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Our Bureau

Mumbai, Aug. 25 The Multi-Commodity Exchange (MCX) on Monday received in-principle approval from the market regulator Securities Exchange Board of India (SEBI) for launching currency futures through its newly-formed subsidiary MCX Stock Exchange Ltd (MSEL).

MSEL will commence enrolment drive for membership from Tuesday as it has already conducted seven road shows.

The road show was attended by over 1,000 plus representatives from industry such as banks, exporters, importers, stock brokers, foreign exchange brokers, commodity brokers and corporates, MSEL said.

Mr Vibhu Ratan Dhara, Assistant Vice-President, Bonanza Commodities, said they have received good enquiries from traders and will definitely apply for membership. Unlike international markets, the lot size should be kept lower so that marginal exporters and importers can participate, he said.

MCX is the largest commodity futures exchange with a monthly turnover of over Rs 4 lakh crore.

The National Stock Exchange, which is the only other applicant to have received SEBI’s nod, plans to launch mock trading on Friday. The Bombay Stock Exchange is waiting for approval while Ahmedabad-based National Multi- Commodity Exchange (NMCE) is in the process of applying to SEBI.

Currently, importers and exporters have the option of entering into forward contract for covering their risk. The banking regulator Reserve Bank of India (RBI) has recently set the guideline for futures trading in currency and made SEBI approval mandatory for launching the trade.

A currency future is a contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the purchase date. The price can be different from that is quoted in the spot foreign exchange markets. Investors can use these futures contracts to hedge against foreign exchange risk.

For instance, if an investor is expecting a cash flow denominated in a foreign currency on some future date, he can lock in the current exchange rate by entering into an offsetting currency futures position that expires on the date of the cash flow.

On the other hand, forward contracts are private agreements between two parties and are not as rigid in their stated terms and conditions. There is a chance that a party may default on its side of the agreement. Futures contracts have clearing houses that guarantee the transactions, which drastically lowers the probability of default to almost never.

More Stories on : Commodity Exchanges | Derivatives Markets | Forex

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