Currency futures to see growth

February 07, 2009 12:55 IST

The five-month-old exchange traded currency futures market is set to witness competition, rising volumes and innovations with the United Stock Exchange of India gearing up to launch the product in April. USEI, the fourth exchange with interest in currency futures, has already received the approval from the Securities and Exchange Board of India to launch the platform. Three exchanges - the Bombay Stock Exchange, the National Stock Exchange and MCX-SX - have already launched currency futures. While BSE has not made much headway, NSE and MCX-SX are running neckand-neck in market share. USEI is promoted by JayPee Capital Market Services, MMTC and a number of public and private sector banks. JayPee will be an anchor investor with a little over 26 per cent stake in USEI, while MMTC will hold 15 per cent in the exchange. The JayPee group is a brokerage house and is among the biggest volume drivers on derivatives in all segments and its market share in the currency segment is more than 10 per cent on both exchanges. With the entry of USEI, where its partner banks have agreed to hedge their positions, currency futures market is expected to grow in breadth and depth. The existing exchanges have already approached Sebi to permit them to have evening sessions in line with commodity futures. Currency is traded round-the-clock in international markets and will help more hedgers to come on exchange traded derivatives. While USEI is relying on its anchor investor's track record in derivatives as well as on partner banks and MMTC to bring their hedging business on the floor of the exchange, MCX-SX is tying up with trade bodies in different parts of India to ensure that their members hedged their currency exposures on its platform. Most of the currency hedging is done in the over-the-counter market, where banks participate, and deals here are bilateral. The Clearing Corporation of India is planning a platform where banks can report their currency forward deals that can be guaranteed and settled by it. Since these deals are likely to have larger contracts, exchanges have requested Sebi to revise upward the minimum contract size, which is $1,000 at present. The total average daily volume on currency exchanges is over $500 million (Rs 2,500-2,600 crore) with an open interest (OI) of 500,000 contracts.

How the currency futures will work

August 22, 2008 11:18 IST

Trading in currency futures will soon become a reality for the retail investor. With the Reserve Bank of India [Get Quote] and the Securities and Exchange Board of India issuing trading norms, exchanges are readying themselves to launch this product in the next few weeks. The new norms would help retail investors, especially those investing abroad and families receiving incomes from relatives in foreign countries. According to a financial planner, currency futures can also be used to hedge the investments in gold. Till now, only business houses were allowed to trade in currency futures to minimise the risks arising from currency fluctuations. Currency futures are contracts to buy or sell one currency (only dollar-rupee as of now) against another at a specified price and date in the future. The National Stock Exchange is planning to start currency futures trading from August 29. The Bombay Stock and the Multi-Commodity Exchange are yet get clearance from Sebi to start operations. An Indian resident would be required to open an exchange-traded currency futures account with a recognised broker. The minimum trading amount will be $1000. The trading period will range from one month to 12 months and the contract will be settled on the basis of RBI's reference rate on the last trading date. Experts are cautious though. "This is not an investment avenue like stocks. Retail investors should use it only for hedging against their foreign investments," said Sudip Bandyopadhyay, director and CEO, Reliance [Get Quote] Money. Let's look at how this will work: For instance, a person invests $200,000 abroad for a year when $1 = Rs 43. If his investments yield 20 per cent returns in a year, he stands to make $40,000, or Rs 17.2 lakh ($40,000 * 43) in rupee terms. However, if the dollar weakens to Rs 40, the returns would fall to Rs 16 lakh, a loss of Rs 1.2 lakh. But if the person had sold a 12-month futures contract at the spot price of Rs 43, amounting to $200,000, and the dollar did fall to Rs 40, he could cover the transaction by buying the dollar and make good the loss incurred in the international market. The upfront payment will be 1.75 per cent of $200,000 or $3,500. Of course, in case the rupee weakens to say 45, the losses in the futures market would be made up by profits in the international market. Jayant Manglik, head (commodity business), Religare Commodities, said, "The investor is hedged against both a rise and fall in currency, thereby ensuring safe returns." No taxation guidelines have been formulated as yet, but Uday Ved, head of taxation, KPMG said the transactions could be considered as business income. "It (currency trading) can not be classified as speculative income as the trading would take place through a stock exchange nor can it be capital gains as there is no underlying capital asset," said Ved. There would be a securities transaction tax of 0.017 per cent, as is applicable to other traded derivative products.

Currency Futures benefit the investors in many ways: For Importers/Exporters who may have some obligations in the Forex market, trading in Currency Futures will help them hedge their positions (risk). Similarly, any investor who has any receivables / payables in foreign exchange can trade in Currency Futures. In fact, he may choose to do so even without having any obligations, just as an investment opportunity. The counter-party risk is eliminated as the Clearing House / Corporation guarantees all the trades. By ensuring that transactions are executed on a price time priority, the best price is available to all categories of market participants. In Currency Futures, mark-to-market obligations are settled on a daily basis, unlike a forward contract, which is an agreement to transact at a forward price on a future date and no money changes hands except on the maturity date.