The Currency market which was till now restricted to banks and companies having foreign exchange exposure, is now being opened up to the retail investor. The NSE will launch currency futures from August 29th. Let us ponder over some of the key features on this new instrument.
The need for Currency Futures:
1. The opening up of the currency markets through derivatives seems to be a move towards the ultimate goal of the government - introduction of Full Capital Account Convertibility (FCAC). A well balanced and robust derivatives mechanism can surely give the government the needed confidence to move ahead with FCAC.
2. Secondly the recent volatility in the Rupee dollar in India (along with the above normal volatility in the currency markets the world over) may be curtailed, at least to some extent, by increasing the number of players. This can be achieved through the currency futures.
3. The introduction of currency futures is likely to bring down the transaction cost of many companies who currently have to deal with banks at a relatively higher cost.
4. Also the opening up of the commodities exchange necessitated currency futures. The reason was that many internationally traded commodities like base metals, precious metal and crude oil were traded on the Indian commodities markets in Rupee terms. However, currency fluctuations do affect commodity prices to a large extent, while the traders in Indian commodities market could not hedge against it..
Meaning: Currency futures are standardized foreign exchange contracts traded on an exchange to buy or sell one currency against another on a specified future date.
Some key features of the currency futures in India are as follows:
a. At present trading will be allowed in only USD/INR
b. Each currency futures contract will be worth $1000 (USD One Thousand)
c. Each currency futures contract will be quoted in Rupee terms but the outstanding positions will be in dollar terms
d. Each contract shall have a maximum maturity of 12 months.
e. All monthly maturities from Month 1 to Month 12 will be available at a given point of time.
f. The currency market will be open from 9 am to 5 pm
g. Settlement will be done on expiry in Indian Rupee only
h. The settlement price will be the RBI Reference rate on the date of expiry. The methodology of computing the RBI reference rate will be publicly disclosed (It is currently not done)
i. The settlement date will be the last business day of the month and time of settlement will be 12 noon.
j. The initial margin will be a minimum 1.75% on the fist day of the currency future trading and minimum 1% thereafter.
k. At present FIIs and NRIs are not permitted to trade in currency futures market.
Conclusion
While currency futures can be used effectively for hedging by companies and traders alike, it is expected to generate a lot of retail participation for purpose of trading and speculation. The small lot size is indicative of this.
Considering the greater transparency, efficiency, liquidity and accessibility that it will bring, it can be expected that investors will lap up this too.
CA Rajiv D Khatlawala
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