Currency
trading is selling/buying one currency to buy/sell another currency. In-fact
the buyer and seller exchange the respective currencies which they hold with
each other. For e.g.: An exporter in India who want to sell his US Dollar
receivables goes to his banker and sells USD to buy Indian Rupee . Meanwhile
an importer would sell rupees to buy US Dollar to make payment to overseas
supplier.
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Absolutely
there is no need for an individual to have a trading experience in stocks to
trade in Currency market. Even many stock brokers don’t have experience in
forex markets. However you should have knowledge about forex markets to feel
the real pulse of the market. Currency derivative markets are in nascent
stage in
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OTC
is acronym of Over The Counter. OTC market is a place where financial
products like currencies, stocks, derivatives are exchanged between two
parties directly. Without any third party supervision, the market runs with
the mutual agreement of two parties. Though, credit risk is higher in this
kind of market, it best suites for custom made products like forward
contracts, complex currency derivatives etc.
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Currency
Futures is a contract between two anonymous persons to buy or sell a
particular currency at an exchange, at a specific price and at a particular
date in the future despite the vagaries in the base price of that currency.
It is similar to a forward contract which is an Over the counter product,
while futures is traded in exchanges. We can call it as exchange traded
forward contracts also.
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Spread
contracts allows a member to execute two trades simultaneously in two
different maturity contracts of the same currency pair, by entering a single
order.
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Trading
in Rupee futures & options through stock exchanges is legal.
Trading in major currencies versus the US Dollar in the international market is not legal. According to RBI guidelines an investor can invest up to $200000 in offshore markets. However, the offshore investments should not be in the form of Margin Money. When you trade through internet in the international forex markets you have to place forex in the form of Margin, which is against the RBI guidelines. So please keep yourself away from trading in international currency markets. |
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Currently
Four pairs including the USDINR, EURINR, GBPINR & JPYINR futures are
traded. In options only the USDINR option contracts are traded.
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Any
resident Indian or company including banks, financial institutions, NBFCs can
participate in the futures market. However, at present, Foreign Institutional
Investors (FIIs) and Non-Resident Indians (NRIs) are not permitted to
participate in currency futures market.
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Yes
individuals without exposure to forex can trade in the Rupee futures and
option segment purely as an investor. You can buy or sell the currency
derivatives, if you want to bet on the direction of the respective currency
pairs. You can benefit from exchange rate fluctuations similar to the stock
price fluctuations in the equity market.
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Rupee
futures & options serve as the vehicle for hedging against currency
fluctuations which influences the exports and imports business. Since the lot
size is small (1 lot=1000$) even medium and small exporters and importers
have the avenue to hedge at a nominal cost compared to the OTC markets. In
OTC markets only the large scale exporters and importers have the muscle
power to negotiate with the banker. Also the counterparty risk (credit risk)
in a futures contract is eliminated by the presence of a clearing
house/corporation, which assumes the counterparty guarantee. Thus,
exchange-traded currency futures help in overall development of the forex market
in the country.
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USD/INR
movement is mainly driven by inflow and outflow of dollars. Basic economics
of demand and supply of dollars is the driving factor behind the USD/INR
currency movement. Apart from those key economic indicators like inflation,
GDP growth, and interest rate decision also play vital part in the currency
movement.
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As
any other trade, trading in rupee futures & options has risk of losses to
your entire capital or more than your capital. Risks involved in rupee
derivatives pertain to movements in the Rupee exchange rate versus the USD,
EUR, GBP, and JPY. You should therefore be knowledgeable about
the currency market if you want to participate as a trader or else take the
help of forex consultants who can give a reasonable judgement about the
markets.
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No.
It is not a must to hold your rupee derivative contracts till expiry. It is
subjective to the individual’s requirement. If you have a decent profit or
want to cut your losses immediately you can always do so by taking the
opposite position. If you have bought, then you have to sell a particular
month contract and vice versa. If someone wants to hold till expiry, see that
you have enough margin funds parked in your trading account.
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The
currency futures market is has grown multifold in a very short span in the
Indian market. Normally the liquidity is more in the short tenors [1 to 3
months] and less in the long term [more than 3 months].
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No.
The Currency Futures are cash-settled.
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The
trading of currency futures & options is subject to maintenance of
initial, extreme loss, and calendar spread margins with the clearing
house/corporation. The initial margin is subject to a minimum of 1.75% on the
first day of currency futures and 1% thereafter. The margins shall be
deducted from the liquid net worth of the clearing member on an online and
real-time basis.
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Margins are (Initial margin + Exposure margin) charged as per
exchange specification.
*Of MTM value of gross open positions
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·
Brokerage charges
·
Service tax, Education cess.
·
Transaction charges
·
Stamp duty charges
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Amendment
to section 43(5) of IT act excludes transactions in derivatives carried out
in a recognized stock exchange from speculative nature. Income /loss from
such transactions are not taxed as speculative income or loss. Thus loss on
Rupee derivative transactions done through recognized stock exchanges can be
off set against any trading income during the year apart from salary. In case
the same cannot be offset then the losses can be carried forward to
subsequent assessment year and set off against any other income in the
subsequent years to a maximum of 8 assessment years. However, there is no
clarity on the treatment of gains as capital gains or as business profits.
Contact your auditor for clarifications. Also, verify whether the recently
introduced United Stock Exchange is in the list of recognized stock
exchanges.
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Stop loss is the level at which trader feels he should
cut/minimize his loss in a trading position. This level should be kept by
considering the risk appetite of the individual, the margin money allocated,
& technical analysis. The stop loss level for a buy position should be
lower than the buy price and for a sell position stop loss should be higher
than the sell price. For example, if an individual buys USD/INR January
futures contract at say 45.20, then stop loss level would be 45 or 44.80 or
any level lower than 45.20.
Take profit is the level at which trader wants to book the profits accrued in the trade position. The take profit level for a buy position is higher than the buy price and for a sell position the take profit level should be lower than the sell price. For example, if an individual buys USD/INR January futures contract at say 45.20, then take profit level would be 45.40 or 45.60 or any level higher than 45.20. |
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These
are technical words in trading. If we buy the underlying, then it is said
that we are going long on the market, and if we sell the underlying, then it
is said that we are going short on the market.
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In Indian Rupee futures, the profit is calculated with the
difference in the value of currency pair [e.g. USD/INR, EUR/INR etc], at
which the trader enters and exits his position. Every one paisa gain is
equivalent to Rs.10/lot. If a trader’s view goes right and gets a gain of 20
paisa in his position, he gains Rs.200/lot. However, this is without the
brokerage charges, service charge and education cess, which a trader should
pay to the broker. Normally a broking firm charges 1 to 3 paisa per
transaction [either buy or sell]. Saying that, the normal brokerage
commission makes up to 2 to 6 paisa for completing one position [i.e. buy and
sell or sell and buy]. A trader should consider these charges also before
deriving profit for his position.
In Indian Rupee Options, the profit is calculated with the difference in the premium amount at which the trader enters and exits his position. Every one paisa gain is equivalent to Rs.10/lot. The profit calculation and brokerage charges are same as that of Indian Rupee Futures. |
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