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Economy

Currency Futures May Be Here Soon

From Mint:

The government could soon allow exchange-traded futures contracts on the rupee-dollar exchange rate in an effort to provide companies with a transparent and simple way of hedging their foreign exchange exposure. The move comes in the wake of losses several firms have incurred on account of buying complex derivatives products, or “exotics”, and the resultant legal battle between them and the banks that sold these products.
Trading on rupee-dollar contracts will be allowed on existing exchanges and will be governed by the capital market regulator, Securities and Exchange Board of India, or Sebi, said a government official familiar with the developments who did not wish to be named.

The official added that this would be extended to other currencies too.

Yay. We will then have a USD-INR product to trade, and perhaps hedge against exposure. It will be useful for speculation as well, and to hedge personal exposure. Imagine that your company gives you stock options in the US market but the dollar is getting flushed down the toilet, you can lock your gains by taking a call option on the USD (you get minimum so many rupees to a USD). But for that the options should allow expiry dates that are reasonably long, say six months to a year or more.

Apart from that, there’s the ability to invest abroad (upto $200,000 per person per year) and then hedge that exposure with the rupee.

We’re starting to get somewhere but not very far. Nifty introduced a “VIX” (a volatility index) which has been useful abroad. But there are no tradeable products (futures or options) on it so there’s not much use of this info right now. Hopefully we will get VIX based futures and options as well. Once it comes I will write a post on how to use it to trade options. But we’re starting to get somewhere, and I hope we continue and get better.

  • Shankar says:

    >Hi Deepak,

    Currently NRIs are offered a product called the “forward currency plan”. Here they can deposit USD towards a 1 yr deposit and get more interest than their FCNR deposit. Ofcourse this is not an off-the-shelf product and there are small windows when the product becomes viable.

    There are two important variables here –
    1. the difference between the spot and forward rate
    2. the instrument in which the converted proceed are invested for a period of 1 year.

    If done right, the fwd currency plan can give upto 8% p.a. to the investor against an FCNR rate of around 4%.

    Incidentally, 4% itself is a good deal … as i assume FCNR rates will come down with the lowering of the USD LIBOR rates.

    Warm Regards
    Shankar