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How do exchange-traded currency futures enable hedging against currency risk?

How do exchange-traded currency futures enable hedging against currency risk?

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On a currency exchange platform, you can buy or sell currency futures. If you are an importer, you can buy futures to "lock in" a price for your purchase of actual foreign currency at a future 10 date. You thus avoid exchange rate risk that you would otherwise have faced. On the other hand, if you are an exporter, you sell currency futures on the exchange platform and "lock in" a sale price at a future date. However, it may be noted that the contract will be marked to market at the daily settlement price and profit or loss will be paid / collected on a daily basis.

How are currency prices determined?

How are currency prices determined?

Currency prices are affected by a variety of economic and political conditions, but probably the most important are interest rates, international trade, inflation, and political stability. Sometimes governments actually participate in the foreign exchange market to influence the value of their currencies. They do this either by flooding the market with their domestic currency in an attempt to lower the price or, conversely, buying in order to raise the price. This is known as central bank intervention. Any of these factors, as well as large market orders, can cause high volatility in currency prices. However, the size and volume of the FOREX market make it impossible for any one entity to drive the market for any length of time.

How and why does the demand and supply of a currency increase and decrease?

How and why does the demand and supply of a currency increase and decrease?

There are several reasons. A rise in export earnings of a country increases foreign exchange supply. A rise in imports increases demand. These are the objective reasons, but there are many subjective reasons too. Some of the subjective reasons are: directional viewpoints of market participants, expectations of national economic performance, confidence in a country's economy and so on.

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Does the national economy of India need currency futures?

Does the national economy of India need currency futures?

Every business exposed to foreign exchange risk needs to have a facility to hedge against such risk. Exchange-traded currency futures, as on MCX-SX, are a superior tool for such hedging because of greater transparency, liquidity, counterparty guarantee and accessibility. Since the economy is made up of businesses of all sizes, anything that is good for business is also good for the national economy.

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Can currency futures help small traders?

Can currency futures help small traders?

Yes, The minimum size of the USDINR futures contract is USD 1,000. Similarly EURINR future contract is EURO 1000, GBPINR future contract is GBP 1000 and JPYINR future contract is YEN 1,00,000. These are well within the reach of most small traders. All transactions on the Exchange are anonymous and are executed on a price time priority ensuring that the best price is available to all categories of market participants irrespective of their size. As the profits or losses in the futures market are also paid / collected on a daily basis, the scope of accumulation of losses for participants gets limited.

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