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currency derivatives currency derivatives
You are here  ||  Product & Services  >>  Currency Derivatives
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The launch of currency derivatives in India, in May this year opened one more lucrative avenue for trading. The recommendations were made jointly by the SEBI and the RBI.

 

Currency derivatives can be described as contracts between the sellers and buyers, whose values are to be derived from the underlying assets i.e. the currency amounts.

 

Currently, India is a USD 34 billion OTC (over-the-counter) market.  Networth has taken membership with NSE, BSE, USE  & MCX-SX to offer trading in currency futures to its customers.

 

Exchange traded currency futures will help-

·          to get transparency and efficiency in price discovery

·          in elimination of counter party credit risk

·          accessibility to all types of market participants

·          get standardized products and transparent trading platform Currency futures are being offered by NSE (National Stock Exchange), BSE (Bombay Stock Exchange), USE (United Stock Exchange) & MCX-SX (Multi-Commodity Exchange)

           

Benefits-

·          Hedges risk

·          Acts as insurance against unforeseen and unpredictable currency and interest rate movements.

·          If receivables or payments to be incurred are in multiple currencies,   

·          derivatives can be used for matching the inflows and outflows.

           

Benefits to SMEs-

SMEs do not receive support from banks readily due to higher counter party risk, lesser solvency and ability to honor its obligations.

They may have to pay higher commissions making the transaction cost higher and the reducing the profit margins. Exchange traded currency derivatives will help these firms to hedge their risk with lower transaction costs. Opening up of trading in currency derivatives will give relief to small traders and SMEs.

 

Features-

·          Only USD-INR contracts are allowed to be traded.

·          The size of each contract shall be USD 1000.

·          The contracts shall be quoted and settled in Indian Rupees.

·          The maturity of the contracts shall not exceed 12 months.

·          The settlement price shall be the Reserve Bank''''s Reference Rate on the last trading day

 

Illustration-

If a person buys five dollar-rupee contracts (each contract equals $1,000) of five months expiry at say Rs. 41, this would amount to a notional value of Rs. 2,05,000, but he would have to pay only a margin on that, say 5 per cent, amounting to Rs. 10,250.

 

Now at the end of five months if the dollar moved up to

Rs. 43, there would be a benefit of Rs. 10,000 (5000 x (43-41)). And if the dollar moved to Rs. 39, a loss of Rs. 10,000 (5000 x (39-41)).

 

If at this time the man bought $5,000 that he requires for travel at the spot price of Rs. 43 he would spend more, but there is the gain of Rs. 10,000 from futures bringing down his costs.

 

At the spot price of Rs. 39 he pays less, but there is the loss of Rs. 10,000 bringing up his costs. In the end his dollar cost amounts to the same, say Rs. 41.10, including the small opportunity cost on the margin he has paid.

 

Advantages of Currency Futures-

·          Easy Accessibility: Currency futures are being offered on the recognised exchanges in India.

·          Easy Affordability: Margins are very low and the contract size is very small.

·          Low Transaction Costs: In currency futures on NSE in India, you have to pay a small amount of brokerage fees and statutory duties and taxes. In overseas forex trading you have to pay commissions in the form of spread.

·          Transparency: It is possible for you to verify trade details on NSE if you have a doubt that the broker has tried to cheat you.

·          Efficient Price Discovery: NSE is well poised to offer efficient price discovery.

·          Counter-party Default Risks: All the trades done on the recognized exchanges are guaranteed by the clearing corporations and hence it eliminates the risks associated with counter party default.

·          Standardized Contracts: Exchange Traded currency futures are standardized in respect of lot size ($1000) and maturity (12 monthly contracts).

Please do get in touch with us to know more.

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