Current Affairs Classes Pre cum Mains 2025, Batch Starts: 11th September 2024 Click Here for more information
Get to know currency derivatives
News:
- 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.