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Disclaimer: We does not sell, advertise, or facilitate the sale of any books or physical products.
A currency derivative is a financial contract between a buyer and seller, with its value derived from the underlying asset — the currency amount.
It typically involves a future contract specifying the exchange rate at which one currency will be converted into another on a predetermined future date.
Foreign exchange derivatives in India are less active than interest rate derivatives, despite being present for a longer period.
The most commonly used Over-the-Counter (OTC) instruments are currency forwards and swaps.
Market usage includes:
(i) Importers, exporters, and banks using the rupee forward market to hedge foreign currency exposure.
(ii) Liquidity and turnover are growing, but contracts are primarily short-term — typically under one year.
(iii) In a currency swap, banks or corporations may convert rupee-denominated debt into another currency (often the US dollar or Japanese yen), and vice versa.
(iv) OTC currency options trading remains relatively inactive.
Currently, there are no exchange-traded currency derivatives available in India.
The currency futures market in India was active during 2010–11.
In March 2011, the average daily turnover across NSE, MCX-SX, and USE reached US$ 8.0 billion, up from US$ 7.1 billion in March 2010.
Increased globalisation has amplified foreign exchange exposure and risk for Indian firms and individuals.
This has led the Reserve Bank of India (RBI) to introduce instruments for hedging exchange rate risk.
Current permissions for Indian residents include:
(i) Trading in futures contracts for four currency pairs on recognised stock exchanges.
(ii) Introduction of plain vanilla currency options on the US Dollar/Rupee spot exchange rate.
The exchange-traded currency options market functions under guidelines issued by both the RBI and the Securities and Exchange Board of India (SEBI).
Regulatory easing for Foreign Institutional Investors (FIIs) includes:
(i) Permission to cancel and rebook forward contracts up to 10% of their portfolio’s market value at the beginning of the financial year.
(ii) This limit was previously restricted to only 2%.
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