Submitted by: Surbhi Choudhary
Different economies are linked with each other in concern of FDI and FII that promote the ultimate growth of the economy. Forex is an international market that facilitates trading in different currency pairs. At domestic or national level, there various Exchanges are available that provide a platform for Currency trading tips like in India NSE (National Stock Exchange), MCX-SX.
In both this exchange mainly 4 currency pairs are traded on its Derivative contract.
Currency Pairs LOT Size
As derivative is the contract whose value is derived from underlying assets in currency, future underlying asset is the RBI Reference rate in the spot market. In this above pairs an individual or institution can work on a future contract and buy or sell fix minimum quantity i.e. Lot Size.
In this above currency pairs 1st currency is the base currency and 2nd currency is counter currency, like USDINR that represent the value of INR in 1 US dollar.
NSE has launched its currency, future trading platform on 29 August 2008 and introduced currency option trading on 29 October 2010.
As in NSE currency trading occur on its future contract that has particular expiry date, i.e. Two working days prior to the last working day of the month. If it is holiday on that day, then preceding day would be expiry at 12:30 PM and the contract cycle that exchange follow is for 12 months.
To trade in currency derivative an individual doesn’t need to pay the full amount. He just has to pay an initial margin amount that is 2-5% to buy or sell a single lot of any pairs. Like suppose the current market price of USDINR September contract is 66.59 and an individual want to purchase a single lot of that then
66.59*1000 =66590 its 2-5% = 2330.65 (Approx) would be the investment required to buy or sell a single lot of USDINR.
As derivative is the contract between buyer and seller of contract that facilitate the delivery of the underlying asset on future dates. The main purpose of currency derivative is also for Hedging Arbitraging and speculation like stock futures contract that facilitate to different investor, trader or investment institutions to avoid the risk of price uncertainty.
Dig. Currency Derivative Mechanism
In this above Example buyer making a contract by paying an initial margin of 2-5% to exchange that before or on expiry of the contract will buy or accept the delivery of 1000 USD from seller.
And the seller making a contract by paying an initial margin of 2-5% to exchange that before or on expiry of the contract will deliver the 1000 USD to Buyer of the contract.
In Indian Currency market, there are different investor are there with different profile like some of them are individual trader and some are investment institutions. Like for different oil and gas industries international currency is required to purchase or import crude oil. Thus, this Oil & gas corporations also invest in the currency market to reduce the risk of price uncertainty.
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