Currency Derivatives Trading

Currency trading – at its most basic definition - is the simultaneous Buy/ Sell of one currency against another. It is like pair trading (USD vs INR). For example – if USD/INR is trading at

and if one Buys at 74.51, it means he/she is bullish on dollar (bearish on INR). Similarly, if one sells dollar, it means bearish on dollar (bullish on INR).

Exchange Traded Currency Futures and Options is like any other derivatives contract (NIFTY, Bank NIFTY) that gets traded on exchange having fixed contract size and expiry date.

Presently, there are 7 currency pairs available in futures and options:

INR Currency Pairs: USDINR, EURINR, GBPINR, JPYINR

International Currency Pairs: EURUSD, GBPUSD, USDJPY

Note: Weekly option is available in all INR pairs expiring every Friday of the week. Weekly Futures available only in EURINR, GBPINR and JPYINR.

Exchange traded Currency Futures & Options has not only opened a new asset class to the individuals but also gives opportunity to express their price view on USDINR and other currency pairs.

Some of the advantages of Exchange Traded Currency Futures & Options are as follows:

• Lower Transaction cost- There is no STT/CTT applicable in Currency Futures & Options. Stamp duty is also the lowest (Rs.10 per crore – only on buy side) of all the products that gets traded on exchange.
• Smaller Contract size- All contracts are of value less than one lac. Easier to take price view.
• Lower Volatility- Compared to other products (Nifty/Gold etc.), USDINR has lower volatility and hence easier to manage position.
• Longer Trading hours- As currency market trades from 9 am to 5 pm, one gets additional one and a half to trade in currency and more time to react.
• Higher Leverage- Because of low margin, leverage can go as high as is as high as 33X to 40X (USDINR).
• Low Margin- Margin required is usually in the range of 2.5% to 5% depending upon currency pair.

Indicative margin in different currency pairs as follows:

Note: The margin percentage can be different at the time of actual transaction For example – for one lot of USDINR, margin requirement would be in the range of Rs. 1,875 (75000 * 2.5%) to Rs. 2,250 (75000 * 3%).

Margin can be given in the form of cash or approved securities with applicable hair-cut. In fact, one can use the same margin given for equity F&O provided he/she is activated to trade in currency segment.

One can trade in the multiples of the above lots both in futures and options.

INR Currency Pairs (1 lot):

USDINR- $1000

EURINR- € 1000

GBPINR- £1000

JPYINR- ¥100000

International Currency Pairs (1 lot):

EURUSD- € 1,000

GBPUSD- £1000

USDJPY- $1000

For example – If USDINR is trading at 74.50, value of one lot = ($1000 * 74.5050 = 74505). If EURINR is trading at 87.35 value of one lot = (€1000 * 87.3525 = 87352.50)

Minimum tick size is 0.0025p across all futures and options contracts. Basically, it means that in one tick, maximum price movement is Rs. 2.5 (1000 * 0.0025)

Both futures and options are cash settled. Daily settlement happens as per the last half an hour weighted average price. However, final settlement for monthly contracts happens at FBIL reference rate at 12:30 pm. Unlike equity, which expires on last Thursday of every month, currency futures and options contracts expire two working days prior to the last business day of month. For example, if Sep 30, 2020 (Wednesday) happens to be last working day of month, September futures and options contract would expire on Sep 28, 2020 (Monday) at 12:30 pm at RBI reference rate declared by FBIL. Weekly option contracts expire every Friday at 12:30 pm at RBI reference rate.

Price movement in any currency pair is an outcome of many factors, ranging from geo-political risk (like Indo-China border issue) to macro developments (fiscal deficit, trade deficit, inflation etc.) to overall risk sentiment. However, short term price movements in USDINR is mainly influenced by:

1. Capital flows:

• Higher the inflows, positive for USDINR
• Higher the outflows, negative for USDINR

2. RBI Intervention: RBI intervenes on both sides (buy and sell) to smoothen the extreme movements in USDINR.

3. Dollar Index (DXY):

• Stronger the DXY, stronger the dollar
• Weaker the DXY, weaker the dollar

4. Global Risk Sentiment:

• Higher the risk-on sentiment, positive for USDINR
• Lower the risk sentiment, negative for USIDNR

Global risk sentiment – A global risk-on sentiment is normally seen as positive for emerging market currencies like USDINR etc. One can look at other emerging market currencies like USDCNY, USDKRW, USDIDR, USDZAR etc. to gauge the likely price movement in USDINR. It is similar to how equity market participants’ looks at global equity indices and tries to gauge the intra-day move in local equity market.

Trade and current account balance - A worsening trade deficit (export < import) is negative for rupee. Whereas an improving trade balance, is positive for INR. Crude oil has a large share in Indian import basket and hence its movement does impact USDINR