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What are currency derivatives

Currency derivatives offer investors the option to trade in major foreign currencies attached with the Indian rupee. Leading stock exchanges of India offer futures trading contracts in different foreign currencies. The two ways movement of the rupee attached with a foreign currency helps investors to put up a wall against the foreign exchange risk and gain.

The silver lining of trading in currency derivatives

You can protect your Forex exposure in business and hedge potential losses by taking appropriate positions. For example, if you are an importer and have USD payments to make on a future date, you can hedge your foreign exchangeexposure by buying USD and by fixing your payout rate today. You can hedge if you feel that USD-INR is going to depreciate. Alternatively, you can go in for short term movements by using Currency Futures, i.e., for example, when you feel that the oil prices will rise, you would buy USD-INR and sell it when exports from the IT Sector will translate.

You can take advantages of different exchanges in different markets barring Forex market, and you can pay the margin amount and trade in currency derivativesinstead of the full traded value.

Currency futures trading and its importance

You basically trade contracts on the exchange much like you do with equity and commodity contracts. These contracts are based on the margins. Globally, currency futures are more speculative and they don't hedge tools.

Currency future contractsare future contracts to exchange one currency for another at a specified date at a price that is fixed on the purchase date.You don't require any underlying charges to trade in currency futures.Therefore,currency futures trading is a wise choice.

Currently, the currency derivativesavailable are GBP, USD, EUR and JPY paired with the Indian currency INR.

Key difference between futuresand options

Futures: The buyer and the seller both are obligated to complete the transaction on the specified date at the price set in the contract.

The buyer has the option but not the obligation to complete the transaction. The seller is obliged to transact if the buyer of the options chooses to carry out the currency trade.