The rapid pace of globalization has increased cross-border transaction of goods, services and financial products. Despite this trend being in existence from the 1980s, the tempo of progress has picked up in the recent years. With such expansion in global trade, the risk associated with hedging against currency fluctuation has become a grave issue.
Currency markets are the giants in the financial markets as they witness the maximum volume and are highly liquid.
As per the Bank of International Settlements (BIS) Triennial Central Bank Survey 2007, the average daily turnover amounted to $3.2 tn in the April 2007 of which India contributed $34 bn increasing to 0.9% in 2007 from 0.3% in 2004. The recent rupee's appreciation vis-à-vis other currencies has been an area of concern for Indian importers and exporters alike. The exchange rate of the rupee was Rs. 39.57 per US dollar as on January 23, 2008. At this level, the Indian rupee appreciated by 10.2% over its level on March 31, 2007. Over the same period, the rupee appreciated by 10.5% against the pound sterling, 0.4% against the euro and 3.1% against the Chinese yuan, while depreciated by 0.5% against the Japanese yen.
India presently has a menu of products for hedging currency exposure like forwards, swaps and options and continues to add onto its kitty. The latest in the offering is `currency futures'.
Currency futures are standardized contracts traded on a futures exchange, to exchange one currency for another on a certain date in the future, at a specified price. The future date is called the delivery date or final settlement date. The preset price is called the futures price. The price on the delivery date is called the settlement price. Currency future contracts allow investors to hedge against foreign exchange risk. Hence, they are also called FX futures or foreign exchange future contracts. |
