The Hindu Business Line : Currency futures on NSE from Aug 29

Parents paying for their children’s overseas education, students raising funds for themselves, persons getting remittances from abroad, and even the outbound traveller can benefit from this facility.

Our Bureau

Mumbai, Aug. 20 It is not just corporations, banks and traders, but also individuals who can hedge their foreign exchange risks when trading in foreign currency futures commences this month end on National Stock Exchange.

“NSE goes live with currency futures from August 29, and we are organising mock trading sessions from today,” said an NSE official during a media workshop on currency futures here on Wednesday.

Forex contracts

Currency futures are standardised foreign exchange contracts traded on recognised stock exchanges, for buying or selling one currency against another on a specified future date at a specified price.

NSE officials were keen to illustrate how lay persons can make use of this instrument. Parents paying for their children’s overseas education, students raising funds for themselves, people getting remittances from abroad, and even the leisure out-bound traveller, can benefit from this. The officials supplied the following example: if an Indian wants to buy $5,000 today at Rs 40.75 to the dollar for travel overseas five months later, he would pay Rs 2,03,750.

With the opportunity cost for five months, this $5,000 for him could eventually work out to Rs 42.80 to the dollar. This would be fine if after five months the dollar is quoting above Rs 42.80. But who can predict the movement of currency?

How it works

If this person instead buys five of dollar-rupee contracts (each contract equals $1,000) of five months expiry at say Rs 41, this would amount to a notional value of Rs 2,05,000, but he would have to pay only a margin on that, say 5 per cent, amounting to Rs 10,250.

Now at the end of five months if the dollar moved up to Rs 43, there would be a benefit of Rs 10,000 (5000 x 43-41). And if the dollar moved to Rs 39, a loss of Rs 10,000 (5000 x 39-41).

If at this time the man bought $5,000 that he requires for travel at the spot price of Rs 43 he would spend more, but there is the gain of Rs 10,000 from futures bringing down his costs.

At the spot price of Rs 39 he pays less, but there is the loss of Rs. 10,000 bringing up his costs. In the end his dollar cost amounts to the same, say Rs 41.10, including the small opportunity cost on the margin he has paid.

So far, only NSE has received an in-principle approval from Securites and Exchange Board of India for setting up currency futures.

All the trade done on the NSE will be cleared and settled by National Securities Clearing Corporation.