Currency futures to bring India closer to global trends

August 29th, 2008 - 8:06 pm ICT by IANS  

New Delhi, Aug 29 (IANS) Currency futures trading will help bring Indian forex markets more in line with global trends, says a note prepared by MF Global, a US-based broker for exchange-traded futures and options.The note made available to IANS said currency futures trading will help to expand the market share of forex derivatives and the volume of forex markets as a whole.

At present, the average daily turnover of the global forex market is estimated at around $3 trillion.

Of this, spot forex trading volume is $932 billion or 31 percent, and the remaining is contributed by derivatives such as forwards, exchange traded futures, over-the-counter (OTC) options and swaps, the note said.

In India, currently the inter-bank forex market (spot, swap and forwards) has an average daily turnover of $40 billion, of which spot forex trading volume is $20 billion or 50 percent of the forex market volume.

The balance 50 percent is accounted for by derivatives such as swaps and and currency forwards.

Thus, unlike the global forex market where market share is split in the ratio of 30 to 70 between spot and derivative market, the market share between spot and derivative market is split 50:50 in India.

Currency futures trading will boost the Indian forex derivative market share and thus bring the split between spot and derivates more in line with the global trend, the note said.

According to the note, there are several underlying benefits of dollar-rupee futures contracts.

First, dollar-rupee futures is an exchange traded instrument and mark to market obligations are settled on a daily basis, unlike a forward contract, which is an agreement to transact at a forward price on a future date and no money changes hands except on the maturity date.

As the profits or losses in the futures market are collected and paid on a daily basis, the scope for building up of mark to market losses in the books of participants gets limited.

Second, lot size of dollar-rupee futures contract to be launched on the National Stock Exchange (NSE) is $1,000, which is much smaller compared to OTC forward and swap contract, and will enable investors, whether large or small, to participate in the futures market.

Third, dollar-rupee futures contract, like all exchange-traded instruments, eliminates counter-party risk as the clearing corporation guarantees the trades.

Fourth, transactions are executed on a price time priority, ensuring that the best price is available to all categories of market participants irrespective of their size.

And finally, it ensures greater transparency, efficiency, speed and accessibility, the note says.

“Small investors will also benefit because now they have to pay only a margin of about two percent to brokers for derivative deals, but banks charge a margin of 10 percent or more,” said analyst Manoj Krishnan of the Delhi-based Price Investment Management and Research Services.

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