In 2008, India allowed Currency Trading. On average, the market saw a turnover of more than Rs. 29,000 crore daily. You receive many benefits by including Currency Trading in your portfolio. An advantage is that it provides your portfolio with the necessary diversification. The margin is low, but the leverage is high. It is free from external manipulations and ensures the safety of your investment throughout.
Currency Derivatives are contracts that derive their value from the underlying asset like a currency. Unlike a Forward Contract, a foreign regulatory exchange standardises this with an intermediary clearinghouse. The agreement traded in the regulated market involves minimal counterparty risks as it should honour the foreign exchange rules.
Types
There are two types of Currency Derivatives, namely Futures and Options. They allow you to trade against the currency movement. Both contracts are margin-based. You place a small portion of the contract value as an initial margin with the exchange. They protect against future price volatility of the underlying asset, hence acting as a risk management financial instrument.
In a Futures Contract, you lock in a specified price for a particular currency to buy or sell at a future date, regardless of its open market price. Like Futures, Options allow counterparties to buy or sell the currency asset at a pre-decided price at a future date. Unlike Futures, they can choose not to trade when the contract expires. Hence, they give buyers the right but not the obligation to buy or sell.
In Currency Derivative Trading, you have Call and Put Options. Call Options give the right and no obligation to buy the underlying asset at a future date and a fixed price. On the other hand, Put Options give the right and no obligation to sell the underlying asset at a future date and a pre-decided price.
Advantages
Currency Derivatives are financial instruments that help adapt to market fluctuations through hedging, speculating, arbitrage, and leverage. Under hedging, traders monitor the risk exposure by combining Futures and Options to protect themselves from the price volatility of foreign currency exchange rates. Speculating allows you to monitor the direction of price movement of the currency asset in the future and take appropriate positions.
Arbitrage allows you to make money on the price difference between foreign exchanges for a particular currency by buying on one exchange and selling on another. Under leverage, you pay only a small margin, like 5% to 10% of the total contract value, to get exposure to a significant capital you otherwise cannot access.
Conclusion
To participate in Currency Trading, you need a Demat Account with a broker by providing the KYC documents. The exchanges include Multi-Commodity Exchange, Bombay Stock Exchange, and National Stock Exchange. COMEX is famous for Currency Trading at international levels. Such a trade is ideal for individuals and corporates who export and import goods and services.
