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What is Currency Derivative?

Currency derivatives are a contract between the seller and buyer, whose value is derived from the underlying asset, the currency value. A derivative based on currency exchange rates is an agreement that two currencies may be exchanged at a future date at a stipulated rate.

How to Trade?

Currency derivative contracts are traded in pairs like Rupee-Dollar, Rupee-British pound, Rupee-Euro, and Rupee-Yen with a contract size of 1,000. For example, if the one dollar is traded at 62.4950, then the contract value will be Rs 62,495 (62.4950*1000). These contracts are quoted till the fourth decimal point.
For example, traders have a view that the dollar value will increase against the rupee, then they take a long position (buy) in the rupee (base currency) - dollar (reference currency) contract. If a trader buys a Rupee - Dollar derivative contract at rate of 62.4950, then the total contract value (lot size of 1,000) becomes Rs 62,495. Suppose, during the course of trade the rate of dollar moves up to 62.4975 then the contract value will jump to Rs 62,497.50/-. Hence, the upward or downward movement in the fourth decimal number results in a gain or loss of 2.50 rupees for traders.
The currency pairs are available to traders at a margin which means they pay only some per cent value of the contract, rather than the full value, making it a lucrative trading option among the traders. The margins for these contracts are decided by exchange based on SEBI guidelines. On an average, traders can buy the contracts by paying a margin of 3-5 per cent of the total value of the contract size. (For example, the margin for the contract value of RS. 62,495/- will be 3124.75/-).
Unlike stock and equity index future contracts which expire on last thrushday of the month, the contracts of the currency pairs expire two working days prior to the last business day of the expiry month at 12:30 pm.
The price fluctuations in the currency contracts have a linkage to the economic indicators of the particular country of which a person is trading the currency (either base or reference currency). Trade balance, inflation, interest rates and political risks affect the movement of the currency futures contracts.

Key Benefits:

  • It is a new asset class for diversification of investments for all resident Indians.
  • It gives hedging opportunities to:
  • Importers and exporters, who can hedge their future payables and receivables,
  • Borrowers, who can hedge foreign currency (FCY) loans for interest and principal payments, with the need for proof of documented exposure.
  • It gives arbitrage opportunities.
  • It gives trading opportunities because of its volatility and multiplicity.
  • It provides highly transparent rates to traders as it is exchange-traded.

Why Invest With Us?

  • Currency derivative and equities can be traded on one platform.
  • Facility to our existing offline as well as online customers to trade in currency derivatives by filling up a simple form. There is no need to open a separate trading account to trade in currency derivatives.
  • Facility to place buy or sell orders through branches, internet and over the phone.

Diwali Muhurat
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