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Posted by Prof. Sushmita S On 04/02/2022 11:49:57

A Brief Report on Currency Derivatives
Currency derivatives are contracts in which a predetermined quantity of a specific currency pair is traded at a future date. Currency derivatives are comparable to stock and futures options in terms of how they are traded. The underlying resources, on the other hand, are currency pairs such as USDINR or EURINR, not stocks. That is, it is a sort of contract whose value is determined by the underlying asset, the currency.

Currency derivatives are adopted in India to protect enterprises from international currency swings such as the euro, dollar, and yen. If specific currencies are susceptible to frequent imports and exports, corporate societies frequently use these contracts. Top MBA colleges in Bangalore.

Futures and options are indeed the two types of currency derivatives contracts. Both contracts are margin-based, which means traders must deposit a tiny fraction of the contract's value with the exchange as an initial margin. Traders in futures lock in a specific price for a specific currency to purchase or sell at a future date, regardless of the currency's open market price at the moment. Options, on the other hand, grant the right to buy or sell but not the obligation to do so. The trader can choose between a call and a purchase option. The owner of a call option has the option to buy the underlying asset at a predetermined price at a future date but is not compelled to do so. The owner of a put option has the option to sell it.

Currency derivatives are financial tools that aid with market volatility adaptation.  The important benefits are;
 

• Traders can shield themselves from the price volatility of foreign currency exchange rates by combining options and futures to hedge their risk exposure. MBA in digital marketing in Bangalore

• Traders can track the future direction of the currency asset's price movement and take appropriate positions(Speculation).

• Traders can engage in arbitrage, which involves buying on one exchange and selling on another to profit on the price differential between foreign exchanges for a specific currency. A++ Rated MBA college in Bangalore

• Traders typically pay a little margin (5 percent to 10% of the entire contract value) in order to gain access to a larger amount of capital that they would not otherwise have.

Currency derivatives, despite being a crucial tool in modern finance, come with the risk of significant volatility and inaccurate speculation. If currency movement is not correctly speculated, the margin may swiftly drop below minimum levels, necessitating immediate margin top-up. There is a potential that the buyer or seller of currency derivatives contracts, particularly options, will choose not to exercise their rights, resulting in losses for both parties. NAAC accredited MBA college in Bangalore

To summarise, currency trading is one of the most lucrative investment opportunities available to retail investors. The majority of banks and financial institutions trade on an opaque and closed market. Currency derivatives based on foreign exchange are regulated and transparent.  Due to its size, volume, and frequency of trade, currency trading in India is a substantial contributor to the national economy. Because the economy is made up of small and large enterprises, anything that benefits the company immediately benefits the national economy.

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