Introduction of Currency Derivatives Trading
A Currency market is a market in which one Currency is traded for another. The Spot exchange rate refers to the prevailing exchange rate at which a Currency can be bought or sold for another. The Forward exchange rate refers to the exchange rate for the future delivery of the underlying Currencies.
A Currency Futures contract, traded on Exchanges, is a standardised version of a Forward contract. The only difference between a Forward contract and the Futures contract is that the Forward contract is an over-the-counter (OTC) product. The main advantages of Currency Futures over Forwards are price transparency, elimination of counter-party credit risk and greater accessibility for all.
The Futures contract is an agreement to buy or sell the underlying Currency, on a specified date in the future, and at a specified price. The underlying asset for a Currency Futures contract is a Currency. The Exchange’s clearing house acts as a central counter-party for all trades and thus provides a performance guarantee.
Currency Futures can be bought and sold on the Currency Exchanges through members of the Exchange. MCX-SX, NSE, BSE and USE all offer Currency Futures in India. Before trading, the investor/trader/speculator needs to open a trading account and deposit the stipulated cash and/or collaterals with the trading member. The average daily turnover in global Forex and related markets is trillions of US Dollars.