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). Currency options are currently available on US Dollars.

Introduction of Currency Futures in India

The introduction of trading in currency Futures effective August 29, 2008, on National Stock Exchange, was a major milestone in the Indian financial market evolution. Subsequently, Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI) permitted trading in USD INR currency futures in other stock exchanges, albeit with some control. Currency futures in India are cash settled and not physically settled that means that they are settled without the actual delivery of the currency on expiry.

Currency futures allows investors to buy or sell a currency at a future date at a previously fixed price. Trading of this instrument at stock exchanges has facilitated an additional avenue and greater flexibility to investors and corporates in India to hedge their foreign currency exposure. It also ensures more transparency in dealing.

Currency Derivatives trading at Stock Exchanges being at a nascent stage, the lot size has been pegged at 1000 units of the overseas currencies in case of USD, EUR & GBP and 100,000 in the case of JPY, with a maximum tenor of 12 months. Further, it is mandatory to settle these contracts in local currency i.e. in Indian Rupee. FII and NRI cannot participate directly in this trading. However, once the market reaches a level of maturity and can withstand the pressures of volatility, one can expect withdrawal of these restrictions.

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