What is a currency derivative?

Derivatives are contracts or products which do not have any independent value and rather derive their value from an underlying asset. Currency derivatives are derivatives wherein the underlying asset is currency value. In this financial contract, the buyer and seller agree to exchange two currencies at an agreed rate, quantity and at a specific future time-period.

Trading in Currency Derivative in India

Internationally, the currency trading market is at a mature stage and holds a significant market share. Currency trading in India is relatively at a nascent stage. However, in the recent past they have witnessed intensified interest and activities, thanks to the developments in the Indian forex segment.

NSE was the first stock exchange in India to receive SEBI’s approval (in-principal) to set up a currency derivative segment. The currency futures trading platform was launched in August 2008. Currency options trading was launched in October 2010. Cross currency F&O trading (such as GBP-USD, EUR-USD, and USD-JPY) were launched in February 2018. There are two ways of currency derivative trading:

• Currency Futures trading

  Currency futures are legally binding contracts which have to be executed on or before a specific date. The parties have to trade a specific currency pair at a pre-decided exchange rate and quantity.

• Currency Options trading

  Exchange traded currency options offer a good amount of flexibility while hedging. They give the buyer the right to trade (buy or sell) a certain currency at a particular exchange rate before or till a given date. So, you can profit from favorable movements in the forex rates, by not exercising the option. The seller gets a premium in exchange for the buyer’s right to decide.

• The basics

  Get yourself acclimatized with the currency trading basics, before you invest your hard-earned money.

• Your trading style

  Every investor has a unique trading style (aligned to his/her risk profile). Before you start trading in currency derivatives, you should understand your style and risk quotient.

• A good broker

  The right broking service provider plays a crucial role in your trading success. The broker will share regular updates from the currency market and help you make the right decisions at the right time. TradeSmart has helped over 85000+ customers in the last two decades in their investment journey. Given our technological, analytical and market knowledge prowess, you are bound to stay one step ahead of others.

• Your limits

  Before beginning your currency trade, you should lay down the entry and exit points. This will help you exit at the right point in case the situation becomes unfavorable.