What is currency trading?

While trade is international, currencies are national. As international transactions are settled in global currencies which are brought /sold against one another and this constitutes, “Currency Trading”.

Factors affecting the exchange rate of a currency:

A country’s currency exchange rate is typically affected by the supply and demand for the currency in the international forex 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. These days the capital inflow and outflow play a major role in the exchange rate.

Why Currency Futures?

Small Size: Volume of single lot in currency derivatives is only approximately Rs.50000, whereas equity and commodity futures which sometimes go above Rs 1 lac. This small size will help in greater participation as even small retail clients can trade in this.

Low Volatility: Central bank vigilance and high volume make the currency markets very stable. Further currency markets are open round the clock and it is matter of time only when our currency markets will also be round the clock. This helps in minimizing gap ups and gap downs and better management of risk by brokers as well as clients. You can’t loose big money in this.

Low Margin: Due to low volatility the margin required is only 2-3% against 5-10% in commodities and 15-20% in equities leading to low cost of trading.

Averaging Opportunity: Due to absence of very strong directional moves which happens in equities and commodities, currency markets are much more disciplined. Thus trades can average their positions, and take benefit of small up n down.

Lower Cost of Trading: Low margin, low brokerage and transparent prices make this market very cost effective.

Easy Accessability to all: Currency market through banking system is only accessible to importers and exporters whereas this futures market is available to any body with small margin of Rs.1000 on a single lot .This is first time in India that retail participants can take part in the currency trading.

Focused Trading: Currency trading is very focused in the sense that majority of trading worldwide take place only in 5-6 major Currencies like us Dollar, Euro, Japanese Yen, sterling Pound, Swiss France, Canadian dollar, Australian Dollar etc. This provides greater depth as there are not hundreds of scripts to watch as in equity.

Lastly, due to near perfect nature of this market, technical analysis tools work best in currency markets, providing opportunities to sophisticated speculators to trade here.

Currency futures trading: A tool to combat price fluctuation risk

We need currency futures if our business is influenced by fluctuations in currency exchange rate. 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 rupee by paying  higher. On the contrary if you are exporting something and the value of the Indian rupee has gone up, u can earn less in terms of rupee than you have anticipated. Currency futures help you hedging against this exchange rate risk.

Model situation:

Contract specifications

Last trading day: Two working days prior to the last business day of the expiry month at 12 noon.

Final settlement date: Last working day of month ,expect saterday,It will be same as that for interbank settlement in mumbai.