Currency Trading in India
India is ranked high in the list of fast growing economies in the world. The robust and stable financial environment in India makes it an ideal place for international businesses to carry out their operations with good profitability. Moreover, India is among the top countries of the world that attracts foreign direct investment. This makes India a very exciting place for carrying out currency trading as there are buyers and sellers of the Indian currency from across the globe. In this article, we will learn everything about currency trading and its related concepts.
Basic Concept of Currency Trading
Foreign currency is often known a Forex Trading. You can indulge in currency trading in India through various Indian exchanges like NSE, BSE and MSEI. The RBI guidelines suggest that every Indian individual and financial institution can indulge in forex trading via currency pairs. The different types of currency pairs include EURINR, GBPINR, USDINR and JYPINR. You can trade in any of the currency pairs through a broker who has a membership of any of the Indian Exchange.
As you are now aware of the basic concept of currency trading, let us learn the meaning of currency trading.
What is Currency Trading?
When individual, corporate, banks or financial institutions engage themselves in the act of buying or selling international currencies it is known as currency trading. The aim of this trading is to take the benefit of the fluctuations in the exchange rates of the various currencies. It is similar to equity trading where you can buy or sell the currency pair according to the expected price movements.
Let us now learn about the common terms that are used while currency trading.
Currency Trading Basics
If you start trading in the currency, there are certain terms that you must be aware of. Below are the terms with their meaning that every currency trader must know.
• Future Price
Future price is the rate at which future contract trade in the futures market.
• Cycle of Contract
SEBI recognizes 12 outstanding contracts at any point in time in a year. The contract can be for one month, two months or up to 12 expiry cycle.
• Expiry Date
The working future contracts expire on a specific date i.e. prior to two working days from the last business day of the contract month. Two days prior to the final settlement date or value date, shall be the last day of the trading contract.
• Spread (tick)
Difference between bid and ask price is called spread (tick). In case of currency futures market minimum spread is 0.0025 which fourth part of one paise.
• Settlement Date
The last business day of the month is the final settlement date of every contract.
• Size of Contract
The contract size of the contract is as follows; JPY/INR it is JPY 100,000; EUR/INR it is EUR 1000; GBP/INR it is GBP 1000 and in case of USD/INR it is USD 1000.
When the future price is deducted from the spot price it is termed as a basis. In the future market, the price is more than the spot price. Basis is positive in the normal market.
• Initial Margin
When you trade in currency for the first time through future contracts, you must deposit a margin amount with the broker known as initial margin.
• Cost of Carry
The future price and spot price relationship can be termed as the cost of carry. The rate of interest is the carry cost in the derivatives market. The cost of carry measures the storage cost after adding interest paid to finance or carry the asset delivery minus the income earned on the asset.
• Marking to Market
Depending upon the closing price in the future’s market, the account of the investor is adjusted according to the profit or loss. This adjustment is known as marking to market.
After learning the basic terms related to currency trading in India, let us learn about the meaning of long and short positions.
Meaning of Short and Long Positions
Short and long positions are two positions that a trader can take in the futures currency market. When the trader expects the currency price to fall in the futures market, he takes a short position by selling it. When the price declines, the trader covers his positions by purchasing from the market at a lower price. Similarly, when the trader expects the price of the currency to rise in the futures market, he takes a long position by purchasing from the market. On the price rise, the trader sells the long currency contract and books the profit. Such fluctuating prices helps the trader to trade and book profits. As the foreign currency is traded in pairs, the trader can take a short position in one currency and go long in another currency depending on the expected future price movement.
Currency has always been an important tool for hedging and arbitraging. In this section of the article, we will learn about both the terms and its significance in currency trading.
Currency as Hedging Tool
Currency is used as a hedging tool by firms and individuals to cover themselves against the potential risk of adverse events resulting in fluctuations of exchange rates. Hedging is important especially for exporters and importers who receive and make payments in foreign currencies. Any adverse fluctuation in the currency can impact their profitability. Therefore, currency hedging protects investors who are exposed to currency fluctuations and eliminate the losses that may happen. Hedging is done by entering into a forward agreement with the dealers.
Currency as Arbitrage Trading Tool
Many times there are price discrepancies between different market instruments across different exchanges or trading platforms. Arbitrage takes the benefit of such difference in the prices in the global markets. Like for example, $1 can have a different value in the Indian trading market and Singapore trading market. Arbitrage takes advantage of such price difference and the trader books profit using these opportunities. Arbitrage is one of the safest and risk-free trading practise.
Now let us have a look at the factors that affect the pricing in the foreign exchange market.
Factors Affecting Foreign Exchange Market
There are three main economic variables that affect the foreign exchange market in India: Inflation, Interest Rates and GDP numbers. There are many other indicators like trade deficit, unemployment rate, fiscal deficit, etc. that affect the currency market. Sometimes even the news flow has an impact on the prices of the currency market and decide the direction in which the currency price will go.
Let us now learn about some of the currency market facts that are essential for every trader to know.
Facts about Currency Market
- The trading of currency futures is possible only on the exchange like Bombay Stock Exchange, National stock exchange, Metropolitan Stock Exchange Limited.
- The trading hours for currency is from 9 a.m. to 5:00 p.m. from Monday to Friday.
- For trading in the currency market, there is no requirement to open a demat account. You can simply open a trading account with the broker and trade in the currency market.
- There are only two segments in the currency market: future and options segments.
When it comes to currency trading, it is advisable to seek the services of leading brokers for fast and hassle free trading experience.IndiaNivesh is one of the leading brokers in India offering affordable brokerage rates. Our currency research team provide clients with regular currency trading tips. We also provide online currency trading in India.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.