With the turmoils in the global economy, Indian Rupee exchange rate has seen huge volatility against USD and other major foreign currencies during the last three years. In the past, Indian financial markets offered very few options such as currency forwards, swaps and options (traded on OTC - over the counter market) to Indian investors for hedging their currency risks. Cash Forex or OTC Forex trading was not easily accessible to small investors and even more, it was suitable to only large participants due to various factors that acted as deterrent to retail investors.
Although trading forex on exchanges is not a new concept in the international currency markets, Chicago Mercantile Exchange being one of the top exchanges for foreign currency futures and currency options, but in India, trading in currency futures is relatively new. However, after having commenced Currency Futures trading from August 2008, Indian Currency Markets have witnessed huge growth in terms of turnover and number of contracts. At present, three recognized stock exchanges NSE, MCX and BSE offer trading in four currency pairs USDINR, EURINR, GBPINR and JPYINR and very soon the market regulator SEBI is likely to allow trading in Currency Options.
Exchange traded currency futures have come as a blessing not only to large participants but also to retail traders and investors. Here is a quick guide to the basics of currency futures.
What is Currency Future?
Currency Future is a legal contract or a commitment to exchange one currency against another at a fixed price and at a fixed date with the contract tradable on any recognized exchange.
What are the advantages of currency futures?
Easy Accessibility: With the availability of currency trading on the recognised exchanges NSE, BSE, and MCX, it has become very easy for all sorts of market participants to trade in currency markets.
Easy Affordability: With contract size of $1000 USD and margin as low as 1.75%, it was never so easy and affordable for any retail investor to take a call on Indian Rupee by taking position in currency markets.
Low Transaction Costs: As compared to high commissions and spreads payable to the banks or foreign exchange agents, you have to pay a small amount of brokerage charges, and statutory taxes when you trade in forex futures on exchanges.
Transparency: When you trade on recognized stock exchanges such as NSE and MCX, it is possible for you to verify trade details if you have a doubt that the broker has tried to cheat you.
Efficient Price Discovery : With its state-of-the-art automated electronic trading system where the orders are executed on price-time priority, exchanges are better poised to offer efficient price discovery than the unregulated OTC Forex markets. In fact, internationally, it has been established that currency future is a better and efficient mechanism for price discovery.
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