USD-Rupee Futures in India
The long and eager wait of traders, derivatives experts and many others is over; NSE began
trading of the Rupee futures on its platform beginning on Friday 29th August 2008. A Reserve
Bank of India (RBI) internal working group last November recommended these futures be
introduced. The step earmarks the introduction of world’s most traded derivative instrument in
India. This was first of the two steps that SEBI has been planning towards introduction of
derivative instruments in India. Interest Rate derivatives have been approved and we should
soon have them trading on the Indian bourses. This article is a reality check on the relevance of
the instrument in India.
What is a Currency Future
A currency future, also FX future or foreign exchange future, is a futures contract to exchange
one currency for another at a specified date in the future at a price (exchange rate) that is fixed
on the purchase date. Currency Futures are generally traded in ‘pairs’ e.g. USD/EUR or
USD/YEN. A combination of Currency futures can be used to operate in non-standard pairs.
Pricing
The pricing of a currency futures contract is completely determined by the prevailing spot rate
and interest rates. Otherwise, investors would be able to arbitrage the difference between the
futures and spot prices. The futures price is given by:
where:
F = futures price
S = spot price
rT = interest rate of the term currency
rB = interest rate of the base currency
T = tenor
Users of Currency Futures
Currency Future is a derivative instrument that can be used by hedgers, speculators, and
arbitrageurs.
A Hedger uses the instrument to reduce risk by locking on to a future exchange rate and
mitigate the risks due to adverse movements of the exchange rate. This can also reduce his
profits.
A Speculator uses the instrument to take a risk by betting on a position based on his view on
the future exchange rate between two currencies.
An Arbitrageur takes advantage of difference in ‘price’ between two places where the
instrument is traded.
While the first category is primarily dominated by importers and exporters of goods and
services the second and third categories are the forte of traders.
Currency Futures in India – Some important points
Lot size of $1,000 which is insignificant compared with global standards (Chicago Mercantile
Exchange offers lot sizes of 12.5 million Japanese yen or Australian $100,000 for a single
contract), but traders expect it to be increased and many more currencies to be traded after
futures trading catches on.
The contract will be settled in rupee on the last business day of the month, based on the
Forex is an abbreviated name for foreign exchange. The Forex trading market is an around-the-clock cash market where the currencies of nations are bought and sold, typically via brokers. For example, you buy Euros, paying with U.S. Dollars, or you sell Canadian Dollars for Japanese Yen. Forex trading market conditions can change at any moment in response to real-time events, such as political unrest or the rate of inflation. The purpose of this article is to give you an introduction to Forex trading.
Sukirno (2004) states that foreign exchange rates or foreign exchange rate is the price or value of a country's currency is expressed in another country's currency, or it can also be interpreted as the amount of domestic currency needed to get one unit of foreign currency. Meanwhile, according to Mankiw (2013) the exchange rate between two countries is a rate agreed resident of both countries for mutual trade with one another. Economists distinguish between the exchange rate being two (Mankiw, 2013), namely:
Historically, this is outlined in the domestic societal framework (a rationalist point of view dictating political outcomes as a direct result of domestic material interests in society). Whatever society wants, society gets, leaving the consumer is to benefit from a fixed exchange rate. Competition exists between all interests. Whatever interest dominates takes the winning interest. The winning interest, then, determines the outcome. With businesses facing pressure to decrease domestic prices, consumers now have the upper hand. (Wellhausen, 10-2-14). Thus, due to the enhancing credibility of the government, consumers also are to benefit from a fixed exchange rate. (Multiple governments
Deliberate fixing of the exchange rate or preannounced rates of depreciation below the prevailing rates of inflation, have been adopted in various countries to break inflation. The experience has been almost unif...
In the present day, the world's economy is ever-changing and adjusting. Many different reasons control the reasons for this. The future of currency is something that can only be predicted and is not guaranteed. However, there are many determing factors behind the changes that can take place. Asia and North America are two continents that have economies that have recently changed or are in the midst of change.
The expanding global market has created both staggering wealth for some and the promise of it for others. Business is more competitive than ever before, and every business, financial or product-based, regardless of size or international presence is obligated to operate as efficiently as possible. A major factor in that efficient operation is to take advantage of every opportunity to maximize profits. Many multinational organizations have used derivatives for years in financial risk management activities. These same actions that can protect multinational organizations against interest rate futures and currency fluctuations can be used to create profits for those same organizations.
[6] Kripalani, Majeet & Egnardio, Pete. The Rise Of India. Business Week Online. December 8, 2003. http://www.businessweek.com/magazine/content/03_49/b3861001_mz001.htm
Therefore the exchange rate will decrease below $1.35 pound. For business or governments that trade billions of dollars even small changes in the exchange rate become
Howells, Peter., Bain, Keith 2000, Financial Markets and Institutions, 3rd edn, Henry King Ltd., Great Britain.
Since the listing of KOSPI 200 futures in May 1996, the derivatives market has grown into one of the key derivatives markets in the world. In the meantime, the market has achieved a higher level of excellence in market operation and secured a trading system and fair market management, and consequently figures as a decent reference among derivatives markets. The brief history of Korean derivatives market related to the products is as follows:
Wang, Jing 2008, ‘Why Are Exchange Rates So Difficult To Predict’, Economic Letter, Vol. 3, no. 6.
...ting in hedging activities in the financial futures market companies are able to reduce the future risk of rising interest rates. By participating in the financial futures market companies are able to trade financial instruments now for a future date (Block & Hirt, 2005).
To manage the multiple currencies, Adidas also sets its products’ price by having a future commodity contract that used USD for its sales.
Machiraju, H. R. , 2002. International Financial Markets And India. 1st ed. New Delhi: New Age International.
The foreign exchange market is one of important mechanism in the international business because foreign exchange is an intermediary for all nations in term of the growth of the economy. There are many functions of foreign exchange market in the global economy. In the international business, it uses the foreign exchange markets in four ways. First, the pay...