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Currency Futures Market in India: Gaining Big

Momentum
D.Muthamizh Vendan Murugavel, Assistant Professor, PG & Research Department
of Commerce, Gobi Arts & Science College, Gobi, Tamilnadu.

Volatility in exchange rates severely affect the operations and profitability of small,
e-mail :
medium as well as large enterprises. Currency futures exchange seeks to provide
mvm_gasc@rediffmail.com
hedge to enterprises to enable them to manage currency risks effectively.

Currency futures launched at National Stock Exchange (NSE)
on Aug 29, 2008 is seen as a platform that is particularly
expected to help small and mid-sized companies to hedge
their risks while dealing in foreign exchange. With increasing
globalisation and robust performance of the economy, India’s
share in global transactions has increased sharply. Though
currency futures products like currency swap, currency
forwards and currency options were already allowed to
corporates in India after Reserve Bank of India’s (RBI)
circular dated April 2007, they were not traded on any
recognised exchanges in India and were available like OTC
(Over-The-Counter) products only. The exchange-traded
currency futures market is an extension of this already
available OTC market, but with added benefits of greater
accessibility to potential participants; high price transparency,
no requirement of underlying exposure in the currency etc.
As the market participants are realising these benefits of
exchange-traded market in currency, they are choosing this
market over OTC.
Currency futures are standardized foreign exchange derivative
contracts traded on a stock exchange. A currency future,
(FX future or foreign exchange future), is a futures contract
to exchange one currency for another on a specified date in
the future at a price (exchange rate) that is fixed on the
purchase date. Typically, one of the currencies is the US
dollar. The price of a future is then in terms of US dollars
per unit of other currency. This can be different from the
standard way of quoting in the spot foreign exchange markets.
The trade unit of each contract is then a certain amount of
other currency. Most contracts have physical delivery. For
those held at the end of the last trading day, actual payments
are made in each currency. However, most contracts are closed
out before that. Investors can close out the contract at any
time prior to the contract’s delivery date.Currency future
contracts allow investors to hedge against foreign exchange
risk. Since these contracts are marked-to-market daily,
investors can, by closing out their position, exit from their
obligation to buy or sell the currency prior to the contract’s
delivery date.
Currency futures market is growing in popularity, as the main
participants of this organized market comprise of bankers,
importers, exporters, multinational corporations and private
speculators. Investors use the futures contracts to hedge against
foreign exchange risk. If an investor receives a cash flow
denominated in a foreign currency on some future date, that
investor can lock in the current exchange rate by entering into
an offsetting currency futures position that expires on the date
of the cash flow. Currency futures can also be used to speculate
and, by incurring a risk, attempt to profit from rising or falling
exchange rates.
Exchange-traded currency derivatives or currency futures were
launched in 2008 with the NSE starting trade towards the end
of August and Bombay Stock Exchange and the MCX-SX in
October. Currency futures are permitted in US Dollar - Indian
Rupee or any other currency pairs, as may be approved by the
Reserve Bank from time to time. Only ‘persons resident in
India’ may purchase or sell currency futures to hedge an
exposure to foreign exchange rate risk or otherwise.

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Currency Futures Market in India: Gaining Big Momentum
FEATURES OF CURRENCY FUTURES
Standardized currency futures shall have the following
features :
 USD, euro, pound and yen -INR contracts are allowed
to be traded.
 Size of each contract shall be for example incase of
USD-INR is $1000.
 Contracts shall be quoted and settled in Indian Rupees.
 Maturity of the contracts shall not exceed 12 months.
 Settlement price shall be the Reserve Bank’s Reference
Rate on the last trading day.
 Only the exchange rate can be negotiated by the buyers
and sellers.
 The remaining specifications, such as defining the
underlying currency, trading unit and delivery month,
are set by the futures exchange.
NEED OF CURRENCY FUTURES
In the absence of currency futures trading in India,
companies were hedging their currency risk by entering into
forward deals with banks where they agree to sell/buy the
dollar at a future date and predefined exchange rate. As
compared to currency futures, this method is less flexible,
less liquid, and less transparent, therefore does not help
companies fetch the maximum possible price. Despite these
limitations, the dollar forward market in India has a daily
turnover of around $3.5 billion. The RBI guidelines have
specified the minimum size of the contract at $1,000 and so
that traders can even hedge small amounts of dollar exposure.
Under the futures contract, an importer buys the required
currency futures contract and “locks in” a price for the
purchase of foreign currency. He thereby hedges (avoids)
risk due to exchange rate fluctuations. An exporter, on the
other hand, sells the expected currency futures contract “locks
in” a price for the sale to hedge risks. With the recent volatility
in exchange rates severely affecting the operations and
profitability of SMEs and large enterprises, currency futures
exchange seeks to provide hedge to enterprises and enable
them to manage risks effectively.
BENEFITS OF CURRENCY TRADING
INDIA
 Easy Accessibility – Small investors would get an easy access
to currency futures trading on the popular exchanges.
Introduction of exchange traded currency option will ensure
equitable participation from both large and small investors in
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currency trading, as compared to OTC contract market, as the
lot will be smaller. Minimum lot size of the newly introduced
scheme has been fixed incase of USD-INR as US dollar 1000
only.
 Easy Affordability – Margins are very low and the contract
size is very small.
 Low Transaction Cost – As opposed to the high pay-out of
commissions in overseas forex trading, currency futures carries
low costs for investors.
 Transparency – It is possible for trader to verify trade
details on NSE if he has a doubt that the broker has tried to
cheat him. It will lead to greater transparency, efficiency and
accessibility in currency futures and option market.
 Counter-party default risk – All the trades done on the
recognized exchanges are guaranteed by the clearing
corporations and hence it eliminates the risks associated with
counter party default. NSCCL (National Securities Clearing
Corporation Limited) carries out all the notation, clearing and
settlement process of currency futures trading.
 Standardized Contracts – Exchange Traded currency
futures are standardized in respect of lot size ($1000) and
maturity (12 monthly contracts). Retail investors with their
limited resources would find it tremendously beneficial to take
positions in standardised USD INR futures contracts.
 Futures contract follow the principle of universal pricing-
“One Price for All”. The futures contracts are not customized
like forward contracts.
 Daily mark-market obligations settlement between parties
concerned.
 Moreover, the currency futures market is used by some
companies for hedging. These companies either purchase
currency futures for their future payables, or sell the futures
on currencies for their future receipts.
 Speculators may also buy or sell futures on a foreign currency
as a protection against the strengthening or weakening of the
US dollar. So, speculators may be able to earn profit from the
rise or fall of these exchanges.
BENEFICIARIES IN CURRENCY FUTURES
IN TRADING
Hedgers: Importers, exporters, corporate, SMEs and banks
can hedge to mitigate their forex risk at relatively low entry
and exit costs.
Traders: Traders interested in taking short term risks for
earning returns on a short term basis participate in currency
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trading. The traders provide liquidity in the market, thereby,
enabling hedgers to efficiently transfer risk.
Arbitragers: Arbitrage in simple terms means purchasing in
one market where the price is low and at the same time selling
it in the other, thus taking advantage of the temporary price
differential which exists between the two markets. Traders
continuously wait for such differentials and try to earn some
profits out of it. Arbitrage can be possible in the same market
but within different contracts.
Membership
(i) The membership of the currency futures market of a
recognised stock exchange shall be separate from the
membership of the equity derivative segment or the cash
segment. Membership for both trading and clearing, in the
currency futures market shall be subject to the guidelines issued
by the SEBI.
(ii) Banks authorized by the Reserve Bank of India under
section 10 of the Foreign Exchange Management Act, 1999
as ‘AD Category - I bank’ are permitted to become trading
and clearing members of the currency futures market of the
recognized stock exchanges, on their own account and on
behalf of their clients, subject to fulfilling the following
minimum prudential requirements:
 Minimum net worth of Rs. 500 crores.
 Minimum CRAR of 10 per cent.
 Net NPA should not exceed 3 per cent.
 Made net profit for last 3 years.
The AD Category - I banks which fulfill the prudential
requirements should lay down detailed guidelines with the
approval of their Boards for trading and clearing of currency
futures contracts and management of risks.
(iii) AD Category – I banks which do not meet the above
minimum prudential requirements and AD Category - I banks
which are Urban Co-operative banks or State Co-operative
banks can participate in the currency futures market only as
clients, subject to approval therefor from the respective
regulatory Departments of the Reserve Bank.
RISK MANAGEMENT MEASURES
The trading of currency futures shall be subject to maintaining
initial, extreme loss and calendar spread margins and the Clearing
Corporations / Clearing Houses of the exchanges should ensure
maintenance of such margins by the participants on the basis of
the guidelines issued by the SEBI from time to time.
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Currency Futures Market in India: Gaining Big Momentum
SURVEILLANCE AND DISCLOSURES
The surveillance and disclosures of transactions in the currency
futures market shall be carried out in accordance with the
guidelines issued by the SEBI.
AUTHORISATION TO CURRENCY FUTURES
EXCHANGES / CLEARING CORPORATIONS
Recognized stock exchanges and their respective
Clearing Corporations/Clearing Houses shall not deal in or
otherwise undertake the business relating to currency futures
unless they hold an authorization issued by the Reserve Bank
under section 10(1) of the Foreign Exchange Management
Act, 1999.
POWERS OF RESERVE BANK
The Reserve Bank may from time to time modify the eligibility
criteria for the participants, modify participant-wise position
limits, prescribe margins and / or impose specific margins for
identified participants, fix or modify any other prudential
limits, or take such other actions as deemed necessary in public
interest, in the interest of financial stability and orderly
development and maintenance of foreign exchange market in
India.
GROWTH OF CURRENCY FUTURES SEGMENT
AT NSE
The Currency Derivatives trading system of NSE, called
NEAT-CDS (National Exchange for Automated Trading –
Currency Derivatives Segment) trading system, provides a fully
automated screen-based trading for currency futures on a
nationwide basis as well as an online monitoring and
surveillance mechanism.
The NEAT-CDS system supports an order driven market,
wherein orders match automatically. Order matching is
essentially on the basis of security, its price and time. All
quantity fields are in contracts and price in Indian rupees. The
exchange notifies the 160 contract size and tick size for each
of the contracts traded on this segment from time to time.
When any order enters the trading system, it is an active order.
It tries to find a match on the opposite side of the book. If it
finds a match, a trade is generated. If it does not find a match,
the order becomes passive and sits in the respective order book
in the system.
Corporates including importers, exporters etc. use currency
futures as a hedge tool to overcome volatility. Globally, the
daily turnover volume of currency futures has remained
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higher than the cash equity segment. However, in the participation in the currency futures market has started
domestic market, it is picking up faster, though it was increasing. Corporates and arbitragers are hedging their risks
launched only in November 2008. It is a good sign that more on the exchange platform now.
Business Growth of Currency Futures Segment at NSE
Month/Year No. of Trading Value Average Daily Open Interest at the end of
Contracts (Rs. Cr) Trading Value No. of Trading Value
Traded (Rs. Cr) Contracts (Rs. Cr.)
*Sep-08 1,258,099 5,763 262 90,871 428
Oct 08 2,275,261 11,142 557 170,202 851
Nov 08 3,233,679 15,969 887 146,262 737
Dec 08 4,681,593 22,840 1,088 177,520 867
Jan 09 4,900,904 23,980 1,199 254,797 1,247
Feb 09 6,416,059 31,761 1,672 315,317 1,612
March 09 9,907,173 50,817 2,675 257,554 1,313
Aug’08-Mar 09 32,672,768 162,272 1,167 257,554 1,313
April 09 7,851,502 39,386 2,462 206,620 1,039
May 09 13,682,468 66,431 3,322 318,203 1,504
June 09 15,724,507 75,363 3,426 267,400 1,285
July 09 19,888,011 96,523 4,197 318,298 1,531
August 09 18,672,623 90,396 4,520 394,756 1,933
Sept 09 22,251,896 107,789 5,673 360,603 1,739
Oct 09 32,267,958 150,843 7,542 447,812 2,109
Nov 09 33,794,926 157,554 7,878 493,018 2,297
Dec09 41,004,341 191,415 9,115 406,200 1,896
Jan 10 60,223,714 276,742 13,837 615,612 2,852
Feb 10 52,112,185 246,875 12,993 637,465 2,976
Mar-10 61,132,852 283,292 14,165 427,873 1,964
2009-10 378,606,983 1,782,608 7,428 427,873 1,964
* Includes turnover details for August 29, 2008- the first day of trading of Currency futures at NSE.
Source: NSE
Currently dollar-rupee futures are trading on three recognized open interest since its inception. The total turnover in the
exchanges, NSE, MCX Stock Exchange and BSE. But segment has increased incredibly from 11142 Cr. in October
the currency derivative is liquid only on the first two bourses 2008 to 2,83,292 in March 2010. The average daily turnover
NSE and MCX, which have together posted a heavy average reached 14,165 Cr. in March 2010. Open interest in the
daily turnover. The currency derivatives segment on the NSE segment on the NSE stood at 4, 27,873 contracts till end-
has witnessed consistent growth both in traded value and March 2010.

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Monthly Currency Future Turnover (In Rs. Cr.) rate may result in loss of the entire deposit of someone trading
in currency. Only people having an in-depth knowledge of
2009 NSE MCX-SX
the working of this market or have done a thorough homework
*December 108256 112049
about the risks involved are able to trade in this market.
November 157554 161641
October 150843 153630 CONCLUSION
September 107789 109666 India is not the only Asian country to have witnessed a sharp
August 90396 90292 spike in currency futures turnover. The Bank of International
July 96523 88290 Settlement has reported that turnover in currency futures in
June 75363 67985 the entire Asia-Pacific region has increased dramatically in
May 66431 58469 2009 from $127 billion in the first quarter to $692 billion in
April 39386 37858
the third quarter. Diversification of investment among global
investors to include currencies in their portfolios could have
March 50817 48644
resulted in exchange-traded currency derivative gain favour
February 31761 32195 across Asia. Because of the global financial crisis, currency
January 23980 24415 futures traded on exchanges are considered much safer than
*December turnover is up to Dec. 15 only. those traded in the open market.
Average turnover of these instruments in the National Stock Indian investors are looking at newer investment mediums to
Exchange and MCX Stock Exchange (MCX–SX) in December invest and diversify their portfolio, and currency markets give
was nine times higher than a year earlier. These exchanges are a very good opportunity to investors to create wealth. Indian
currently clocking an average daily turnover of over Rs 20,000 consumers’ or investors’ need for money is changing and their
Crores in currency products while it was just Rs 2,400 crores means of earning this money has also seen a sea change. They
in January this year. are ready to explore every new avenue and are ready to learn
the details of these markets. Information about the market
The exchange-traded currency futures has now been expanded plays a very important role in development of any market. If
to the euro, pound and yen pairing with the rupee, giving the this currency futures market is to grow, providing correct and
investors more flexibility to hedge their risks against volatility analytical information to investors and traders will be the key,
in exchange rates. Previously, currency futures were allowed apart from concentrating on factors such as education, policies
only in the dollar-rupee contracts. The introduction of new and technology. Introduction of exchange traded currency
currency pairs will go a long way in helping market futures will bring depth in currency market in India. Corporates
participants, especially international traders, hedge against can now hedge their exposure in different currencies more
cross-currency volatility and mitigate risk in export and imports effectively. Big losses what the corporates have incurred
across all major traded currencies.
recently can be avoided in future effectively. 
The first trade in the new currency pairs was executed by East References
India Securities, IndusInd Bank executed the first trade
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amongst banks. Union Bank was the first PSU bank to trade
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and execute the single largest trade. ICICI Bank and State
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Bank also participated actively. This market has now become
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bigger than the cash segment of the equity market, which
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recorded a huge average volume of trade recently. The turnover
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of the currency futures market in the country during January
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2010 exceeded the cash equity segment by over a whopping
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48 per cent to Rs 34,453 crores. The speciality of exchange-
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traded currency futures are that they allow a participant to
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directly buy or sell the Dollar,Euro,Yen or pound sterling www.rediff.com/business
without having an underlying exposure, so it is also a view- www.zeenews.com
based market. One can take this opportunity of investing www.rediff.com/news
smartly in currency futures and gain by every tick. www.thehindubusinessline.com
Risks of trading in Currency Futures www.commodityonline.com
www.hindustantimes.com
Trading in Currency futures or forex trading comes with high www.angelbroking.com
levels of risk. Even a small adverse fluctuation in the exchange www.google.co.in

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