'Knowing how currency markets work is important'

Abhishek Goenka, CEO, India Forex Advisors, tells Babar Zaidi what the introduction of forex options means for small investors.

Babar Zaidi        Print Edition: September 2010

How can trading in rupee-dollar currency options benefit investors?

Currency markets present a good investment opportunity. However, investors should participate only after a thorough understanding of how they work. In options, the risk is lower because the loss is limited to the premium paid. But investors need to know how puts and calls work and whether the premium being paid for an option is feasible. It's advisable to take a course on forex derivatives offered by currency exchanges and associations.

What are the factors that affect currency movements?

One has to be clued in to global developments, trends in world trade as well as economic indicators of different countries. These include GDP growth, fiscal and monetary policies, inflows and outflows of the currency, local stock market performance and interest rates.

What should an investor keep in mind before foraying into this field?

The currency derivatives market is highly leveraged. In the stock futures market, a 20% margin gains a five-fold leverage. In forex futures, the margin payable is just 3%, so the leverage is 33 times. This means that even a 1% change can wipe out a third of the investment. However, the Indian currency markets are well-regulated and there is almost no counter-party risk. Investors should start small and gradually invest more.

What will be the direction of the US currency over the next 3-6 months?

Investors should go long on the dollar due to global growth concerns, including poor performance of Asian giants such as China. They should buy the dollar at every dip. We expect it to touch Rs 48 in the next 2-3 months provided it holds above Rs 46.50 consistently.

Will the turmoil in Europe pull down the euro further?

Medium-to-long-term investors should go short on the euro. The downside pressures have reduced for now, but in 2-3 months, the focus will be back on the dollar. We maintain a bearish stance on the euro against the rupee and expect it to recede to Rs 58-59.

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