Currency futures in India

Currency Futures: Advantages and benefits

Currency Futures trading entered its second week in India and already proved to be a success within this short time period.

However, common man is yet to get acclimatized with Currency Futures in general and particularly with advantages it provides.

For a common-man in India, question of handling forex rarely arose in the past until as late as early 21st Century. Indian economy has grown rapidly during the last few years. India is one of the top global economies.

Nowadays it is common to find Indian residents often looking out for hedging currency risks. Unlike in the past, a large population of India (common-man) earns huge amount of foreign exchange from overseas.

INR has seen huge fluctuations of around 10% in its price against USD in a span of less than one year. Indian financial markets offered very few options such as currency forwards, swaps and options (traded on OTC - over the counter market) to Indian investors for hedging their currency risks.

Besides, cash Forex or OTC Forex trading is not easily accessible to small investors. Even more, it was suitable to only large participants due to various factors that acted as the deterrent to retail investors.

NSE (National Stock Exchange of India) was the first recognised exchange to launch currency futures trading in India. Currency futures offer unique advantages over overseas forex trading to retail investors and small traders.

Advantages of Currency Futures

EASY ACCESSIBILITY: Currency future is being offered on the recognised exchanges in India. NSE (National Stock Exchange) has already commenced currency futures trading. Two more leading exchanges BSE (Bombay Stock Exchange) and MCX (Multi-Commodity Exchange) Stock Exchange would very soon commence currency futures trading. Small investors would get an easy access to currency futures trading on the popular exchanges. It is as easy as trading in a blue chip stock on any of your favorite exhange.

EASY AFFORDABILITY: Margins are very low and the contract size is very small. As per the specification of NSE USD-INR currency future contract, the lot size is 1000$. Margin is 1.75%. Don’t you think that it was never so easy and affordable for any retail investor to take a call on Indian Rupee by taking position in currency futures?

LOW TRANSACTION COSTS: When you trade in INT currency futures on NSE in India, you have to pay a small amount of brokerage fees and statutory duties and taxes. In overseas forex trading you have to pay commissions to the banks or foreign exchange agents in the form of spread. Spread is the difference in the buy/sell price over the reference rate, which can be very high.

TRANSPERANCY: It is possible for you to verify trade details on NSE if you have a doubt that the broker has tried to cheat you.

EFFICIENT PRICE DISCOVERY: Internationally it has been established that currency future is a better and efficient mechanism for price discovery. With its state of the art automated electronic trading system where the orders are executed on the basis of price-time priority, NSE is well poised to offer efficient price discovery.

COUNTER-PARTY DEFAULT RISKS: All the trades done on the recognized exchanges are guaranteed by the clearing corporations and hence it eliminates the risks associated with counter party default. NSCCL (National Securities Clearing Corporation Limited) carries out all the novation, clearing and settlement process of currency futures trading.

STANDARDIZED CONTRACTS: Exchange Traded currency futures are standarizsed in respect of lot size (1000$) and maturity (12 monthly contracts). Retail investors with their limited resources would find it tremendously beneficial to take positions in standardised USD INR futures contracts.
 
Five Key Factors that Move the Forex Markets -- and How to Profit from Them
Hi! We're Boris Schlossberg and Kathy Lien, and we've been making people money in Forex for over a decade. As Directors of Currency Research at GFT and long-timeInvestopedia.com contributors, we've seen our share of wins and losses... Thankfully, over the years, we've also been able to learn from our less glamorous predictions and come up with a currency trading system that has earned us a very respectable success rate on Forex trades.
Today, we're sharing our Forex trading system with you. We're going to show you how to analyze the movements of any currency pair using a simple checklist of five key currency-moving factors. These are the same factors that we use to analyze
 
Why Forex?
Although trading currencies originated as a way to purchase foreign goods and services, investors soon learned that there are huge speculative returns to be made by predicting the value of international currencies. Today, those who use the Forex market as an investment vehicle outnumber those who trade currencies to expedite world trade. In fact, as of December 2006, 80% of all trades in the currency market are made by investors or investment entities out to make a quick return on their extra cash.
The Forex market is the most prolific market in the world, attracting trillions of dollars per day from central banks, corporations, hedge funds, and individual speculators. This fast-paced market operates 24/7, 5 days a week, beginning with trade in Wellington, New Zealand, and continuing on to Sydney, Australia; Tokyo, Japan; London, England; and New York, New York before the whole cycle begins again.
Forex is exciting, and with the right guidance and a bit of luck you can earn 500%, 600%, even 2000% returns. But Forex is not for everyone. If you prefer the penny slots to the high roller tables, then the high-stakes world of Forex trading is probably not for you. Forex is best traded with money you have allocated as risk capital -- money you don't need for day to day expenses.
So, if you'd like to spice up your more secure investments with a pinch of adrenalin and a dash of risk, try a few Forex trades. But first, let us show you how you can gain an edge in the market with the...
Five Keys to Predicting Forex Market Movements
To profit from the fascinating world of international trade, you must have a firm grip on the key factors that affect a currency's value. When making our trades, we analyze five key factors. In order of importance, they are:
• Interest Rates
• Economic Growth
• Geo-Politics
• Trade and Capital Flows
 
Key Factor 1. Interest Rates.
We use two methods to profit from the difference in countries' interest rates:
• interest income
• capital appreciation
Generating interest income.
Every currency in the world comes attached with an interest rate that is set by its country’s central bank. All things being equal, you should always buy currencies from countries with high-interest rates and finance these purchases with currency from countries with low-interest rates.
For example, as of the fall of 2006, interest rates in the United States stood at 5.25%, while rates in Japan were set at .25%. You could have taken advantage of this rate difference by borrowing a large sum of Japanese yen, exchanging it for US dollars, and using the US dollars to purchase bonds or CDs at the US 5.25% rate. In other words, you could have borrowed money at .25%, lent it out at 5.25%, and made a 5% return. Or you could save yourself all the hassle of becoming a money lender by simplytrading the currency pair to affect the same transaction.
Generating income from capital appreciation.
 
Interest Rates Spark a 700 Point Rally
Another great example of the power of interest rates in the currency market occurred in August of 2006. At that time, the Bank of England surprised the market by raising its short-term rates from 4.5% to 4.75%. Interest rates for Japan were still at a low .25%.
The rise in England's interest rates widened the interest rate differential on the popular GBP/JPY cross from 425 basis points to 450 basis points. Investment money flowed into Great Britain as traders bought up pounds to take advantage of the new spread. As the demand for the GBP increased, the value of the GBP increased, and the spread between the currencies increased. This domino effect lead to a 700-point rallyin the GBP/JPY over the next three weeks.
 
Click Here for Larger Image
Figure 1-2. When the Bank of England raised short-term interest rates in August 2006, it lead to a 700-point rally in the GBP/JPY over the next three weeks.
80 Points in Less than 24 Hours
More recently, we have used interest rate differentials to successfully predict several profitable trades for Forex Advisor members.
The concept of interest rates can be used to trade currencies using both long- and short-term perspectives. On a long-term basis, we look for major themes. On a short-term basis, we look for surprises in the news that shift the market’s interest rate expectations. We were able to make two winning trades based on short-term interest rate flows in the Australian dollar/Japanese yen (AUD/JPY) currency pair on January 24, 2007.
The trigger for our trade was the surprise drop in Australian consumer prices during the fourth quarter. The market was looking for hot inflation numbers but instead they received cold ones. Low inflation numbers meant the central bank of Australia was not likely to raise interest rates as expected. This news sent the Australian dollar tumbling hard against the Japanese yen, as traders speculated that the interest rate differential between the two currencies would no longer grow.
 
The first trade we made on January 24 banked us 45 points. We took profit before the currency pair retraced and then sold it again when it showed further signs of weakness. The second January 24 trade produced an additional 35 points for a total of 80 points.

Click Here for Larger Image
Australian dollar vs. Japanese yen, January 24, 2007. By predicting the affect of unexpectedly low inflation on the Australian dollar, we made two winning trades on January 24. Combined, these trades netted us 80 points in one day.
 
Five Key Factors that Move the Forex Markets -- and How to Profit from Them
Key Factor 2. Economic Growth.
The next factor you need to consider when predicting a country's currency movements is its economic growth. The stronger the economy, the greater the possibility that the central bank will raise its interest rates to tame the growth of inflation. And the higher a country's interest rates, the bigger the likelihood that foreign investors will invest in a country's financial markets. More foreign investors means a greater demand for the country's currency. A
 
greater demand results in an increase in a currency's value.

Hence, a ripple effect: economic growth inspires higher interest rates inspires more foreign investment inspires greater currency demand which inspires an increase in the currency's value.
How Anemic Economic Growth Crashed EUR/USD 2,000 Points
For a good example of the impact of economic growth on the direction of currency rates, let’s look at the EUR/USD from 2005 to 2006. Economic growth is best measured by a country's Gross Domestic Product, or GDP. The United States and Eurozone represent two of the most prosperous regions in the world with GDPs running at $13 trillion and $11 trillion respectively.
In 2005 and 2006, the difference in growth rates between the two major economic powers was clearly reflected in currency movements. In 2005, the Eurozone lagged significantly behind the United States in economic growth, averaging an anemic 1.5% rate throughout the year while the US expanded at a healthy 3% rate. Consequently, investment capital flowed from Europe to the US and the EUR/USD dropped by nearly 2,000 basis points by the end of 2005. In 2006, however, Eurozone growth perked up while US growth began to slow. At the end of 2006, Eurozone GDP actually overtook US growth rates, causing the EUR/USD to rally.
 
We've used GDP's to forecast trends on several more Forex trades in the past. One great example is our November 14, 2006, United States dollar/ Japanese yen trade (USD/JPY).
67 Points in Four Hours
In the middle of November 2006, hurt by the contraction in its housing sector, the US economic data began to deteriorate. Rumor had it that the US might lower interest rates in the first quarter of 2007, which would encourage foreign investors to look elsewhere.
Meanwhile, the Japanese economy was buoyed by the weak yen that made Japanese products affordable internationally and helped spur double digit growth in exports. On
 
the 1% forecast. We decided to take advantage of the strength of the Japanese economic growth vs. the relatively weak economic outlook in the US, so we went short USD/JPY at 117.82. As we hoped, that morning, in sharp contrast to Japan, US retail sales produced very weak numbers and the USD/JPY pair collapsed. We were able to collect 67 points on the trade in less than four hours.
 
Five Key Factors that Move the Forex Markets -- and How to Profit from Them
Key Factor 3. Geo-Politics.
Do you hate the business section? Do your eyes glaze over at the mere mention of economic data and mind-numbing accounting numbers? Fear not. The currency market is the only
 
hi,
i m doing my MBA in Fin.and right now working on grand project of "Viability of Currency Futures from importers and exporters point of view" So please share relevant data for my project>

Anticipating reply very soon

Thanks:cr-02902:
 
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