Taking positions on currency movements through futures

A previous classroom touched on the basics of equity futures and options. In this edition, ET provides the lowdown on exchange traded currency futures

1. What are currency futures?
Like equity futures and options, regulator SEBI, in consultation with RBI, has allowed registered and recognised exchanges like BSE and NSE to offer currency F&O. For simplicity’s sake we will focus on currency futures in this edition. A currency futures contract allows you to buy or sell a currency pair at a set price for delivery on a future date. The settlement happens in Indian rupees only.


2. What are the products open to retail investors ?
Futures contracts are available on the Dollar, British Pound, Euro and Japanese Yen, each against the rupee. There are other cross currency futures as well.

3. How can one trade?
An equity trading account with a brokerage firm is sufficient to access this segment.

4. How does it work?
Say, you are bullish rupee and bearish dollar, you sell a dollar rupee futures contract or buy a dollar put option or sell a dollar call option. Assume you expect the dollar to weaken to 69.9 from 70.16, Friday’s last traded price. You sell the dollar-rupee futures expiring on January 29. The lot or contract size is $1,000. Say the dollar dips by 26 paise today to 69.9 at closing. You make 0.26×1,000 or Rs 260 per lot. If however, the dollar strengthens to say 70.4, you lose 0.24×1,000 or Rs 240 per lot. The same works for the other currency pairs, but dollar -rupee is the most active accounting for almost 90 per cent share of the four pairs versus rupee.

5. How much exposure can a retail investor or trader take?
In dollar-rupee, gross position shall not exceed 6 per cent of total open positions across all contracts, or $10 million, whichever is higher. In pairs like Euro and Pound, the exposure limit is 5 million euros or pounds and in Yen it is 200 million.

6. How many contracts are liquid?
The contract cycle is 12 months, but the most liquid is the front month contract . In the current case clients, can trade as far off as December 27, 2019 contract, but the most liquid is January 29, 2019 contract.

7. How much margin does one have to pay?
For one lot it is around 5 per cent but it changes if volatility increases. On the basis of January USDINR futures contract at 70.16, you put up a margin to trade of Rs 3,508.

8. Who are the other participants in the currency futures segment?
Banks, foreign portfolio investors and stock brokers who run proprietary books apart from HNIs and ultra HNIs.