The foreign currency market worldwide is the largest market for trades. The turnovers in this market are much higher than trades in the equity markets.
When it comes to currencies, no currency is traded in isolation, it is always traded as a pair. To put it simply, EUR/INR means the value of Euro in Indian Rupees which means Euro and INR is traded as a pair. Similarly there are other pairs USD/GBP, EUR/GBP etc. Some of the commonly traded currencies in the currency market are US Dollars, British Pound, Euro, Japanese Yen, Canadian Dollar, Australian Dollar, UAE Dirham, Swiss Franc etc. These currencies are freely traded all over the world. These commonly traded currencies are traded in the currency market in India through a complicated system of brokers, banks, financial institutions, stock exchanges, hedgers, arbitrageurs. Currency futures trading is one way for people to trade in currencies in India.
What are currency futures:
Currency futures give the holder a right to purchase or sell foreign currency at a particular price in the future. The price will be in another currency. For example, USD currency futures trading at 72 3 months from now will mean the holder will have to purchase US Dollars at Rs. 72 after 3 months.
There are currency derivatives available to trade on National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) .
However, the traders do not need to hold the currency futures till they expire. In case the currency future is held till expiry, then the traders need to deliver the currency by purchasing it from the currency market. On the other hand, it is possible to square off the open position by taking a contrary position for the future of the same expiry. For example, if a trader agrees to buy USD 3 months after, then he can square it off by selling the same quantity of USD. This derivative contract can expire after 3 months.
The buy and sell orders cancel each other out and the net difference is credited to the trader’s margin account. The difference between the sell price and the buy price is the profit or loss and is adjusted in the trader’s margin account.
Currency futures are also margin trades. The trader needs to keep a margin account that can be used as leverage. The margin amount depends on the broker. Some brokers may have a higher margin requirement. Before you do currency futures trading, be sure to check the margin requirement. The margin requirement will change based on each broker.
You can check the currency future prices on the NSE website. Futures contracts generally have 3 expiry dates. The futures contract can either expire in one month, in two months or in three months. Even though futures are traded on the stock exchange, the currency market works for 24 hours as prices change depending on when financial markets open abroad. Therefore, the currency futures can get impacted even outside of stock exchange hours. It is important to remember this when you do currency market trading because trades can be closed at any time if you are making a profit on it.