FAQs

What is currency trading?

While trade is international, currencies are national. As international transactions are settled in global currencies, usually they are brought/sold for one another and this constitutes ‘currency trading’.

What  are  the  factors  that  affect  the  exchange  rate  of  a currency?

A country’s currency exchange rate is typically affected by the supply and demand for the country’s currency in the international foreign exchange market. The demand and supply dynamics is principally influenced by factors like interest rates, inflation, trade balance and economic & political scenarios in the country.  The  level  of  confidence  in  the economy  of  a  particular  country  also  influences the  currency of that country.

How and why does the demand and supply of a currency increase and decrease?

There are several reasons.  A rise in export earnings of a country increases foreign exchange supply.  A rise in imports increases demand. These are the objective reasons, but there are many subjective reasons too. Some of the subjective reasons are: directional viewpoints of market participants, expectations of national economic performance, confidence in a country’s economy and so on.

What is a currency futures contract?

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).

What is the need of currency futures?

Currency futures are needed if your business is influenced by fluctuations in currency exchange rates. If you are in India and are  importing something,  you  have  done the  costing  of  your imports  on the  basis  of  a  certain  exchange rate  between the Indian Rupee and the relevant foreign currency. By the time you actually import, the value of the Indian Rupee may have gone down and you may lose out on your income in terms of Indian Rupees by paying higher. On the contrary, if you are exporting something and the value of the Indian Rupee has gone up, you earn less in terms of Rupees than you had anticipated. Currency futures help you hedge against these exchange rate risks.

Does the national economy of India need currency futures?

Every business exposed to foreign exchange risk needs to have a facility to hedge against such risk.  Exchange-traded currency futures are a superior tool for such hedging because of greater transparency, liquidity, counterparty guarantee and accessibility.  Since the economy is made up of businesses of all sizes, anything that is good for business is also good for the national economy.

Why exchange-traded futures? What’s wrong with the currency forward market that has been existing in India for a long time?

The  exchange-traded  futures,  as  compared  to  OTC  forwards, serve  the  same  economic purpose,  yet  differ  in  fundamental ways. Exchange-traded contracts are standardised. In an exchange-traded  scenario  where  the  market  lot  is  fixed  at  a much lesser size than the OTC market, equitable opportunity is provided  to  all  classes  of  investors  whether  large  or  small  to participate  in  the  futures  market. The other advantages of an Exchange traded market would be greater transparency, efficiency and accessibility. The  counterparty  risk  (credit  risk)  in  a  futures  contract  is eliminated  by  the  presence  of  a  clearing  house/  corporation, which  by  assuming  counterparty  guarantee,  eliminates  default risk.  Thus, introduction of exchange-traded futures help in overall development of the forex market in the country.

Who can participate in a currency futures market?

Any resident  Indian  or  company  including  Banks  and  financial institutions  can  participate  in  the  futures  market.  However, at present, Foreign Institutional Investors (FIIs) and Non-Resident

Indians (NRIs) are not permitted to participate in currency futures market.

What are the terms and conditions set by RBI for Banks to participate in exchange traded Currency Futures?

RBI has allowed Banks to participate in currency futures market. The AD Category I Banks which full fill stipulated prudential requirements are eligible to become a clearing member and / or trading member of the currency derivatives segment. AD  Category  I  Banks  which  are  urban  co-operative  banks  or state co-operative banks can participate in the currency futures market  only  as  a  client,  subject  to  approval  thereof,  from  the respective regulatory department of RBI.

If  I  am  an  AD  Category  I  Bank,  why  should  I  become  a member of a currency futures exchange? I have the interbank market, anyway.

The interbank market is a market for Banks. Small and medium sized clients of Banks cannot directly participate in the interbank market.  If  a  Bank  is  a member  of  a  currency  futures exchange, it can trade on behalf of its small and medium-sized clients,  who  otherwise  would  not  have  been  able  to  benefit from  fluctuations  in  currency  exchange  rates.  Thus,  Banks  can increase  their  customer  base  if  they  become  a  member  of  a currency  futures  exchange.  Banks  themselves  can  also  benefit from  a  currency  futures  exchange  by  arbitraging  between  the existing  interbank  market  and  the  currency  futures  exchange. Larger participation in a currency futures exchange gives the exchange platform a greater vibrancy than the interbank market, which is limited to Banks.

Can currency futures help small traders?

Yes. The minimum size of the USDINR futures contract is USD 1,000.  Similarly  EURINR  future  contract  is  EURO  1000,  GBPINR future  contract  is  GBP  1000  and JPYINR  future  contract  is YEN 1, 00,000. These are well within the reach of most small traders. All transactions on the Exchange are anonymous and are executed on a price time priority ensuring that the best price is available to all categories of market participants irrespective of their size. As the profits or losses in the futures market are also paid / collected on a daily basis, the scope of accumulation of losses for participants gets limited.

If I am an individual with no exposure to foreign exchange risks, does a currency futures exchange mean anything to me?

Yes, it does, if you want to invest purely as an investor. You can benefit from exchange rate fluctuations just as you can benefit by investing in equities in the stock market. However, as in the

Stock markets, you also stand to lose money if the price movements are not in keeping with what you had anticipated. Participating in a currency futures exchange is risky, just as the stock market is. You should therefore be knowledgeable about the currency market if you want to participate as an investor.

How do exchange-traded currency futures enable hedging against currency risk?

On a currency exchange platform, you can buy or sell currency futures. If you are an importer, you can buy futures to “lock in” a price  for  your  purchase  of  actual  foreign  currency  at  a  future date.  You thus avoid exchange rate risk that you would otherwise have faced. On the other hand, if you are an exporter, you sell currency futures on the exchange platform and “lock in” a sale price at a future date. However, it may be noted that the contract will be marked to market at the daily settlement price and profit or loss will be paid / collected on a daily basis.

What are the risks involved in currency futures market?

Risks in currency futures pertain to movements in the currency exchange rate. There is no rule of thumb to determine whether a currency rate will rise or fall or remain unchanged. A judgement on this will depend on the knowledge and understanding of the variables that affect currency rates.

Which are the global exchanges that provide trading in currency futures?

Internationally, exchanges such as Chicago Mercantile Exchange (CME), Johannesburg Stock Exchange, Euronext liffe, BM & FBOVESPA and Tokyo Financial Exchange provide trading in currency futures.

Why should one trade in Indian exchanges as compared to international exchanges?

Indian currency futures enable individuals and companies in India to hedge and trade their Indian Rupee risk. Most international exchanges offer contracts denominated in other currencies.

What is the minimum trading unit (i.e. contract size) and tenure of the USDINR, EURINR, GBPINR and JPYINR futures contract?

The contract size  of the USDINR  futures  contract  is USD  1,000, EURINR future contract is EURO 1,000, GBPINR future contract is GBP  1,000  and  JPYINR  future  contract  is  YEN  1,00,000.  The contracts shall have a maximum maturity of twelve months. All monthly maturities from 1 to 12 months are available.

What is the last trading day of these currency futures contract?

The  last  trading  day  of  a  futures  contract  on  MCX-SX shall  be two  working  days  prior  to  the  last  working  day  (excluding Saturdays)  of  the  month. The settlement price is the Reserve Bank of India’s reference rate on the last trading day.

In which currency are the currency futures contracts settled?

They are settled in cash in Indian Rupees.

What  are  the  various  types  of  margins  that  are  levied  to manage the risk?

The  trading  of  currency  futures  is  subject  to  maintenance  of initial,  extreme  loss,  and  calendar  spread  margins  with  the clearing  house /  corporation. The details of the margins levied are mentioned in the respective product specifications.

What are the currencies traded on MCX-SX and NSE Currency Exchange?

                                                          

In the first phase of operations, only the USDINR currency pair was traded on Exchange. With the changing need of the participants,  the  regulators  have  allowed  Exchanges  to  facilitate trading  in  other  major  currency  pairs  as  EURINR,  GBPINR  and JPYINR future contracts.

What are the trading hours for Currency Future Market?

Trading in currency futures is on all working days from Monday to Friday and is between 9.00 am to 5.00 pm.

Above information gathered from the MCX-SX and NSE Currency exchange’s websites.