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What are Currency Derivatives in India

12 Sep 2023

Currency derivatives are futures and options contracts in which a specified amount of a particular currency pair is traded on a pre-set date in the future. Trading currency derivatives is similar to trading stock and futures options. However, the underlying resources are currency pairs such as USDINR or EURINR and not stocks.

Currency options and currency futures are dealt on the grounds of foreign exchange market. The foreign exchange rate is the value of a foreign currency in comparison to the domestic currency. The main participants in currency trading in India are banks, companies, exporters, and importers

 Currency Derivatives and the Indian Market

In India, Currency derivatives are used to safeguard businesses against currency fluctuations from foreign currencies such as the euro, dollar, and yen. Corporate societies often use these contracts for certain currencies if they are repeatedly subject to imports and exports.

Currency derivatives in the Indian market are still largely dominated by central banks and importers-exporters. The daily volume of 44,859 Cr. is mainly supplied by banks, companies, importers, and exporters. But speculators and arbitrageurs are also increasing their participation in the currency market. As more retail investors begin to discover the extent of profit gains in the forex market, the popularity and demand for currency derivatives in India will witness substantial growth.

How to trade in currency derivatives in India?

There are two ways one can trade in currency derivatives in India-

1.       BSE and the National Stock Exchange (NSE) are two nationally recognized Forex exchange platforms that offer currency derivatives.

2.       Invest in currency derivatives through stockbrokers.

Benefits of Currency Derivatives

Hedging – Hedging protects the trader from foreign currency exposure and reduces losses by using currency derivatives. It also helps exporters and importers to generate profits or cover up losses during currency fluctuations.

Trading – In trading, Currency and futures options allow you to trade on short-term market movements while keeping an eye on the direction of movement. Currency Derivatives help traders to yield profits from the forex market by simply strategizing the investments.

Arbitrators - Some markets and exchanges allow you to take advantage of currency exchange rates by trading currency derivatives. Even a minimal price difference can yield profits in currency derivatives.

There are many benefits in currency trading offered by trusted platforms such as Motilal Oswal. If you too wish to try your hand at online forex trading,  open a currency trading account with investment plans.

Conclusion

Currency trading is one of the most profitable investment options for retail investors. It offers an opaque and closed market in which most banks and financial institutions trade. The foreign exchange-based currency derivatives segment is regulated and transparent. A market that small businesses and even individuals can use to hedge their currency exchange risk.


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