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Q. What is Forex? |
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Any currency other than the local currency which is used in settling international
transactions (export, import) is called foreign currency. The system of trading
in and converting the currency of one country into that of another currency is referred
to as foreign exchange (Forex).
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Q. What are the factors affect the exchange rate of a currency? |
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A countries currency exchange rate is typically affected by supply and demand for
the countries currency in the international foreign exchange market. The demand
and supply dynamics is principally influenced by factors like interest rates, inflation,
trade balance and economic and political scenario of the country. The level of confidence
in the economy of a particular country also influences the currency of that country. |
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Q. How and why does the demand and supply of a currency increase and decrease ? |
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There are several reasons. A rise in export earning of the country increase 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
view points of the market participants, expectations of national economic performance,
confidence in a country's economy and so on. |
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Q. What is a currency futures contract? |
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A currency futures contract is the standardized version of a forward contract that
is traded on the regulated exchanges. It is an agreement to buy or sell a specified
quantity of an underlying currency on a specified in future at specified rate (e.g.,
USD 1= INR 44.00). |
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Q. Why do we need currency futures? |
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We need currency futures if our business is influenced by fluctuations in currency
exchange rates. If you are in India and importing something, you have done the costing
of your imports on the basis of a certain exchange rate between the Indian Rupee
and the relevant foreign currency (usually, the US Dollar or the EURO). By the time
you actually import, the value of Indian Rupee may have gone down and you may lose
out on your income in terms of Indian Rupees by paying higher. On the contrary,
if you are exporting something and the value of Indian Rupee have gone up, you earn
less in terms of Rupee than you had anticipated. Currency futures helps you hedge
against these exchange rate risks. |
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Q. Why exchange traded futures? What's wrong with currency forward market that has
been existing in India for a long time? |
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The exchange-traded futures, as compared to OTC forwards, serve the same economic
purpose, yet differ in fundamental ways. Exchange traded contracts are standardized.
In an exchange traded scenario where the market lot is fixed at much lesser size
than the OTC market, equitable opportunities is provided to all classes of investors
whether large or small to participate in the futures market. The other advantages
of an exchange traded market would be greater transparency, efficiency and accessibility.
The counterparty risk (credit risk) in futures contract is eliminated by the presence
of a clearing house / corporation, which by assuming counterparty guarantee, eliminates
default risk.
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Q. Who can participate in a currency futures market? |
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An resident Indian or company including banks, and financial institutions can participate
in the futures market. However at present, Foreign Institutional Investors (FIIs)
and Non Resident Indians (NRIs) are not permitted to participate in currency futures
market. |
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Q. What are the trading hours for currency derivatives? |
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The timings as provided by National Stock Exchange (NSE) of India is 9:00 hrs to
17:00 hrs IST from Monday to Friday. |
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Q. In how many currencies can I trade? |
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At present, the SEBI has given the approval in trading cross currency contract of
US Dollar-Indian Rupee. The market participant can trade in this contract as if
right now. |
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Q. How many currency futures contracts are available for trading? |
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There are 12 near month currency futures contracts available on NSE & each contract
end on last business day of the respective month. |
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Q. What is the minimum contract size of the USD/INR futures contract? |
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The minimum contract size of the USD/INR futures contract is USD 1000. |
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Q. Can I take physical delivery of currency? |
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No, the current currency derivative market required contracts to be settled in cash
and the settlement prices of the contract would be RBI’s reference rate on the last
trading day. |
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Q. In which currency are the USD/INR contracts settled? |
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They are settled in cash in Indian Rupees.
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Q. What is the last trading day of the USD/INR futures contract? |
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The last trading day of a futures contract shall be two working days prior to the
last working day of the month. The settlement price is RBI's reference rate on last
trading day. |
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Q. Which are the regulatory bodies in Indian currency derivative markets? |
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In India, the currency derivative market falls under the purview of Security Exchange
Board of India (SEBI). Indian Rupee trades in a managed floating rate regime and
thus RBI intervention is also seen at time. Besides, the bye-laws of respective
Exchange Platform will also apply. |
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Q. Do I need to open up a new DEMAT account and a new trading account with SIHL
for currency futures? |
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A new Demat Account is not required. Further as the currency future contract is
based on NSE platform, the existing SIHL equity client are required to fill up a
new contract agreement known as KYC form however the client code would be the same
as their equity client code. On the contrary, new SIHL client or the existing SIHL
Commodity Client are required to open up a new trading account by filling up KYC
form and they will be given a new client code for currency trading.
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Q. What is a hedge? |
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Hedge is an investment position taken in order to protect oneself from the risk
of an unfavorable price move in a currency. |
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Q. Why one must hedge his foreign currency Risk? |
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• To mitigate Exchange rate risk: Fluctuations in the exchange rate of currencies
give rise to exchange rate risk. As the time gap between finalizing an export/import
order and receiving/making payment against it widens, the possibility of fluctuation
of exchange rate rises. A hedge helps in protecting businesses from unfavorable
fluctuations. • To avail the following benefits: It brings certainty in business-
you would know the precise exchange rate at which your receivables/payables will
be converted. Helps in estimating receipts and payments-once you are aware of one
side on the P/L you can plan the other. Business is immune to any further movement
in currency markets, thus Relieving itself of the exercise of tracking currency
market.
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