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What is Currency Derivative Trading and What are Its Merits?

Nov 20th 2015 at 5:21 AM

Currency derivative refers to the Future and the Option contracts with the aid of which one can buy or sell the currency pair at some future date. The option is very similar to the stock future but it is mainly the currency pair which is dealt with. With the Future Contract, one currency may be exchanged for the other. The currency derivative trading may be done in Euro, US Dollar, Japanese Yen and the Great Britain Pounds. For currency future, the asset you need to trade is the currency unlike the equity futures where the traded asset is the equity share. Currency derivative has become a very efficient and attractive way to manage the risk. There are various benefits that may be enjoyed by trading currency derivative.

Hedging the potential losses in trading:

Currency derivative allows you to protect the foreign exchange market exposure and also to hedge the potential losses if you take up the relevant steps. If you need to make the USD payments on some future dates, you may easily hedge the foreign exchange exposure and buy the US Dollars today and also simultaneously fix the rate on the spot. For those, who think that the value of the USDINR may get reduced can utilize the feature of hedging. Even the exporters can hedge the future Receivable if they sense that the future amount may reduce. This way, the borrowers may hedge the FCY or the foreign currency loan for the principal payments and the interest. If you are a residential Indian, you can hedge the offshore investment.

Short term speculation made easy:

By using the currency Futures, you can also speculate the market and predict its movement on a short term basis and invest accordingly. For example, if you think that the price of oil will rise, you may buy the USD INR hoping  that the INR is sure to depreciate. In contrast to this, if you sense that the value of INR will increase, you may try and sell out the USDINR.

The power of leveraging:

Trading in the currency derivative is possible by paying only a margin % amount on the total traded value or the trading amount. This is possible only through currency derivative trading.

How to reap profits with currency derivative?

It is now possible to make great profits by taking the fullest advantage of the exchange rate of the particular currency in the different markets. Different exchange rates can bring good profit.

What are the various products you can trade through the currency derivative?

In the currency derivative segment, one can trade the following products:

  • Carry forward is such a product that allows one to take both the Options and the Future positions with the margin % charged which is defined by the exchange.
  • In case of Intraday, you can only take the Future Position. You need to square off the position by the end of the day.

Author Resource:- The Author is a professional writer, presently writing trading in futures in India.

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