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Gaining from futures currency

Trading in currency futures helps you speculate and hedge against daily market volatility. But you should be aware of the associated risks as well
WORRIED over your investment growth in the light of volatile currency exchange rate? Put your fears aside. After a long wait, currency futures’ trading was launched on NSE (India’s largest stock exchange) at 8.45 am, on August 29, 2008. Currency future is a standardised futures contract with currency as the underlying instrument. Put simply, it is a contract or an agreement to buy or sell any currency at a specified future date before contract expiry date.

For those who are new to futures trading, the key factor to understand is the leveraging character of the product and the associated risk. The currency movements in the last few months bear out the importance of having currency in your portfolio and how the futures platform, with the availability of the one-year contract, makes it possible.

START HERE

If you want to trade in currency futures as a retail investor, then you need to get yourself registered with a trading member of the exchange after entering into agreement and KYC (know your customer) details. Currency futures’ trading is similar in form and structure to equity and commodity futures trading. Therefore, anybody already having exposure to either of these can make a seamless transition.

With regard to the costs, there are two primary costs involved in trading on currency futures — brokerage fees and transaction costs. Although there are no transaction charges from the exchange to promote the product at present, this can change soon. The brokerage structure that is applicable to currency derivatives is 0.05% on carry forward trades and 0.025% on intraday trades. The transaction cost involves service tax, stamp duty and SEBI turnover fees. STT is not charged.

INVESTMENT OBJECTIVES

You may enter into currency futures trading with the objective of hedging and speculating. As retail traders, you can enter the market to benefit from day to day volatility. Currently the currency is moving in a band of 50-60 paise and the volumes are also increasing. Therefore, the small investors can benefit from it. Besides with the currency futures getting launched on MCX in October, one can even indulge in arbitraging.

Experts believe that traders who would like to pursue a high-risk-high return strategy will find that currency futures are a very liquid and potentially rewarding market to be in, if they have the right analysis and view on currency movement. Investors should also consider diversifying their portfolio by adding currency to their current asset allocation by taking advantage of the 12-month contract facility. Given the dynamic financial situation globally, diversification will be the single best strategy for investors for a safer investment horizon.

GAINS GALORE

Trading in currency derivatives brings a whole range of benefits for you. Currency futures’ trading is a transparent mechanism wherein you receive contract notes for the trades done in your account. Besides the rate and price are determined by the exchange and you even have the option of verifying your trade on the exchange site, thereby leaving no scope for default. You are not required to have any underlying exposure to trade in currency derivatives as in the case of an OTC market. As long as you are willing to pay margins, you can trade in currency futures. Commodity analysts believe that accessibility is also high because of the similarity with existing equity and commodity futures markets.

CHECKLIST

Just like equity and commodity markets, currency futures pricing is decided by those who put a buy or sell price in the market. Price discovery in the currency futures market reflects the OTC market at the moment, considering the high volumes and liquidity in that market, but eventually as volumes will pick up, price discovery will be more vibrant, liquid and transparent in the futures market.

Commodity analysts feel that currency exchange rates are affected by global happenings in addition to local events and information on such events is available on real-time basis. “For those who have the ability to convert the local and globally available information into a directional price call on currency, there is no better market to trade in. The currency futures markets help benefit financially by analysing such information.

Research analysts suggest that in order to trade effectively and profitably in currency futures, you need to strategise your investments. Since the currency futures are denominated in dollar and globally the dollar is traded as commodity, one needs to track the international commodity index while developing the outlook of rupee.

FACTS

Currency Pairs - Only USD/INR
Contract Size - 1000$ per lot (contract).
Contract Maturity - Maturity period from one month to 12 months period
Quote - Quoted in INR with a tick size of 0.25 Paisa
Eligibility - Only resident Indians are allowed to trade in currency futures
Margins - NSE specifies initial margin and maintenance margins as per its existing practice of levying SPAN (Standardised Portfolio Analysis of risks)
MTM (Mark-to-Market) - Involve daily MTM margins worked out on the basis of daily closing prices declared by NSE. Settlement of MTM takes places on T +1 basis. NSCCL (National Securities Clearing Corporation) is responsible for clearing, settlement and risk management
Settlement Price - Final settlement price is decided as per the RBI fixed exchange rate on last trading day of the contract. Settlement in cash in terms of INR
Position Limits - Maximum permissible open position capped at $25 million

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