Get to know currency derivatives

Get to know currency derivatives

News:

1. Currency derivatives , considered to be one of the best options to manage any risk against foreign currency exchange rate volatility,

Important facts:

2. Currency derivatives:

• Currency derivatives are exchange-based futures and options contracts that allow one to hedge against currency movements.
• One can use a currency future contract to exchange one currency for an another at a future date at a price decided on the day of the purchase of the contract.
• In India, one can use such derivative contracts to hedge against currencies like dollar, euro, U.K. pound and yen.
• Corporates, especially those with a significant exposure to imports or exports, use these contracts to hedge against their exposure to a certain currency.
• All such currency contracts are cash-settled in rupees. Recently the SEBI gave a green signal to start cross currency contracts as well on euro-dollar, pound-dollar and dollar-yen.
• The currency segment was unveiled in 2008 and since then, the volumes had registered a steady rise.

3. Trade in currency derivatives:

• The two national-level stock exchanges, BSE and the National Stock Exchange (NSE), have currency derivatives segments.
• The Metropolitan Stock Exchange of India (MSEI) also has such a segment.
• One can trade in currency derivatives through brokers.
• All the leading stock brokers offer currency trading services too.
• It is just like trading in equity or equity derivatives segment and can be done through the trading app of the broker.

4. Such derivatives introduced on exchange platform because:

• Prior to the introduction of currency derivatives on exchanges, there was only the OTC – over the counter – market to hedge currency risks and where forward contracts were negotiated and entered into.
• It was kind of an opaque and closed market where mostly banks and financial institutions traded.
• Exchange-based currency derivatives segment is a regulated and transparent market that can be used by small businesses and even individuals to hedge their currency risks.