What is currency trading?
While trade is international, currencies are national. As international transactions are settled in global currencies, usually they are brought/sold for one another and this constitutes ‘currency trading’.
What are the factors that affect the exchange rate of a currency?
A country’s currency exchange rate is typically affected by the supply and demand for the country’s 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 & political scenarios in the country. The level of confidence in the economy of a particular country also influences the currency of that country.
How and why does the demand and supply of a currency increase and decrease?
There are several reasons. A rise in export earnings of a country increases 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 viewpoints of market participants, expectations of national economic performance, confidence in a country’s economy and so on.
What is a currency futures contract?
A currency futures contract is a standardized version of a forward contract that is traded on a regulated exchange. It is an agreement to buy or sell a specified quantity of an underlying currency on a specified date in future at a specified rate (e.g., USD 1 = INR 46.00). (Note: USD is abbreviation for the US Dollar, and INR for the Indian Rupee).
What is the need of currency futures?
Currency futures are needed if your business is influenced by fluctuations in currency exchange rates. If you are in India and are 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. By the time you actually import, the value of the 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 the Indian Rupee has gone up, you earn less in terms of Rupees than you had anticipated. Currency futures help you hedge against these exchange rate risks.
Does the national economy of India need currency futures?
Every business exposed to foreign exchange risk needs to have a facility to hedge against such risk. Exchange-traded currency futures, as on MCX-SX, are a superior tool for such hedging because of greater transparency, liquidity, counter party guarantee and accessibility. Since the economy is made up of businesses of all sizes, anything that is good for business is also good for the national economy.
