INDIVIDUALS TO GET OPPORTUNITY FOR HEDGING FOREIGN CURRENCY RISKS FROM 29 AUGUST 2008
The authorities have decided to introduce currency futures in recognized stock exchanges in India and the NSE is the first exchange to receive such permission. The operations will go live from Friday 29 August 2008. Currency futures are standardised foreign exchange contracts traded on recognised stock exchanges, for buying or selling one currency against another on a specified future date at a specified price.
To begin with only USD-INR contracts will be allowed to be traded and the minimum size of the currency futures contract has been fixed at $1,000. The contracts shall be quoted and settled in Indian Rupees – settlement price being the Reserve Bank's Reference Rate. Only ‘persons resident in India’ have been permitted to participate.
This move to allow both companies and individuals to buy exchange-traded futures contracts on the rupee-dollar exchange rates is seen as an attempt on the part of the authorities to bring about better price discovery in foreign currency markets. It may be recalled that the move was initiated jointly by RBI and SEBI through their Standing Technical Committee. According to RBI “..wider hedging opportunities could enhance the flexibility for the residents to manage their currency risk dynamically..”
The proposed arrangement will provide companies with a transparent and simple way of hedging their foreign exchange exposures and is particularly significant considering the fact that several companies have suffered losses on currency hedges in the recent past. The so-called over the counter (OTC) transactions so far resorted to by these companies, lack transparency and can not be said to reflect true prices. Some studies show that 85% of price discovery in global foreign exchange markets is on account of futures markets even if forward markets (OTC) account for most of the trade volume.
Now parents paying for their children’s overseas education, students raising funds for themselves, persons getting remittances from abroad, and even the outbound traveller can benefit from this facility.
Contributed by:
Prof Bikramjit Sen
(Globsyn Business School)
Source:
The authorities have decided to introduce currency futures in recognized stock exchanges in India and the NSE is the first exchange to receive such permission. The operations will go live from Friday 29 August 2008. Currency futures are standardised foreign exchange contracts traded on recognised stock exchanges, for buying or selling one currency against another on a specified future date at a specified price.
To begin with only USD-INR contracts will be allowed to be traded and the minimum size of the currency futures contract has been fixed at $1,000. The contracts shall be quoted and settled in Indian Rupees – settlement price being the Reserve Bank's Reference Rate. Only ‘persons resident in India’ have been permitted to participate.
This move to allow both companies and individuals to buy exchange-traded futures contracts on the rupee-dollar exchange rates is seen as an attempt on the part of the authorities to bring about better price discovery in foreign currency markets. It may be recalled that the move was initiated jointly by RBI and SEBI through their Standing Technical Committee. According to RBI “..wider hedging opportunities could enhance the flexibility for the residents to manage their currency risk dynamically..”
The proposed arrangement will provide companies with a transparent and simple way of hedging their foreign exchange exposures and is particularly significant considering the fact that several companies have suffered losses on currency hedges in the recent past. The so-called over the counter (OTC) transactions so far resorted to by these companies, lack transparency and can not be said to reflect true prices. Some studies show that 85% of price discovery in global foreign exchange markets is on account of futures markets even if forward markets (OTC) account for most of the trade volume.
Now parents paying for their children’s overseas education, students raising funds for themselves, persons getting remittances from abroad, and even the outbound traveller can benefit from this facility.
Contributed by:
Prof Bikramjit Sen
(Globsyn Business School)
Source:
http://www.thehindubusinessline.com/2008/08/21/stories/2008082152670100.htm
http://www.livemint.com/2008/06/03113134/Sebi-to-come-out-with-currency.html
http://www.livemint.com/2008/06/03113134/Sebi-to-come-out-with-currency.html
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