Currency Derivatives: What is it?

For the true blue speculator one more product is available – the Currency Derivatives. All brokerage houses now provide you with this new product – and is available with just a few clicks. So if you do not know anything about $, Euro, Pound, Jap Yen, ….you are still welcome to deal in EURINR (Euro Rupee), GBPINR (Pound Rupee) and JPYINR (Japanese Yen- Rupee).

What exactly is a currency derivative? It is a derivative contract – and is derived from the underlying asset (in this case the currency). These are standard exchange traded contracts of a specified quantity- to exchange one currency for another at a specified date in the future (fixed date again standardized) at a price fixed on the PURCHASE date but called the future price!

Should you trade in Currency futures: Well IT IS A TRADING TOOL. Unless you an exporter or an importer with a need to take a view on the forex rates, it is a speculative contract. So all the rules of speculation are applicable to this contract. However if you have exports and are afraid that the Rupee will strengthen, you should ‘protect’ yourself against future fluctuations in the currency markets. Of course if you have borrowings in USA and you are selling to the USA – you have a natural hedge. For a Group like the Tata group they have a lot of monetary transactions in various currencies – buying a hotel in Egypt, paying for JLR, …etc. – as a group they may actually not have to much of a ‘net’ risk, but then TCS cannot use its money to buy something for Indian Hotels!

As an Investor: If you are sure that given political conditions the dollar is likely to go down further you could buy PUT options on the dollar.  However if you think the world situation can only get better, you will find it worthwhile CALL options on the dollar!

If you are a small importer / exporter you can use it as a hedge against a 3-4 quarters imports / exports too!

Arbitrage (Taravani wallas, remember?) opportunities between present and future prices makes it easy for all to play. This is because it allows you to trade in interest rates implied by foreign exchange market. Volatility, Interest rates change, and a huge multiplier (leverage as it is called) is ensured.

Why should you deal in Currency Derivatives:

we will deal with separately, what say?

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