A currency Derivatives, also known as FX 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.
It allows investors to protect foreign exchange exposure in business and hedge potential losses by taking appropriate positions.
Currency Derivatives are available on four currency pairs viz. US Dollars (USD), Euro (EUR), Great Britain Pound (GBP) and Japanese Yen (JPY).
Cross Currency Futures & Options contracts on EUR-USD, GBP-USD and USD-JPY are also available for trading in Currency Derivatives segment.
Types of Currency Derivatives:
A currency future is a contract to buy or sell currency at a specific price on a future date.
Currency futures contract is traded on an exchange, which has standard contract specifications,
like units, tick size, expiry date, and settlement rules.
Advantages of Currency Futures:
In case of fluctuations pertaining to exchange rates, corporates can take appropriate positions and hedge
any potential losses from exports or imports. e.g. An importer, having USD payments to make at a future
date and of the view that USDINR was going to depreciate, they can hedge foreign exchange exposure by buying
USDINR and minimize their losses by taking appropriate positions through hedging with the help of currency derivatives.
Investors 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 USDINR 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 USDINR.
Investors can make profits by taking advantage of the exchange rates of the currency in different
markets and different exchanges.
Investors can trade in the currency derivatives by just paying a 2.5 to 5 % value called the margin amount
instead of the full traded value.
A Currency option is a contract which gives the option buyer the right, but not the obligation to buy
or sell the underlying at a stated date and at the stated price
There are two types of currency options: calls and puts. Buying a call option gives the holder the right to
buy a currency pair for the strike price on or before the expiry date, and buying a put option gives the
holder the right to sell a currency pair for the strike price on or before the expiry date.
Advantages of Currency Options:
Limit losses to the premium paid as investors are not obliged to buy or sell the underlying on expiry.
Provide protection against exchange rate fluctuations in investment portfolios.
Allow investors to take advantage of price movements in the exchange rate because they can
take a view as to whether the exchange rate will strengthen or weaken.
Standardized contracts traded on a regulated exchange eliminate counterparty risk.