Currency derivative trading is a derivative contract which is traded in a recognized stock exchange It involves buying or selling of derivatives contracts of a currency against the other. The price and the time of contract for such trading are fixed.
Permitted Currencies for trading
Currency trading is permitted in
Euro – Indian Rupee,
Great Britain Pound – Indian Rupee,
US Dollar – Indian Rupee,
Japanese Yen – Indian Rupee.
These currency trading are done through United stock exchange (USE), National Stock Exchange (NSE), MCX-SX.
Concept of Currency Derivatives
This currency trading is an option for the buyer that gives him the right to sell or buy one currency against the other. This trading is done at a predetermined price and predetermined date. In India, both futures and options are permitted for trading. In Options, depending on whether the currency contract can be exercised on the specified date or before the specified date, trading can be of different types. While trading on the specific date comes under the category of European while if the currency can be exercised till the date that is specified then the trading comes under American. So whether the trading is done in American or European this kind of trading has an expiry date predetermined. In India, only European contracts are traded.
When you have this date already fixed, there are chances that you lose a lot of money. So you can’t wait to trade the currency after the prefixed date of contract which can further exemplify your losses. So it is very important to understand that you can trade only with that much money that you can afford to lose. Trading on big amounts is not a very wise decision under this category.
When you are trading at US dollar versus Indian Rupee – if you buy Indian Rupee and sell US dollar then it is called INR call and USD put. Conversely if you are selling Indian Rupee and buy US dollar it is called INR put and USD call. Same goes for the Japanese Yen – Indian Rupee, Great Britain Pound – Indian Rupee and Euro – Indian Rupee.
Now this foreign exchange trading is done in two subtle investment options viz. spot forex market and currency futures. So let’s have a close analysis on how good is trading with the currencies.
Since the market is very competitive the brokerage rates are extremely low for such trading. Secondly the trading can be done directly on the exchange platforms by the clients. Again there is an immediate execution to the trading that is taking place. The most important feature is that since the exchange market is so big that even a bank can’t control the prices for an extended period. So there is no influence of any business tycoons that may affect the outcomes of the trades as in the stock markets. Further as the currency trading is done in a big non-centralized market the chances of fraud is pretty less or rather nil in such trading.
So what becomes very important is the speculation. Just in case if one finds that the price of petrol to rise and that may affect the import bill for India then it is wise to buy US dollar expecting that the price of Indian rupee will depreciate. In the same way if you expect the Indian rupee to go strong as compared to dollar for Foreign Indirect Investments (FII) inflows or due to IT markets having strong Exports then it would be wise to sell US dollar and make profits out of it.
An important incident, I should mention. I met a person who had traded in currency derivatives. He was very upset. According to him, he was trading in stock market and was very happy. His relationship manager asked him to try currency derivatives also saying that it just attracts 3% to 4% margin with a very small lot size of just $1000. So a margin is just 1500 to 2500 per lot. Thinking it a very small risk, he invested without understanding market dynamics, ultimately loosing few lacs.
Now this lacs was lost in just one lot. But what let him take higher number quantum of positions. It is nothing but a small movement in currency on daily basis which is mainly responsible for small margin percentage. Any large fluctuation on any given day due some domestic or International news leave them in a helplessness situation.
You can try arbitrage also
Again profits can be booked through arbitrage. Taking advantage of exchange rates in different exchange markets, profits can be booked. With the advantage of leverage it is also possible to trade in the currency market buy paying a margin amount and not the full traded amount. Most importantly the trading can be done throughout the day. So it becomes more attractive who have a lot of time allotted for their regular work. This trading can be done part time for such people as well.
Definitely making money is never an easy task. There is always a risk involved in any business you do. But with proper speculation and obviously with the ability to take risks making money out of the forex trading options can be very fruitful. Proper analysis of the market of different countries, the personal relationships among different countries plays a big role to understand the currency futures and trade accordingly.