Understanding More About Currency Derivative Trading

Trading stock market in India can be performed through different ways. Some could choose to purchase and sell shares/stock while others can select to trade via derivatives. These basically are said to be financial contracts or instruments that base their value upon spot market price performance. Such underlying market conditions could be market indexes, interest rates, currency exchange rates, equity prices, market securities and credit. These transactions could be of various types like swaps, options, futures, caps, floors, structured debt obligations, deposits, collars, forwards or just any combination. Trading in derivatives in India, generally, takes place on individual/separate derivative exchange or a separate segment present in the current stock exchange.

Derivative Instrument Types that are Traded at NSE

Basically, two types are said to be traded at NSE.

  • Futures: It is an agreement among two parties, for selling or buying a specific asset at particular time at certain price in the future. These are settled in cash and are used in commodities market. They are denominated always in specific currency.
  • Options: It is regarded to be a contract where investor has an option and not an obligation for selling or buying an underlying at future stated dates at pre-determined rates. It can be of two types, viz.
    • Puts: They provide the purchaser with the right to sell a specific quantity of underlying asset at particular rates either before or on pre-determined date.
    • Calls: They provide the purchasers the right for buying a specific quantity of ‘underlying assets’ at a given price, either before or on the pre-decided date.

All option contracts are said to settle in cash.

Understanding More About Currency Derivative Trading

Two derivative contract categories:

  • Exchange traded derivative: Such derivative types are said to be traded via specialized derivative exchanges/other exchanges.
  • OTC (Over the counter) derivatives: Such derivatives do not actually trade upon future exchanges or formal stocks or through centralized counterparty.

Foreign currency market that is stated to be the world’s largest trading market is also called ‘Forex’ or simply ‘FX’ in short. This type of market is based upon currency trading. It is known to trade in currency derivatives, which are financial instruments that are based upon foreign currency.

About Currency Derivatives

They are contract types, where currencies get traded in contract or futures form and can be easily traded as assets within their own rights. The investors, who might select to purchase future contracts especially in currencies, would be purchasing the right for exchanging specific amount of particular commodity at future date. Currencies that are utilized for currency future trading tends to include the following like: EDR (Euro-Indian Rupee), USDINR (US Dollar Indian Rupee), GBPINR (Pound Sterling Indian Rupee) and JYPINR (Japanese Yen Indian Rupee). Exchanges such as SX, MCX-SX and USE offer currency trading within the country.

Benefits from currency derivative trading

  • Hedging
  • Speculation
  • Leverage
  • Arbitrage
  • Trading style

One can easily find more information in regards to be subject from the various blogs and websites that are present on the web. Moreover, knowledge can also be gained from finance related magazines that are sold in the market.

Author’s Bio: The author has been writing articles for a long time and is working for vikson.in. He enjoys writing articles on finance for his readers to make them understand about it.

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