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Can currency futures help small businesses?
Yes. The minimum size of the USD/INR futures contract is USD 1,000. All transactions on the exchange are anonymous and are executed on a “price time priority” ensuring that the best price is available to all categories of market participants irrespective of their size. Also, since the profits or losses in the futures market are collected or paid on a daily basis, the scope of accumulation of losses for participants gets limited.
If I am an individual with no exposure to foreign exchange risks, does a currency futures exchange mean anything to me?
Yes, it does, if you want to invest purely as an investor. You can benefit from exchange rate fluctuations just as you can benefit by investing in equities in the stock market. However, as in the stock markets, you also stand to lose money if the price movements are not in keeping with what you had anticipated. Participating in a currency futures exchange carries risks similar to participating in stock markets.
How do exchange-traded currency futures enable hedging against currency risk?
On a currency exchange platform, you can buy or sell currency futures. If you are an importer, you can buy futures to “lock in” a price for your purchase of actual foreign currency at a future date. You thus avoid exchange rate risk that you would otherwise have faced. On the other hand, if you are an exporter, you sell currency futures on the exchange platform and “lock in” a sale price at a future date.
What are the risks involved in currency futures market?
Risks in currency futures pertain to movements in the currency exchange rate. There is no rule of thumb to determine whether a currency rate will rise or fall or remain unchanged. A judgment on this is the domain of experts with deep knowledge and understanding of the variables that affect currency rates.
Why should one trade in Indian exchanges rather than in international exchanges?
Currency futures traded in Indian exchanges enable individuals and companies in India to hedge their Indian Rupee risk, while most international exchanges offer contracts denominated in other currencies.
What are the risk management measures of a clearing house/corporation?
The trading of currency futures is subject to maintenance of initial, extreme loss, and calendar spread margins with the clearing house/corporation. The initial margin is subject to a minimum of 1.75% on the first day of currency futures and 1% thereafter. The margins shall be deducted from the liquid net worth of the clearing member on an online and real-time basis.
What is the minimum trading unit (i.e. contract size) and tenure of the USD/INR futures contract?
The contract size of the USD/INR futures contract is USD 1,000. It has a maximum maturity of a year. All monthly maturities from 1 to 12 months are available.
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