USD-Rupee Futures in India
The long and eager wait of traders, derivatives experts and many others is over; NSE began
trading of the Rupee futures on its platform beginning on Friday 29th August 2008. A Reserve
Bank of India (RBI) internal working group last November recommended these futures be
introduced. The step earmarks the introduction of world’s most traded derivative instrument in
India. This was first of the two steps that SEBI has been planning towards introduction of
derivative instruments in India. Interest Rate derivatives have been approved and we should
soon have them trading on the Indian bourses. This article is a reality check on the relevance of
the instrument in India.
What is a Currency Future
A currency future, also FX future or foreign exchange future, is a futures contract to exchange
one currency for another at a specified date in the future at a price (exchange rate) that is fixed
on the purchase date. Currency Futures are generally traded in ‘pairs’ e.g. USD/EUR or
USD/YEN. A combination of Currency futures can be used to operate in non-standard pairs.
Pricing
The pricing of a currency futures contract is completely determined by the prevailing spot rate
and interest rates. Otherwise, investors would be able to arbitrage the difference between the
futures and spot prices. The futures price is given by:
where:
F = futures price
S = spot price
rT = interest rate of the term currency
rB = interest rate of the base currency
T = tenor
Users of Currency Futures
Currency Future is a derivative instrument that can be used by hedgers, speculators, and
arbitrageurs.
A Hedger uses the instrument to reduce risk by locking on to a future exchange rate and
mitigate the risks ...