Author : Team DNA Money
What is a futures contract on the INR/USD exchange rate?
It is exactly like a futures contract of Nifty or of Infosys. A futures price is traded on the screen. That pertains to the INR/USD exchange rate at a future date. If the spot price goes up, the futures buyer makes a profit at the expense of the futures seller.
How do I trade in currency futures?
Send in an order to your NSE member exactly as you do with Nifty futures or Infosystch futures. Can everyone trade in currency futures?
Anyone in India, except for NRIs and FIIs, can trade on the currency futures. However, the only restriction for the participants is that the position limit for a single client cannot exceed more than $5 million or 6% of the market-wide open interest, whichever is larger, and for trading members (excluding banks), the position cannot exceed $25 million or 15%, whichever is higher. In short, non-FII and non-NRI participants can take positions up to $5 million immediately, and this limit will grow when the open interest of the market exceeds $100 million.
What about credit risk - what if the person who has lost money defaults?
As with all derivatives trading on NSE, the clearing corporation (NSCCL) becomes the counterparty for the net settlement obligations of all clearing members. Hence, default of a clearing member does not adversely affect the counterparty. NSCCL will require margins to back exposures, as is the case with derivatives being traded at present.
An example of future currency trading…
Suppose today is August 1, and the INR/USD exchange rate is at Rs44 a dollar and the futures price on NSE is Rs45. The contract size is 1,000. Think of this as a 'market lot'. Suppose the contract expires on August 31. The buyer of the futures contract makes a commitment to buy 1,000 on August 31 at a price of Rs45 per dollar. On August 31, suppose the INR/USD exchange rate on the spot market is Rs43 a dollar. In this case, the buyer has made a loss of Rs2. Since the contract size is 1,000, the buyer pays Rs2,000 to the seller.
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