1. Institute Of Management Development & Research, Pune
Financial Planning and Wealth Management
Writeup on Investment Avenue “Currency Market”
Submitted to: Dr Shruti Nagar Submitted by: Anand Kumar (21)
2. Meaning:
❑ Foreign exchange market is the market in which foreign currencies are
bought and sold.
❑ The buyers and sellers include individuals, firms, foreign exchange
brokers, commercial banks and the central bank.
❑ Like any other market, foreign exchange market is a system, not a place.
The transactions in this market are not confined to only one or few
foreign currencies. In fact, there are a large number of foreign currencies
which are traded, converted and exchanged in the foreign exchange
market.
Facts about Indian Currency Market:
❑ Control by SEBI and RBI
❑ Trading Hours: 9am to 5pm. Globally 24-hour active market
❑ Market is made by Hedgers, Speculators and Arbitragers.
❑ Hedgers are the importers and exporter in Currency Market. They
minimize the risk of currency fluctuation in international market.
❑ Speculators earn money by the volatility of the market. Generally retail
investors participate in this.
❑ It is the world’s largest financial market and has an average daily volume
of about $5 trillion.
3. Currency Pairs trade:
❑ In a currency pair, there are 2 distinct pieces viz. the base currency and
the quotation currency
❑ Currency Pair in India:
▪ USDINR
▪ EURINR
▪ GBPINR
▪ JPYINR
❑ Understanding the quotation currency and base currency.
▪ In the rupee/dollar trade, the USD is normally the base currency
and the INR is the quotation currency. So when we write USD 1 /
INR. = Rs.73, then the USD is the base currency, the INR is the
quotation currency and Rs.73 is the value. The base currency is
always expressed in 1 unit.
Types of Currency Market:
❑ The first one is the spot market or cash market.
❑ The second one is the futures market where currency futures are
traded. In the Indian currency market, futures is the preferred way of
doing trades.
4. How to do forex trading in India?
❑ In India, the NSE and the BSE offer currency futures and also currency
options.
❑ The USD/INR pair is the most liquid contract but other contracts are also
catching up.
❑ The currency futures and currency options operate on the same lines as
the equity and commodity derivatives markets.
❑ Traders who want to take a view on currency can trade currency futures
▪ For example, if investor expect the US dollar to strengthen versus
the INR then he can buy USD/INR futures. Conversely, if investor
expect the INR to appreciate then he can sell USD/INR futures.
Also, the margins on currency trading are much lower than equity
or commodities trading.
❑ Currency futures can be used by companies that have currency risk
❑ Your risk is that if the dollar appreciates from 67 to 70 then you end up
paying higher in rupee terms. So you can hedge your risk by buying
equivalent USD/INR futures
❑ If the dollar appreciates to Rs.70 then the loss on your import payable
will be compensated by your profit on the currency futures position
5. KYC and Platform need
• There is no cash or equity form like we use in Indian stock market, for
trading this currency market.
• Investor need to open a trading account only with a broker & no need to
open a DEMAT account.
• Investor can only trade future & option segments in currency market.
• For trading account investor has to present PAN Card, Photo Id Proof,
Address Proof, Bank Account details, Last six-month statement of bank
account.
Salient features of Future Contract of the USD INR pair
6. Option Contract of the USD INR pair
From the option quote, we know the following –
Option type – Call option
Strike – 73.5000
Spot price (see RBI reference rate) – 73.6629
Expiry Date – 13th
March 2020
Position – Long
Premium – 0.5900 (quoted in INR)
7. We know the lot size is $1000
Premium to be paid = lot size * premium
= 1000 * 0.5900
= 590
In a Nutshell:
❑ Less expensive
❑ Highly liquid in the near-term at least
❑ For a margin maintained with the broker, investors can leverage their
position based on risk appetite
❑ no counterparty default risk (settled through clearing houses.
❑ low taxation
❑ highly regulated market
❑ Organizations with exposure to foreign exchange (through exports or
imports) but do not enjoy facilities with banks to hedge the same, future
exchanges provide a platform to hedge underlying risks
8. Recommendation
So first of all, we have understand who can invest in Currency market in India.
Hedgers: Hedgers are the one who participate in the international trade.
Because of this trade the risk of currency fluctuation can minimize the profit
and lead to loss. So, hedgers are the one involves in the currency market to
minimize the risk of currency fluctuation. They take the help of Hedge Fund
Companies or Investment Bank as they are more specialized to do so. These
companies charge commission for this activity.
So, for the hedgers it is very important for them to participate in the currency
market with the help of Hedge Fund Companies.
Speculators: Talking about the speculators, they are the one who does not
bother about minimizing risk. They just try to make profits out of the
fluctuations in the currency. They take position by speculating about the
movement of currency.
For investing in this market, a great understanding of macro economics is
required. Currency fluctuation is based out of many factors which happens
across the globe.
So, in my view it is very risky investment avenue hence it is rewarding. I would
suggest to invest only if the risk appetite is high.
Also, I can say as per consumer life cycle Alpha and Bravo are the one who can
take high risk. So, they may invest in currency market if they are aware and
knowledgeable to understand macroeconomics.
9. Famous Currency Traders:
George Soros - George Soros rose to international fame in 1992. He is known
as the trader who broke the Bank of England. Soros made a profit of $1 billion
after short selling $10 billion in British pound sterling (GBP).
Andrew Krieger - Andrew Krieger became famous as a successful trader at
Banker's Trust where the company rewarded him by increasing his capital limit
to $700 million compared to the standard $50 million limit. He made a lot of
profit from the Oct. 19, 1987 crash, also known as Black Monday. He also made
money by trading the New Zealand Dollar.
