Introduction to Currency Trading
Currency trading is the act of buying and selling international currencies. Very often, banks and financial trading institutions engage in the act of currency trading. Individual investors can also engage in currency trading, attempting to benefit from variations in the exchange rate of the currencies. The currency trading (FOREX) market is the biggest and the fastest growing market in the world economy.
Any currency can be traded on the international level. However, in India only 4 major currencies are traded against the Indian Rupee. Currency trading is always done in pairs.
For Example :-
- US Dollar – Indian Rupee (USDINR),
- Euro – Indian Rupee (EURINR),
- British Pound – Indian Rupee (GBPINR),
- Japanese Yen – Indian Rupee (JPYINR).
Terms of Currency Trading :-
Exchange RateIt’s a price – the number of units of one nation’s currency that must be given in order to get one unit of another nation’s currency.
Spot PriceThe price at which a currency trades in the spot market. In the case of USD/INR, spot value is T + 2.
Futures PriceThe price at which the futures contract trades in the futures market.
Contract CycleThe currency futures contracts on the SEBI recognised exchanges have one-month, two-month, and three-month.
Final Settlement DateThe last business day of the month will be termed the Final Settlement date of each contract.
Expiry Date :-It is the date specified in the futures contract. All contracts expire on the last working day of the contract months. The last day for the trading of the contract shall be two working days prior to the final settlement date or value date.
- USD/INR it is USD 1000,
- EUR/INR it is EUR 1000,
- GBP/INR it is GBP 1000 and
- in case of JPY/INR it is JPY 100,000.
Cost of Carry
The relationship between futures prices and spot prices can be summarised in terms of what is known as the cost of carry. This measures (in commodity markets) the storage cost plus the interest that is paid to finance or ‘carry’ the asset till delivery less the income earned on the asset. For currency derivatives carry cost is the rate of interest. Marking-to-Market :- In the futures market, at the end of each trading day, the margin account is adjusted to reflect the investor’s gain or loss depending upon the futures closing price which is known as marking-to-market.
Short and Long Positions :
Short positions are taken when a trader sells currency in anticipation of a downturn in price. Making this move allows the investor to benefit from a decline. Long positions are taken when a trader buys a currency at a low price in anticipation of selling it later for more. Making these moves allows the investor to benefit from changing market prices.
What is Margin?
The amount that must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin. Margin is a performance bond that insures against trading losses. Margin requirements in the FX marketplace allow you to hold positions much larger than the asset value of your account, the trade is executed only if there are sufficient margin funds in your account. The Forex Capital Management trading system calculates cash on hand necessary to cover current positions, and provides this information to you in real time. If funds in your account fall below margin requirements, the system will close all open positions. This prevents your account from falling below your available equity, which is a key protection in this volatile, fast moving marketplace.
Who can trade in Currency Futures markets in India?
Any 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.