currency derivatives trading: Is it your cup of tea really to trade in currency derivatives?


By DK Aggarwal


In this uncertain world, when most of the global central banks have kept their interest rates low for a longer period of time, the most attractive avenue in financial markets is turning out to be forex trading. When major central banks remain on the same page, volatility in tradable forex pairs reduces substantially, making it fruitful for small traders who want to dabble in it.

Admittedly, currency trading requires one to dive deeper into various aspects of monetary and fiscal policies of the economy for the currency one is dealing with. The opportunities in forex trading are immense based on the round-the-clock trading window in various time zones across the world. But can there be a suitable way to build a proper venture in forex trading, or is it really difficult to find an optimum solution?

There is no certain template to achieve success in forex trading, but one’s ability to understand various monetary policy tools can provide some edge to implement your trading strategies in the short term. Having said that, price action in the rupee in last four months is showing an upside momentum after the RBI Governor took comfort in the rupee appreciation.

On the contrary, there are challenges of doing forex trading in India, as our currency derivatives market window is open only from 9 am to 5 pm, which hardly captures the liquidity window for mid-London and early New York sessions. Plus, we have only four rupee pairs to trade against numerous direct USD and non-USD pairs traded worldwide.

Finally, the major challenge of getting into currency derivatives is the volume it attracts on a daily basis. The big chunk of it goes to forex hedging and into merchandise trade in forward and spot markets. The volume-based turnover in the spot market can change the daily and weekly trends of the currency futures, notably in the USD-INR pair, which is the most tradable currency pair in India.

Despite these challenges, volumes in the currency segment of Indian exchanges have risen substantially since inception. Additionally, the USD-INR pair contracts provide tremendous opportunities to customise one’s currency trades. On top of it, liquidity in near-month contracts is now sufficient to absorb big orders without distorting bid-ask spreads. That creates an attraction option to trade financial instruments, and with timely information and ability to see through the price actions, one can make a great deal of money in currency derivatives in the long term.

(DK Aggarwal is the CMD of SMC Investment and Advisors)





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