A currency future, also known as FX future, is a futures contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the purchase date. On NSE the price of a future contract is in terms of INR per unit of other currency e.g. US Dollars. Currency future contracts allow investors to hedge against foreign exchange risk. Currency Derivatives are available on four currency pairs viz. US Dollars (USD), Euro (EUR), Great Britain Pound (GBP) and Japanese Yen (JPY). Cross Currency Futures & Options contracts on EUR-USD, GBP-USD and USD-JPY are also available for trading in Currency Derivatives segment.

Impact of Currency

Massive currency fluctuations can affect any economy. If, for example, the Rupee weakens against the US Dollar, it will make imports costlier and exports cheaper. This will hurt importers, but benefit exporters. Since India is a major oil importer, this will lead to more expensive oil imports, and lead to price increases in fuels like diesel and petrol. These higher fuel prices have an inflationary effect since they will affect all commodities that has to be transported. If, however, the Rupee strengthens against the US Dollar, it will make exports more expensive. Exporters, therefore, will earn less. This will affect sectors like information technology. These fluctuations in-turn encourage investors to opt for currency futures trading. Let’s see what it is and how it works.

Advantages  of Currency futures

urrency Derivatives are very efficient risk management instruments and you can derive the below benefits:

i. Hedging: You can protect your foreign exchange exposure in business and hedge potential losses by taking appropriate positions in the same. For e.g. If you are an importer, and have USD payments to make at a future date, you can hedge your foreign exchange exposure by buying USDINR and fixing your pay out rate today. You would hedge if you were of the view that USDINR was going to depreciate. Similarly it would give hedging opportunities to Exporters to hedge thier future receivables, Borrowers to hedge foreign currency (FCY) loans for interest and principal payments, Resident Indians, who can hedge their offshore investments.

ii. Speculation: You can speculate on the short term movement of the markets by using Currency Futures. For e.g. If you expect oil prices to rise and impact India's import bill, you would buy USDINR in expectation that the INR would depreciate. Alternatively if you believed that strong exports from the IT sector, combined with strong FII flows will translate to INR appreciation you would sell USDINR.

iii. Arbitrage: You can make profits by taking advantage of the exchange rates of the currency in different markets and different exchanges.

iv. Leverage: You can trade in the currency derivatives by just paying a % value called the margin amount instead of the full traded value.

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