In order to trade on the currency market platform, an investor must understand the factors that affect the currency price movement. In addition to that, it is also important to understand the fundamental factors that drive movement in the currencies. On the Indian currencies market platform the following pairs are traded - USD-INR, EURO - INR, JPY - INR and GBP-INR. Taking the first step forward, let us understand the fundamental factors that affect Rupee.
The main factor that affects the USD INR or any other currency is the demand/supply dynamics for the individual currencies. However, the demand/supply dynamics is influenced by many other factors such as interest rates, inflation, money supply, trade balance, growth in imports, exports, capital flows, overall economic growth in the country and global developments. For example, whenever the country's exports are greater than the imports, there is a huge capital inflows of the foreign currency through payments received whereas vice versa when the imports exceed the exports there is huge capital outflow from the country. In other words, rising exports increase supply of foreign currency whereas rising imports increase demand for foreign currency. However, apart from these basic demand-supply fundamentals, factors like view of market participants and expectations of growth in the country also affect the currency's demand/supply dynamics.
Who can benefit from trading in currency futures?
Both importer and the exporter can benefit from currency futures. In case of an importer, when he is entitled to make payments and if the domestic currency depreciates, then he may have to pay more amount of domestic currency to make the same payment, eventually making a loss. On the other hand an exporter will receive lesser amount if the home currency appreciates. The main objective of initiating currency forwards on the OTC market was enabling risk management (largely offloading or transforming existing currency risk of a customer). However, it is also used as an alternative investment within prescribed limits. Currency futures can be an added advantage in your investment portfolio.
What are the benefits of exchange-traded currency futures as compared to OTC Currency forward contracts in India?
· Futures contract follow the principle of universal pricing- "One Price for All". The futures contracts are not customized like forward contracts.
· Futures have smaller contract sizes as compared to forwards with a minimum lot of USD 1000. This enables even the small and medium enterprises to hedge their currency risks.
· Standardized exchanges provide online trading platform, thereby enabling remote access to participants.
· Price discovery mechanism is completely transparent. Prices are derived mainly through the demand/supply behavior of participants.
· Settlements in futures are done through the clearing house of respective exchanges. Hence the risk of counterparty defaulting is eliminated.
Who can benefit by trading in currency futures?
Hedgers: Importers, exporters, corporate, SME's and banks can hedge on MCX-SX to mitigate their forex risk at relatively low entry and exit costs.
Traders: Traders interested in taking short term risks for earning returns on a short term basis participate in currency trading. The traders provide liquidity in the market, thereby, enabling hedgers to efficiently transfer risk.
Arbitragers: Arbitrage in simple terms means purchasing in one market where the price is low and at the same time selling it in the other, thus taking advantage of the temporary price differential which exists between the two markets. Traders continuously wait for such differentials and try to earn some profits out of it. Arbitrage can be possible in the same market but within different contracts.
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