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Currency Futures In India

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

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