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    Arrow Currency futures allow investors a wide range of hedging

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    [DOWN]The Indian market seems to be finally moving away from its obsession with equities to newer financial products that not only expand the basket of
    assets but also provide hedging avenues for the domestic investor. While the commodities futures
    market is now five-years old and has captured a significant attention of retail investors, itís the turn of the currency futures. In this regard, futures with the USD-INR (exchange rate of Indian rupee against the US dollar) as the underlying commenced trading on local exchanges, NSE and MCX-SX , in the second half of 2008. Further, earlier this month futures on more currency pairs, namely EUR-INR , GBP-INR and JPY-INR have been introduced for trading on these exchanges. Since the introduction of the USDINR futures in August 2008, the turnover of these instruments on both exchanges has grown 50 times to about $3 billion from $60 million.

    Why tradable

    Besides the futures on USD-INR , for the other currency pairs that have been introduced recently, the initial margin money ranges from Rs 1,300-3 ,500 per lot, depending on the volatility and the liquidity for the respective pair. Such an affordable margin requirement and a considerably small lot or contract size make these instruments a reasonable prospect for traders as well as emerging companies that have a significant business exposure to the countries of the respective currency in terms of revenue

    The open interest of the recently-introduced futures on three currency pairs represents a rising interest among traders. As can be seen from the first chart, since its inception, the open interest of the February future of the three currency pairs have more than trebled in three weeks.

    Traders may also utilise these futures to trade on derived currency pairs. For example, if a trader is holding a view on the future direction of EUR-USD (exchange rate of euro against the US dollar), he can initiate a simultaneous contra-position on futures of EUR-INR and USD-INR .

    The world of listed derivatives

    Globally the FX market is the biggest financial market, with an average daily turnover of the traditional foreign exchange segment being $3.2 trillion as on April 2007 according to the latest data released by Bank for International Settlements (BIS). The traditional segment of this market includes spot transactions, outright forwards as well as foreign exchange swaps that take place at the over-the-counter (OTC) or unorganised exchange where the counter-party risk is not guaranteed.

    On the other hand, according to the latest estimate, the global turnover of the foreign exchange derivative instruments traded on organised exchanges for the quarter ended September 2009 stood at about $7 trillion. According to various estimates, trading on organised exchanges accounts for just about 7-10 % of the total daily turnover of all forex markets and indicates the global size of the market.



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