Summers

2009

Currency futures:
What’s in store?
GD Fact Brochure

Monetrix- The Finance and Economics

Club of MDI
Launch of trading in currency futures has come at such a time when several Indian corporates have
burnt their fingers in another version of currency derivative called Over the Counter (OTC) products
few months back, and the issue has turned into a legal battle between suffered companies and
banks involved.

Though currency futures products like currency swap, currency forwards and currency options were
already allowed to corporate in India after Reserve Bank of India's (RBI) circular as on April 2007, but
they were not traded on any recognised exchanges in India and were available like OTC products
only.

With increased depth of foreign exchange market, which has reached to a daily turnover of $30.0
billion as on March 2007 from $27.0 billion in March 2006, it was felt that there should be some
measures to protect the corporate from excess volatility in foreign exchange market, which
otherwise would impact export performance and balance sheet of the companies and the country
too.

More so, in an era when Indian companies are buying foreign companies and are going abroad for
availing loans/funds there's an increased exposure of corporate India to various currencies of the
world, in which they have to make payment or receive payments. In this direction this step of
government, RBI and Securities and Exchange Board of India (SEBI) is a welcome move, which will
create a full fledged foreign exchange derivative market in India and will bring India nearer towards
capital account convertibility.

Hence, the exchange traded currency future will ensure that there will be no incidents of Indian
corporates suffering due to unfavourable movements of currency rates in between option booking
date and option expiry date since daily mark-to-market mechanism will ensure effective hedge. Had
this facility been available to Indian corporate earlier, the extent of losses Indian corporate suffered
could have been avoided.

Benefit of exchange traded currency future contracts

• Daily mark-market obligations settlement between parties concerned

• Counter-party risk of non obligation of contract could be avoided due to intermediary like
clearing corporation, which will become guarantee for both the parties
• Introduction of exchange traded currency option will ensure equitable participation from
both large and small investors in currency trading, as compared to OTC contract market, lot
will be smaller. Minimum lot size of the newly introduced scheme has been fixed as US
dollar 1000 only
• It will lead to greater transparency, efficiency and accessibility in currency futures and
option market

Features of exchange traded currency future

• Initially only future contracts on US dollar- Indian rupee (INR) would be available. This
means, the investors can hedge themselves when the exposure is in US dollar only.
• Minimum contract size will be US dollars 1000.00.
 • The currency future contract shall have maximum maturity of 12 months only. Of course the
contract of varied maturity from 1 month to 12 months will be available.
• The currency future will be settled in Indian rupees only.
• Settlement price will be RBI’s reference rate on the last trading date.

Introduction of exchange traded currency futures will bring depth in currency market in India.
Corporate can now hedge their exposure in different currencies more effectively. Big losses what the
corporate have incurred recently can be avoided in future effectively.