risky and do notgive them favorable terms of lending if they seek bank loans. In these case, access to exchange traded futures help them cover their foreign exchange risk effectively. The similar phenomenon holds true for exporters who can hedge their currency risk and manage their own books without having to depend on the banking system.

Risks involved in Currency Futures Trading

Risk of currency futures mainly pertains to the movements in the currency exchange rate. There is no rule of thumb to determine in which direction the rates will move. A judgement will be based on the knowledge and understanding of the factors that affect currency rates. As an SME / MSME or a retail investor it is not only difficult to have a correct judgement of these rate fluctutations always. For effective currency risk management you can depend on the research carried out at Beeline and keep your portfolio well hedged against currency risks.



♦  What is Currency Derivatives?

 Currency Derivatives are Future and Options contracts which you can buy or sell specific quantity of a particular currency pair at a future date. It is similar to the Stock Futures and Options but the underlying happens to be currency pair (i.e. USDINR, EURINR, JPYINR OR GBPINR) instead of Stocks. A future contract of USDINR of expiry 27th Jan, 2015 will be represented by symbol ‘FUTCUR-USDINR-27JAN2015’. A call option contract of USDINR of expiry 27th Jan, 2015 for Strike Price ‘63’ will be represented by symbol ‘OPTCUR-USDINR-27JAN2015-63-CE’.

♦ What are the benefits of trading in Currency Derivatives?

 Currency Derivatives are very efficient risk management instruments and you can derive the below benefits:

  1. 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 USD INR and fixing your pay out rate today. You would hedge if you were of the view that USD INR was going to depreciate. Similarly it would give hedging opportunities to Exporters to hedge their future receivables, Borrowers to hedge foreign currency (FCY) loans for interest and principal payments, Resident Indians, who can hedge their offshore investments.
  2. 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 USD INR 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 USD INR.

    3.  Arbitrage: You can make profits by taking advantage of the exchange rates of the currency in different                         markets and different exchanges.

    4.   Leverage: You can trade in the currency derivatives by just paying a % value called the margin amount                         instead of the full traded value.

    ♦  What categories of Currency Derivatives contracts are offered for trading through Beeline                       Broking Ltd.

 Future and Option contracts in Currency derivatives have been introduced in India. Trading in Currency derivatives through Beeline Broking Ltd. is presently offered in both Future and Option contracts in NSE and BSE.

     ♦ 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.

     ♦ 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 Derivatives at I-Sec will be offered to all Resident Individuals / HUFs / eligible Corporates fulfilling the FEMA criteria.

      ♦ What is the date of expiry?

 All Currency contracts expire two working days prior to the last business day of the expiry month at 12 noon.

      ♦ What are the trade timings of Currency trading?

 Currency Derivatives the trade timings in  exchanges are as follows: Trading Session- Monday to Friday- 9:00 AM to 5:00 PM.

      ♦  Can Currency futures help small traders?

 Yes. The minimum size of the USD INR futures contract is USD 1,000. Similarly EUR INR future contract is EURO 1000, GBP INR future contract is GBP 1000 and JPY INR 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.

      ♦  How is Currency Price 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 are the margin charged in currency Future and Option Contracts?

 Generally, Currency futures and options contracts require a margin percentage of the contract value, i.e. defined by exchange. The exchange also requires the daily profits and losses to be paid in/out on open positions (Mark to Market or MTM) so that the buyers and sellers do not carry a risk for not more than one day.

      ♦  Can I use same margin to trade in both Equity and Currency segment?

 Yes, same margin can be used to trade in both Equity and Currency segment.

       ♦  Will I have single login id to access both equity and Currency trading account?

 Yes, you can trade in Equity, F&O, Commodity and Currency segment by logging in to our single integrated trading platform – or can login to our trading website with same login id and password.

       ♦  I am an existing equity customer; do I need to open a separate trading account for currency?

 No, you don’t need to open a separate trading account for currency trading. You have to place a request to enable currency trading permissions along with submission of required documents. You can visit the nearest branch; can contact your relationship manager or call at Client Helpline Number: …..

        ♦  What are the risk involved in currency trading

 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 judgment on this will depend on the knowledge and understanding of the variables that affect currency rates.

        ♦  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 stock market. However, as in the stock markets, 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 stock market is. You should therefore be knowledgeable about the currency market if you want to participate as an investor.

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