What is currency trading?
Currency trading is the act of buying and selling international currencies for example USD-EUR or USD-YEN. 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 market is bigger than stock and commodity combined and every day more than U.S. $3 trillion in currencies change hands in a highly professional interbank market, in which electronic trading platforms link currency traders from banks across the world directly. FX markets are effectively open 24 hours a day thanks to global cooperation among currency traders. At the end of each business day in Asia, traders pass their open currency positions on to their colleagues in Europe, who – at the end of their business day – pass their open positions on to American traders, who just begin their working day and pass positions on to Asia at the end of their business day. And there, the circle begins anew. Currency market is by far the most liquid market at least for the main currency pair.
Currency trading terminology
The exchange rate is a price – the number of units of one nation’s currency that must be surrendered in order to acquire one unit of another nation’s currency.
Various terminologies in currency market: Spot price: The price at which a currency trades in the spot market. In the case of USD/INR, spot value is T + 2.
Futures price: The price at which the futures contract trades in the futures market.
Contract cycle: The currency futures contracts on the SEBI recognized exchanges have one-month, two-month, and three-month up to twelve-month expiry cycles. Hence, these exchanges will have 12 contracts outstanding at any given point in time.
Final settlement date: The last business day of the month will be termed the Value date/ 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 (excluding Saturdays) 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.
Contract size: In the case of 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. ( Ref. RBI Circular: RBI/2009-10/290, dated 19th January, by which RBI has allowed trade in EUR/INR, JPY/INR and GBP/INR pairs.). There are also other currency pair which are traded in larger lots.
Basis: Basis can be defined as the futures price minus the spot price. In a normal market, basis will be positive. Futures prices normally exceed spot prices.
Initial 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. For currency trading, the requirement are very low making it highly leveraged market and a small move could wipe your whole deposit.
Mark-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. Depending on the profit and loss, the investors have to replenish the account to main minimum margin.
Can anyone 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 but trading in INR dominated currency is not very popular as the market is not very liquid and the spread are higher than traders would like. Most of the trader end up trading in foreign currency pairs by passing the RBI rules as they are not very strictly enforced.
Which currency pairs are listed?
Any currency can be traded on the international level but as per the ruling of RBI, Indian national cannot trade in foreign currency from India. But RBI policy does allow investor to trade in INR currency pairs and the main pairs are
USDINR is by far the biggest trading pair in India.
Which are the Exchanges used?
The commonly used exchanges on the national level are – Multi Commodity Exchange (MCX- SX) National Stock Exchange (NSE) The most commonly used exchange on the international level – COMEX Who are the Regulators of the Market The currency market is regulated jointly by the Reserve Bank of India (RBI) and Securities & Exchange Board of India (SEBI).