What are Currency Futures & Options?

What are Currency Futures & Options?

Thanks to growing foreign institutional investor (FII) flows and markets moving to new highs, the rupee has strengthened in the past few weeks to 64 levels from 66 plus to the dollar.

What can one do if one wants to ride the rise?

What are currency futures and options?

Like an equity F&O, currency futures and options derive value from underliers, such as dol lar, INR, GBP , Yen and Euro, all of which can be traded and settled in rupees on NSE, BSE and MSEI, though it is most popular in the first one. A currency , unlike a share futures or options, has a pair.

For example, dollar -rupee future can be bought or sold. If it's bought, you're bullish dollar and bearish rupee and vice versa.

How does one trade?

Through your normal equity trading account.

Illustrate a trade...Three contracts run concurrently .Currently , it's the April series. If you're bearish dollar, short one futures contract ($1,000 a lot) for the April 26 expiry . That is sell the dollarrupee. On Friday , dollar closed down 30 paise to the rupee at 64.43. So, you sell dollar-rupee expecting a target of 64 in this series.

If rupee rises to 64, you make 0.43 x1,000, or `430 gross.Margin to trade is around 5% of 1,000 dollars, or `3,221, at Friday closing. A `430 gain is a gross return of 13.3% on the investment of `3,221. However, you could lose the same amount if dollar moves up.

 Is there a less risky option?

Yes, as in equity F&O, there are currency options on dollar-ru pee. But you can't hold an option for long, as time decay reduces its value if the rupee consolidates around the current levels. A futures contract does not suffer from time decay but losses can be unlimited just like profits.In options, a buyer pays a premium to either short or long dollar. That's his maximum loss.

However, profits are unlimited. For an option seller, maximum profit is the premium earned from a buyer, but losses are unlimited.

 What's the position limit for a domestic retail client on dollarrupee derivatives?

$15 mn on dollar-rupee and $5mn cumulative for GBP , Yen and Euro versus rupee.

Src: ET,  Ram Sahgal

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