Currency trading is the act of buying and selling international currencies.
For example USD-EUR or USD-YEN. Frequently, Financial trading & Banks institutions engage in the act of currency trading. Individual investors can also invest in currency trading, attempting to benefit from variations in the exchange rate of the currencies.
Now these days, The currency markets present a good investment opportunity. However, investors should trade only after a thorough understanding of how they work. In options, the risk is lower because the loss is limited to the premium paid.
But investors need to know how puts and calls work and whether the premium being paid for an option is feasible. It's advisable to take a course on forex derivatives offered by currency exchanges and associations.
1). Spot price :- The price at which a currency trades in the spot market. In the case of USD/INR, spot value is T + 2.
2). Future price :- The price at which the futures contract trades in the futures market.
3). 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.
4). Final settlement date: :- The last business day of the month will be termed the Value date/ Final Settlement date of each contract.
5). 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.
6). 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.)
7). 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.
8). Cost of carry :- The relationship between futures prices and spot prices can be summarized in terms of what is known as the cost of carry. This measures (in commodity markets) the storage cost plus the interest that is paid to finance or ‘carry’ the asset till delivery less the income earned on the asset. For currency derivatives carry cost is the rate of interest.
9). 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.
10). Marking-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.
Any currency can be traded on the international level. However, on the Multi Commodity Exchange (MCX- SX), only 4 major currencies are traded against the Indian Rupee. - USDINR, - EURINR, - GBPINR, - JPYINR
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