Q. What is a currency futures contract?
A currency futures contract is an instrument by which you can buy or sell a specific amount of a particular currency in the future at a specified exchange rate. For example, a currency futures contract could allow you to buy US dollars on June 15, 2009 at the exchange rate of USD 1 = Rupees 45. This rate would apply to you, no matter what the market exchange rate is on June 15, 2009.
Q. Why do we need currency futures?
International trade is marked by movements in the value of various global currencies. If you’re an importer or exporter, you wish to buy and sell goods at the most attractive exchange rate. So if you’re an exporter, you prefer a cheaper Rupee (which makes your exports more attractive, relative to other countries). And if you’re an importer, you prefer a stronger Rupee (which makes it cheaper for you to buy more imports from outside). But since currency markets move up and down consistently, it’s hard to predict what rate would prevail when your transaction actually happens. Currency futures come to the rescue here because they allow you to manage the rise and fall of the rupee by limiting your exposure.
Q. Does the national economy of India need currency futures?
Indeed. In fact, as India becomes more integrated with the world economy, Indian enterprises will need to use currency futures to help manage their foreign exchange exposure.
Q. How and why does the demand and supply of a currency increase and decrease?
There are several reasons. A rise in export earnings of a country increases foreign exchange supply. A rise in imports increases demand. These are the objective reasons, but there are many subjective reasons too. |
|
|
| |
Importantly, there is zero counterparty risk (credit risk) in a futu- res contract because the clearing house (the exchange) assumes a guarantee for the counterparty. This eliminates default risk. |
|
|
|
|
Some of the subjective reasons are: directional
viewpoints of market participants, expectations of
national economic performance, confidence in a country’s economy and so on.
Q. What is an OTC market?
OTC stands for “Over The Counter.” There is no central market but all the participants, like dealers and traders communicate with each other via a network of phones and computers. The contracts that are traded in the OTC market are customized to suit the needs of the parties to the transaction.
Q. Why exchange-traded futures? What’s wrong with the currency forward market that has existed in India for a long time?
Exchange-traded futures give you the advantage of standardisation. Players of all sizes can participate in this market, provided the market lot is fixed at a much smaller size than the OTC market. Exchange-traded futures also provide the assurance of higher transparency, efficiency and accessibility.
More importantly, there is zero counterparty risk (credit risk) in a futures contract because the clearing house (the exchange) assumes a guarantee for the counterparty. This eliminates default risk.
Q. Who can participate in a currency futures market?
Any resident Indian or company, including banks and financial institutions, can participate in the futures market. However, at present, Foreign Institutional Investors (FIIs) and Non-Resident Indians (NRIs) are not permitted to participate in currency futures market.
Montek Singh Ahluwalia, Deputy Chairman, Planning Commission, releases a research paper on “Meeting Financial and Risk Management Challenges on SMEs”, initiated by SME CHAMBER OF INDIA and MCX-SX on the "7th Global SME Partnership Summit” organised by SME Chamber of India at Mumbai. (from the left) Chandrakant Salunkhe, President, SME Chamber of India; M.S. Ahluwalia; Tamer Taskin, President, Aegean Region Chamber of Industry (EBSO), Izmir, Turkey; Anthony J. C. De Sa IAS, Director, UNIDO; Joseph Massey, Director, MCX-SX and A. Rameshkumar, Chairman, SME Chamber of India (Northern Region).
EMAIL THIS ARTICLE 
PRINT THIS PAGE 
