What are currency derivatives?
Derivatives are contracts or products which do not have any independent value and rather derive their value from an underlying asset. Currency derivatives are derivatives wherein the underlying asset is currency value. In this financial contract, the buyer and seller agree to exchange two currencies at an agreed rate, quantity and at a specific future time-period.
Trading in Currency Derivative in India
Internationally, the currency trading market is at a mature stage and holds a significant market share. Currency trading in India is relatively at a nascent stage. However, in the recent past they have witnessed intensified interest and activities, thanks to the developments in the Indian forex segment.
NSE was the first stock exchange in India to receive SEBI’s approval (in-principal) to set up a currency derivative segment. The currency futures trading platform was launched in August 2008. Currency options trading was launched in October 2010. Cross currency F&O trading (such as GBP-USD, EUR-USD, and USD-JPY) were launched in February 2018. There are two ways of currency derivative trading:
- Currency Futures trading
Currency futures are legally binding contracts which have to be executed on or before a specific date. The parties have to trade a specific currency pair at a pre-decided exchange rate and quantity.
- Currency Options trading
Exchange traded currency options offer a good amount of flexibility while hedging. They give the buyer the right to trade (buy or sell) a certain currency at a particular exchange rate before or till a given date. So, you can profit from favorable movements in the forex rates, by not exercising the option. The seller gets a premium in exchange for the buyer’s right to decide.
How to trade currency?
Currency trading happens in pairs. Unlike in the stock market, where you can trade (buy or sell) one stock, in the currency market, you buy one currency and in exchange sell another currency.
In order to start currency trading, you need to:
- Open a trading account.
- Complete the Know Your Customer (KYC) formalities.
- Make the deposit for the required margin amount.
- Your broker will share the access credentials required for currency trading.
Benefits of Currency Derivatives Trading
Currency Derivatives serve multiple purposes:
Foreign exchange derivatives are a great hedging mechanism and help protect your forex exposure.
Currency derivative trading presents you with arbitrage opportunities which can be capitalized and turned into profits. For instance, you can leverage on the difference in exchange rates of a particular currency in different exchanges as well as markets.
You are required to pay a minimal margin amount rather than the complete trade value. You benefit from low margin and high leverage.
Currency trading provides you trading opportunities as a result of fluctuations in currency values.
How to open an account?
You need to approach currency trading through an authorized broker or broking firm. They will assist you in opening a currency trading account. TradeSmart can help you open a trading account for nominal charges. The following documents are required:
- PAN Card
- Address Proof
- Passport-sized photograph
- Cancelled cheque
In-person verification (requisite by exchange) can be done at a later date through a webcam facility.
Currency trading tips
Currency trading for beginners can be an overwhelming experience. Here are some tips which will make your currency derivative trading journey smoother and more fruitful. You should “know”
- The basics
Get yourself acclimatized with the currency trading basics, before you invest your hard-earned money.
- Your trading style
Every investor has a unique trading style (aligned to his/her risk profile). Before you start trading in currency derivatives, you should understand your style and risk quotient.
- A good broker
The right broking service provider plays a crucial role in your trading success. The broker will share regular updates from the currency market and help you make the right decisions at the right time. TradeSmart has helped over 85000+ customers in the last two decades in their investment journey. Given our technological, analytical and market knowledge prowess, you are bound to stay one step ahead of others.
- Your limits
Before beginning your currency trade, you should lay down the entry and exit points. This will help you exit at the right point in case the situation becomes unfavorable.
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Currency prices are determined by a host of economic as well as political factors like interest rates, inflation, international trade, political stability, etc. Central bank’s intervention (by injecting more currency or buying out) can also influence the currency movement.
Anyone who falls under the category of “Resident Indian” can participate in currency trading in India. For institutions or entities to be eligible, they need to take concurrence from the concerned regulators. Currency future trading is open for resident individuals and HUFs as well as eligible entities who meet the FEMA (Foreign Exchange Management Act) criteria.
Currency Derivative trading takes place from Monday to Friday. The timings are as follows:
- Currency F&O – 9am to 5pm
- Cross Currency F&O – 9 am to 7.30pm
INR is usually traded with US Dollars, Euros, British Pound and the Japanese Yen. Globally, INR ranks 20th in the list of most traded currencies (US Dollar is the top most traded currency).