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What are Currency Futures?
Currency Futures is a standardized foreign exchange derivative contract on a recognized stock exchange to buy or sell a standard quantity of one currency against another on a specified future date at a specified price. It allows clients to take a view on the movement of the exchange rate as well as hedge against currency risk. Clients can use Currency Futures as a trading, investing and hedging tool. Currently only USD-INR contracts are available for trading.
What is the difference between Futures and Forwards?
Futures are Exchange traded contracts whereas Forwards are over-the-counter (OTC) contracts. Futures are standardized with respect to quantity, quotation method and date of expiry whereas Forwards are tailored to meet the needs of the individual customers. As futures are exchange traded the counter party risk is minimal. Marking to market is done at the end of every trading day in future market while no such adjustments is carried out in forward market.
Why Currency Futures?
  • Efficient management of funds. Due to daily MTM.
  • Financial Leverage. Use of margins to trade.
  • Hedge exposure in an underlying currency against the adverse Foreign exchange rate movement. Allows hedge for near 12 months.
  • All the trades are done on the recognized stock exchanges and guaranteed by the clearing corporations and hence it eliminates the risks associated with counter party default.
  • Small contract lot size of USD 1000. Clients can customize the trade size to suit their requirements
Market Participants
There are three categories of market participants in the Currency Futures Market: Hedgers use Currency Futures to protect an existing portfolio (or an anticipated investment) against possible adverse movement. Hedgers have a real interest in the underlying currency. They use futures to reduce their risk and protect their profits in the underlying activity.
Investors use Currency Futures as an instrument for investment in the hope of making a profit in the medium and long term. They have no interest in the underlying currency other than taking a view on the future direction of the currency price. Day traders have also been attracted by an opportunity to trade in Currency Futures. Arbitrageurs profit from price differential of similar products in different markets, e.g. price differential between the outright exchange rate and the futures price.
How to close a trade position?
Currency Futures position is closed out by entering into an equal but opposite transaction. Those who entered either by buying (long) or selling (short) a futures contract can close their contract obligations by squaring-off their positions at any time during the life of that contract by taking opposite position in the same contract
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