Currency Futures & Options

Used to Hedge Risks





With US president Donald Trump promising to increase fiscal spending to boost the economy, fears of a jump in inflation and a subsequent rise in interest rates have gripped the market. This could weaken emerging market currencies against the dollar. While big corporate houses and FIIs can hedge their currency risk in the over-the-counter market, retail participants too have an avenue through currency futures launched by the likes of NSE and BSE.

1. What are the currency pairs traded on home grown exchanges?

US Dollar, GBP , Euro and Japanese Yen on one leg each against rupee futures. Of these four, dollar-rupee futures and options are most liquid. Options are not allowed in other cur rency pairs on the ex changes.

Who are the participants?

FPIs and SMEs can hedge the currency risk to their stock market portfolios. Apart from them, resident Indians with out underlying expo sure can take positions of up to $15 mn in USD INR derivatives. They can take positions of $5 mn in other pairs put together.

How does the trade work?

If you are negative rupee positive dollar, you can buy a dollar rupee call option or simply go long USD-INR futures. The minimum lot size of a contract is $1,000 and you have to put up 5% margin to trade one lot of futures normally .

What is the risk?

The same that's inherent in any futures and options' contracts be it equity, interest rate, etc. Since the trade is levered, you could suffer substantial losses, if your call goes wrong. So it's best to trade with a stop loss.

 What is a futures and options contract?

Futures allow the purchase or sale of an underlying asset at pre-set price for delivery on a determined date. A call option gives a buyer the right to purchase an asset at a pre-set price on a future date. A put option gives a buyer the right to sell an asset, similarly. In reality all these contracts are settled in rupees.

 How many contracts run concurrently?

Three contracts run concurrently. The near month (now January) has over 90% out standing positions, while the mid and the far month are less liquid.

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