Currency Derivatives

What are currency derivatives? How do they work? And why should you care? Find out here at Relitrade Stock Broking Company in Ahmedabad, Gujarat, India.

What are currency derivatives? How do they work? And why should you care? Find out here!

What are currency derivatives? How do they work? And why should you care? Find out here at Relitrade Stock Broking Company in Ahmedabad, Gujarat, India.

What are currency derivatives? How do they work? And why should you care? Find out here at Relitrade Stock Broking Company in Ahmedabad, Gujarat, India.

The world economy has been in turmoil for years now, and many people wonder how this affects their personal finances. In fact, there are several different types of financial instruments that allow individuals to trade currencies, commodities, and other assets. These include futures contracts, options, swaps, forwards, and currency pairs.

What Are Currency Derivatives?
Futures contracts are agreements between two parties to buy or sell an asset at a specified price at some future date. Options are similar to futures except that the buyer does not actually own the asset until the option expires. Swaps are used when one party wants to exchange cash flows with another party. Forward contracts are used to hedge against foreign exchange risks. Currency pairs are used to speculate on the value of a pair of currencies.

Why Do You Need To Know About Them?
Futures contracts are used by investors to protect themselves against changes in the value of assets. They allow investors to lock in the current value of an asset at a certain point in the future. This allows them to make money even if the market moves down before the contract expires.

How Do They Work?
Futures contracts are traded on exchanges. These exchanges are similar to stock markets where buyers and sellers come together to buy and sell futures contracts. A futures contract is based on a commodity such as gold, oil, or wheat. It represents ownership of a quantity of that commodity at a specified price on a particular date in the future.

Who Uses Them?
Futures contracts are used by investors who want to speculate on the direction of prices of commodities. They are also used by companies that need to hedge against fluctuations in the value of their assets.

How Can You Benefit From Using Them?
Futures contracts allow traders to buy or sell an asset at a certain price in the future. This means that when the contract expires, the buyer will receive the agreed upon price. If the price goes up, the seller receives more money than he would have received had the price gone down.

Currency Derivatives

What are currency derivatives? How do they work? And why should you care? Find out here at Relitrade Stock Broking Company in Ahmedabad, Gujarat, India.

Currency Derivatives

What is Currency?

  • A generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade.
  • Currencies are often traded in by banks and financial trading institutions. Individual investors can also trade in currency derivatives to take advantage of variations in currency exchange rates. The market for currency trading is one of the biggest and fastest growing in the world
What are currency derivatives? How do they work? And why should you care? Find out here at Relitrade Stock Broking Company in Ahmedabad, Gujarat, India.
What are currency derivatives? How do they work? And why should you care? Find out here at Relitrade Stock Broking Company in Ahmedabad, Gujarat, India.

What is Currency Derivative?

  • The term ‘Derivatives’ indicates it derives its value from some underlying i.e. it has no independent value. Underlying can be securities, stock market index, commodities, bullion, currency or anything else.
  • These are options and futures contracts through which you can buy or sell specified quantities of pairs of currencies at a future date (which is predetermined).
  • The price or exchange rate is decided on the date of purchase. The derivatives are similar to options and futures in the stock market, aside from the fact that currency pairs are the underlying assets.
  • Currency derivatives are complex financial instruments which are traded over – the – counter and this is a collective term used for futures, forwards and swaps. Currency derivatives are used for hedging. This hedging involves a future payment or receive in a foreign currency.
  • To put it simply an example of Derivatives is curd which is derived from Milk. Derivatives are unique product, which helps in hedging the portfolio against the future risk. At the same time, derivatives are used constructively for arbitrage and speculation too.

How Currency Derivative Works?

  • Trading in these derivatives gives you an option to trade in four foreign currencies which are pegged against the Indian rupee. You can trade through futures trading contracts for different foreign currencies through leading stock exchanges in India. However, foreign institutional investors and non-resident Indians cannot trade in this market.
  • Investors can hedge against foreign exchange risk and benefit from the rupee’s movement against major foreign currencies. There has been an increase in volumes of trading in currency futures over the years. The euro, Japanese yen, British pound and US dollar are the major currencies for which you can get currency derivatives paired with the rupee.
  • Traders have to pay only a certain percentage value of the contracts to trade, and not the full contract value, which makes these contracts lucrative. Usually, they have to pay about 3%-5% of the value of the contracts for buying currency derivatives.
What are currency derivatives? How do they work? And why should you care? Find out here at Relitrade Stock Broking Company in Ahmedabad, Gujarat, India.

Factors Affecting Exchange Rate of Currency Economical

Supply and Demand

GDP, IIP, WPI

Fiscal Deficit

Current Account Deficit

Monetary Policy – Domestic International

Political – Geo Political

Government Policies

Crude Oil Prices

Trade Data

Speculation

Currency Futures

  • A currency futures contract is a standardized version of a forward contract that is traded on a regulated exchange. It is an agreement to buy or sell a specified quantity of an underlying currency on a specified date in future at a specified rate (e.g., USD 1 = INR 46.00). (Note: USD is abbreviation for the US Dollar, and INR for the Indian Rupee).”
  • Currency Futures can be traded through MCXSX, NSE and USE
    They are used by MNCs to hedge their currency positions and by speculators who hope to capitalize on their expectations of exchange rate movements.
  • The contracts can be traded by firms or individuals through brokers on the trading floor of an exchange, on automated trading systems, or over-the-counter.
  • Participants in the currency futures market need to establish and maintain a margin when they take a position.
  • Initial Margin: Deposit that a trader must make before trading any futures.
  • Maintenance Margin: When margin reaches a minimum maintenance level, the trader is required to bring the margin back to its initial level.
    Variation Margin: Additional margin required to bring an account up to the required level.

Currency Futures in India?

  • Currency futures trading was started in Mumbai August 29,2008.
  • With over 300 trading members including 11 banks registered in this segment, the first day saw a very lively counter, with nearly 70,000 contracts being traded.
  • The first trade on the NSE was by East India Securities Ltd.
  • Amongst the banks, HDFC Bank carried out the first trade.
  • The largest trade was by Standard Chartered Bank constituting 15,000 contracts. Banks contributed 40 percent of the total gross volume.
  • Traded in BSE, NSE and MCX exchanges

Hedging with Currency Futures:

  • Importer – Buys the required currency futures contract, “locks in” a price for the purchase of foreign currency
  • Exporter – Sells the expected currency futures contract, thus “locks in” a price for the sale of foreign currency

Imperfections in Hedging with Currency Futures

  • Maturity mismatch – Mismatch in maturity date of futures contract and date of cash transaction
  • Size mismatch – Mismatch between size of futures contract and size of cash transaction
  • Hedging with currency futures may not result in perfect hedge
  • Final delivery of the foreign currency will take place only through the banking system
What are currency derivatives? How do they work? And why should you care? Find out here at Relitrade Stock Broking Company in Ahmedabad, Gujarat, India.

Currency Options, Features & Exchange Traded Options

  • Contract that allows the buyer the right but not the obligation to buy or sell the underlying at a stated date and at a stated price
  • A currency option is another type of contract that can be purchased or sold by speculators and firms.
  • Currency options are classified as – Call option – Puts option
  • A call option gives the right to buy and put option gives the right to sell
  • In every currency transaction, one currency is bought and another sold.
  • Variation Margin: Additional margin required to bring an account up to the required level.

Features of Currency Options

  • The underlying for the currency option shall be US Dollar – Indian Rupee (USD-INR) spot rate.
  • The options shall be premium styled European call and put options.
  • The size of each contract shall be USD 1000. The premium shall be quoted in Rupee terms. The outstanding position shall be in USD
  • The maturity of the contracts shall not exceed twelve months.
  • The contracts shall be settled in cash in Indian Rupees.
  • The settlement price shall be the Reserve Bank’s Reference Rate on the date of expiry of the contracts.

Exchange Traded Currency Options

  • Standardized with predefined maturity
  • Easily accessible in OTC
  • Helps during UP & Downs
  • Risk management & Cost control

Currency Derivatives

What are currency derivatives? How do they work? And why should you care? Find out here at Relitrade Stock Broking Company in Ahmedabad, Gujarat, India.

What are currency derivatives? How do they work? And why should you care? Find out here!

What are currency derivatives? How do they work? And why should you care? Find out here at Relitrade Stock Broking Company in Ahmedabad, Gujarat, India.

What are currency derivatives? How do they work? And why should you care? Find out here at Relitrade Stock Broking Company in Ahmedabad, Gujarat, India.

The world economy has been in turmoil for years now, and many people wonder how this affects their personal finances. In fact, there are several different types of financial instruments that allow individuals to trade currencies, commodities, and other assets. These include futures contracts, options, swaps, forwards, and currency pairs.

What Are Currency Derivatives?
Futures contracts are agreements between two parties to buy or sell an asset at a specified price at some future date. Options are similar to futures except that the buyer does not actually own the asset until the option expires. Swaps are used when one party wants to exchange cash flows with another party. Forward contracts are used to hedge against foreign exchange risks. Currency pairs are used to speculate on the value of a pair of currencies.

Why Do You Need To Know About Them?
Futures contracts are used by investors to protect themselves against changes in the value of assets. They allow investors to lock in the current value of an asset at a certain point in the future. This allows them to make money even if the market moves down before the contract expires.

How Do They Work?
Futures contracts are traded on exchanges. These exchanges are similar to stock markets where buyers and sellers come together to buy and sell futures contracts. A futures contract is based on a commodity such as gold, oil, or wheat. It represents ownership of a quantity of that commodity at a specified price on a particular date in the future.

Who Uses Them?
Futures contracts are used by investors who want to speculate on the direction of prices of commodities. They are also used by companies that need to hedge against fluctuations in the value of their assets.

How Can You Benefit From Using Them?
Futures contracts allow traders to buy or sell an asset at a certain price in the future. This means that when the contract expires, the buyer will receive the agreed upon price. If the price goes up, the seller receives more money than he would have received had the price gone down.

Currency Derivatives

What are currency derivatives? How do they work? And why should you care? Find out here at Relitrade Stock Broking Company in Ahmedabad, Gujarat, India.