A surge in investors’ interest in Indian rupee futures is contributing majorly to the growth at the Dubai Gold & Commodities Exchange, the only exchange outside India where rupee futures can be traded.

Trust Securities DMCC, a specialised financial brokerage firm, has said that there has been a surge in investors’ interest in the trading of Indian rupee futures and foreigners, who cannot access the Indian exchanges, have turned to the DGCX to trade the rupee-dollar futures contact.

Trading volume at the DGCX has grown at twice the rate of world derivative exchanges, with 2011 seeing a 110 per cent increase in volumes over the year 2010, the highest annual volume since the exchange commenced trading in November 2005 as the region’s first commodity derivatives exchange.

DGCX, the leading derivatives exchange in West Asia, is an initiative of the Dubai Multi Commodities Centre (DMCC), Financial Technologies (India) and the Multi Commodity Exchange of India (MCX).

The multi-asset broker across a broad range of listed derivatives and equity securities said the activity levels in the rupee-dollar futures are a major contributor to that growth having risen to over 563 per cent above 2010 levels.

Mr Bruce Powers, Head of Research at Trust Securities, said: “Over the past eight months or so volatility in the rupee has increased, offering better opportunities to traders and short-term investors who can take advantage of price trends. A big advantage of the futures market is that it offers opportunities to profit whether the market is trending up or down.’’

Arbitrage opportunities

He said a second trading strategy being employed was called arbitrage. With arbitrage, a trader was attempting to exploit small price differentials between different rupee futures markets.

Although not a large portion of the volume of DGCX rupee futures trading yet, it was expected to gain in popularity as the activity levels continue to rise.

Rupee options

Given the popularity of the DGCX rupee futures contract, the exchange launched an Indian rupee options contract in late-September 2011. It provides investors with an instrument to hedge their futures positions, and also supports volume growth in the rupee futures contract.

Businesses and high net worth individuals (HNIs) are using the DGCX rupee futures contract for hedging, speculation and arbitrage opportunities.

Indian expatriates in the UAE, which is the leading trading partner of India, are paying particular attention given the exchange rate risk as the UAE Dirham is pegged to the dollar.

The Reserve Bank of India has kept its benchmark interest rate at 8.5 per cent and inflation is still an issue.

Although a majority of trading volume is not coming from hedging strategies, rupee futures are an efficient mechanism for non-resident Indians and overseas Indian businesses to hedge currency risk.

(This article was published on February 15, 2012)
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