Trading in currency futures is entirely screen based on the NSE, BSE and the MCX. Like when you trade in index futures or stock futures, even in currency futures you need to select the pair you want to trade, the maturity of the contract and whether you want to go long or short on the currency futures pair. When we refer to currency pairs what we need to first understand are the contract specifications and they are different from contract to contract. Let us look at the contract specifications of Rupee Currency Pair and Cross Currency Pairs separately.
Contract Specifications for Rupee Currency Pairs
A Rupee Currency Futures is a contract where one side of the contract is the Indian rupee. These contracts are currently available on four INR pairs i.e., USDINR, EURINR, GBPINR and JPYINR. Of course, the USDINR is the most actively traded pair in India because the dollar is the standard benchmark for trade and investment purposes. The table below captures the key contract specifications of Rupee Currency Futures.
Data Source: NSE
Contract Specifications For Cross Currency Pairs
A Cross Currency Futures is a contract where the Indian rupee is not part of the contract and it is a pair of two foreign currencies. Cross currency contracts were permitted much after the rupee contracts were permitted. These contracts are currently available on 3 cross currency pairs i.e. EURUSD, GBPUSD and USDJPY. Among these contacts, the USDJPY is the most actively traded cross currency pair in India. However, these cross currency pairs are yet to pick up in a big way like the case of rupee pairs. Cross currency pairs are useful for businesses that have receivables and payables in different currencies and are hence exposed to dual currency risk. By dong a cross currency pair, the hedging cost can be reduced substantially. The table below captures the key contract specifications of Cross Currency Futures.
Data Source: NSE
Like in the case of rupee currency pairs, the lot sizes are denominated in amounts of the principal first currency in the pair. For example, the cross pair can be used by a company that is importing from Germany and exporting to the US. In this case, the company needs to protect itself against the appreciation of the Euro and the depreciation of the dollar. Buy going long on a EURUSD cross currency pair, the company can simplify the trade and also reduce the cost of hedging substantially.
Key Concepts Pertaining To Currency Futures Contract Specifications
While most of the concepts pertaining to currency futures are like equity and index futures, there are some unique concepts you need to understand. Here are a few of them.
Base Price: of the futures contracts on the first day shall be the theoretical futures price. On subsequent trading days base price will be previous trading day’s daily settlement price.
Settlement Price: is also called closing price and is calculated as the last half an hour weighted average price of the contract. In case a futures contract is not traded on a day or not traded during the last half hour, a 'theoretical settlement price' will be computed.
Contract tenor: refers to the period when the contract will be available for futures trading, i.e. the cycle” of the contract. The currency futures contracts are available for trading for all maturities from 1 to 12 months.
Open, High, Low, and last traded price: refer to intraday prices and are dynamic in nature. The exchange broadcast keeps disseminating the open, high and low prices on a real time basis. Last traded price is different from the closing price.
Key Players in The Currency Futures Market
Broadly, there are five key players in the currency futures market. Each plays a unique role in the specific market.
- Trading Members (TM): Trading members are members of an authorized Exchange (what we know as brokers). They can trade either on their own account or on behalf of their clients who could be individuals or institutions. Each TM is assigned a unique trading member ID and a unique SEBI registration number.
- Clearing Members (CM): are members of the Clearing Corporation of the exchange (NSCCL for NSE). CMs carry out risk management and confirmation and settlement of participant trades through the trading system.
- Trading-cum-Clearing Member (TCM): can execute trades and also clear trades on their proprietary account and also on behalf of clients. TCMs can clear and settle the trades for their own account and for clients through the Clearing House.
- Professional Clearing Members (PCM): A PCM is a clearing member but not a trading member. Typically, banks and custodians (who cannot become trading members) become PCMs and clear and settle for their trading members and participants.
- Participants: are the clients of a trading member. These participants could be individuals, corporates, HUFs or even mutual funds and FPIs. Normally, participants trade through multiple trading members and settle through a single clearing member.
Understanding Order Types In Currency Futures Trading
Traders can place orders in currency futures based on 3 different conditions viz. (1) Time conditions (2) Price conditions and (3) Miscellaneous conditions. Let us look at sub-categories of these conditions.
Time-based conditions
- Day order: is an order that is valid only for the day on which it is entered. If the order is not executed during the day, the system cancels the order at the end of the day.
- Immediate or Cancel (IOC) order: is an order that is executed as soon as it is released into the system; failing which the order is cancelled. Partial match is possible.
Price based conditions
- Market orders: do not have a specified price and are designed to execute at the best available price. Execution is subject to liquidity. Market Orders work best in trending markets.
- Limit Orders: are designed to buy or sell a defined quantity either at or better than the price. Limit orders are the best way of protecting your trades in highly volatile markets.
- Stop-loss orders: is protection against adverse price movements in a trade. Stop-loss order gets triggered after the market price of the security reaches or crosses a threshold price. For buy trades, stop-loss orders are lower, and for sell trades, the stop-loss orders are placed higher. It restricts the loss in a worst-case scenario.
Miscellaneous conditions
- “PRO” orders: means that the orders are entered on the trading member's own account. This is popularly referred to as proprietary trading wherein the member of the exchange trades as part of treasury operations.
- “CLI” orders: refers to the orders that the trading member enters in the system on behalf of the client. Such orders can be for retail or institutional clients and the broker has to take care of collection of margins.