Currency Derivatives
Currency Derivatives let participants hedge or trade exchange-rate risk. The exam tests USD-INR and cross-currency contracts, contract sizes, settlement and the regulatory split between SEBI and RBI.
Core rules
- NSE launched currency futures in 2008.
- Major pairs include USD-INR, EUR-INR, GBP-INR and JPY-INR.
- Contract size is USD 1,000, EUR 1,000, GBP 1,000 and JPY 100,000; prices are quoted in INR per unit.
- Contracts are cash-settled in INR; there is no physical delivery of foreign currency.
- SEBI regulates the exchange-traded segment; RBI and FEMA govern underlying foreign-exchange exposure.
- Hedgers, arbitrageurs and speculators provide liquidity; position limits apply.
Worked example
An importer must pay USD 10,000 in one month and buys ten USD-INR futures contracts (10 × USD 1,000) at ₹83.00. At expiry the settlement price is ₹84.00. Futures gain = (84.00 − 83.00) × 1,000 × 10 = ₹10,000. Spot dollars now cost ₹10,000 more, so the gain offsets the higher import cost. The reasoning: the hedge gain is calculated on notional USD 10,000, not on the rupee value of the contract.
Traps that cost marks
- Using USD 100,000 as the USD-INR contract size.
- Treating JPY 100,000 as JPY 1,000.
- Assuming foreign currency is delivered.
- Forgetting that the underlying exposure must comply with FEMA.