The currency derivatives market in India is gaining heft with daily volumes scaling new highs. Starting with a meagre Rs 800 crore in August 2008, the volumes have shot up to a daily average of Rs 45,000 crore now. It is expected to become a big draw for retail investors soon.
How it works Currency derivatives can be traded on the National Stock Exchange, the Multi Commodity Exchange and the United Stock Exchange. A trader can invest in both currency futures and options. A futures contract gives you the right to buy or sell a specified quantity of a currency on a fixed date at an agreed price. An options contract is more flexible as it grants the holder the right, but does not make it mandatory to buy or sell currency at a fixed rate on a specified date. Currently, only resident Indians (individuals, companies and financial institutions) can trade in the four currency pairs available in the local market - dollar/rupee, pound/rupee, euro/rupee, and yen/rupee.
Under ordinary conditions, the currency market is less volatile compared with equities, making it a relatively lessrisky asset class. "It is easier to predict this market and take positions," says Pramit Brahmbhatt, CEO, Alpari Forex (India), one of the leading forex brokers in the country. Trading in currency derivatives also requires lower capital than equity derivatives as you need to pay a much smaller premium or margin - as low as Rs 1,000 on a contract value of over Rs 30,000.
And its drawbacks
Taking a position on currency movements requires a basic understanding of the macroeconomic conditions that influence the valuation of a currency such as inflation, interest rates, crude oil prices and government policies. Low awareness about the product is one of the reasons why it has remained a market largely for banks, traders and corporations in India. But the surge in liquidity should lead to a greater retail participation. "Firsttime traders should start with small ticket sizes," advises Pankaj Pandey, Research Head, ICICI Direct. Globally, retail accounts for 10 per cent of spot forex turnover.
Courtesy: Money Today