Capital (Currency)

1. What is Currency Derivatives?
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. From Currency Derivatives market point of view, underlying would be the Currency Exchange rate. 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.

2. What are the benefits of trading in Currency Derivatives
Currency Derivatives are very efficient risk management instruments and you can derive the below benefits:

i. Hedging:
You can protect your foreign exchange exposure in business and hedge potential losses by taking appropriate positions in the same. For e.g. If you are an importer, and have USD payments to make at a future date, you can hedge your foreign exchange exposure by buying USDINR and fixing your pay out rate today. You would hedge if you were of the view that USDINR was going to depreciate. Similarly it would give hedging opportunities to Exporters to hedge thier future receivables, Borrowers to hedge foreign currency (FCY) loans for interest and principal payments, Resident Indians, who can hedge their offshore investments.

ii. Speculation:
You can speculate on the short term movement of the markets by using Currency Futures. For e.g. If you expect oil prices to rise and impact India's import bill, you would buy USDINR in expectation that the INR would depreciate. Alternatively if you believed that strong exports from the IT sector, combined with strong FII flows will translate to INR appreciation you would sell USDINR.

iii. Arbitrage:
You can make profits by taking advantage of the exchange rates of the currency in different markets and different exchanges.

iv. Leverage:
You can trade in the currency derivatives by just paying a % value called the margin amount instead of the full traded value.

3. What are Currency Futures Contracts?
Currency Futures contracts are legally binding agreement to buy or sell a financial instrument sometime in future at an agreed price. Currency Future contracts are standardized in terms of lots and delivery time. The only variable is the price, which is discovered by the market. Currency Futures contracts have different expiry validity and will expire after the completion of the specified tenure.