Currency Futures

In: Business and Management

Submitted By fruttu2211
Words 2037
Pages 9
Currency Futures

Introduction:

Globalization and integration of financial markets, coupled with the progressively increasing cross-border flow of funds, have transformed the intensity of market risk, which, in turn, has made the issues relating to hedging of such risk exposures very critical. The economic agents in India currently have a menu of over-the-counter (OTC) products, such as forwards, swaps and options, available to them for hedging their currency risk and the markets for these are quite deep and liquid. However, in the context of growing integration of the Indian economy with the rest of the world, as also the continued development of financial markets, a need has been felt to make available a wider choice of hedging instruments to the market participants to enable them to cope better with their currency risk exposures.
India has been experiencing heightened cross-border flows in recent times with globalization and relaxations in the rules governing external transactions. The flows have been strong on both current and capital accounts. There has also been some increase in volatility in exchange rates due to global imbalances and changing dimensions of the capital flows. According to the Bank for International Settlements (BIS) Triennial Central Bank Survey 2007, the share of India with daily turnover at USD 34 billion (daily average) has increased from 0.3 per cent in 2004 to 0.9 per cent in 2007. The depth in the domestic foreign exchange market is validated by the BIS survey data.
Currently, hedging of foreign exchange risk is possible only on the OTC market using forwards, currency swaps and options. Currency and interest rate swaps are permissible for hedging long - term exposures. The use of these products is subject to certain requirements as laid down in terms of FEMA Notification 25, which normally permits hedging of transactions backed by…...

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