The term 'Derivatives' indicates that it derives its value from some underlying i.e. it has no independent value. Underlying can be securities, stock market index, commodities, bullion, currency or anything else. Currency derivatives segment of MCX-SX includes both Futures and options for which the underlying is Currency exchange rate.

Structural reforms in the Indian Foreign Exchange market introduced in the year 1993 included the change in Exchange rate regime from pegged to free floating. Although this Act, which supported liberalisation, helped the Indian Forex market in various ways, it was also accompanied by extensive fluctuations of exchange rates. Entities with Forex exposure made use of the OTC market to manage volatilities in the Forex market. To further facilitate the same, RBI along with SEBI, introduced Exchange traded Currency Derivatives, an effective tool in Currency Risk management in the year 2008.

Currency derivatives can be used to hedge against the risk of Foreign Exchange rate fluctuations. As it is a standardised contract traded on a screen based platform through an organised Exchange, Currency Derivatives also provides opportunities for intra-day/positional trading. It also gives opportunity for arbitrage. These features are explained in detail below:

i. Hedging: Real time exposure to Foreign exchange risk can be covered by entering into a suitable futures or options transaction in MCX-SX. For e.g., if you are an importer, and have USD payments to make at a future date, you can hedge your foreign exchange exposure by buying USDINR and fixing your pay out rate today. You would hedge if you were of the view that USDINR was going to go up. Similarly it would give hedging opportunities to Exporters to hedge their future receivables to Resident Indians, to hedge their offshore investments, etc.

ii. Trading: The daily movement in the Currency segment has given rise to increased trading opportunities, both intraday and positional. The average daily intra spread of USD-INR which was around 15 paisa in the initial periods of 2008 -2009, now reads between 80paisaand 1 rupee, highlighting the immense trading opportunity.

iii. Arbitrage: You can make profits by taking advantage of exchange rates of the currency in different markets and different exchanges.

All Resident Indians as defined in section 2(v) of the Foreign Exchange Management Act, 1999 (FEMA, Act 42 of 1999) are eligible to trade in the Currency Derivatives segment. FIIs and NRIs are not permitted to participate in currency futures market.

The trading platform at G.A.Vasant (Future) gives access to the Currency futures and options segment of MCX-SX. The above can be accessed either online or offline (over phone) at our dedicated dealing desk at our registered office.

Exchange traded currency derivatives are standardised contracts, where one can trade as low as 1000 dollars. The margin charged is as minimal as that of 2.5% to 3% on the turnover. In the OTC market the transaction lacks transparency and is more customised in nature. Trading on the Exchange platform reduces risk and provides opportunity for reasonable profits.

Currency Futures are standardised contracts,the rate of which is determined based on the spot rate of the underlying and the interest differential between the two currencies. The main features are summarised as below:

Calendar spread means risk offsetting positions in contracts expiring on different dates in the same underlying.

A spread contract is a separate Futures contract based on 2 underlying Futures contracts - Near month and Far month contract. A spread order once executed results in trade of Near month and Far month futures contract. These contracts could be used for rollover.

Rollover is essential in Futures market, as future contracts expires periodically. A rollover is nothing but the transfer of trading volume from the expiring contract month to a new contractmonth.

Currency Options are contracts that grant the buyer of the option the right, but not the obligation, to buy or sell underlying currency at a specified exchange rate during a specified period of time. For this right, the buyer pays premium to the seller of the option.

The need for Exchange traded Currency Options arises on account of the following reasons: 1. Options have the comparative advantage of maintaining a certain degree of flexibility in hedging, as, while protecting against a downside risk, they allow the investor to profit from favourable movements of foreign exchange rates by simply not exercising the option. 2. The exchange platform brings in all attendant benefits of transparency, finerspreads, access, safety, central counterparty, etc.

Currency option is currently introduced only in USD-INR contracts.