Currency derivatives are exchange-based futures and options contracts in which a currency pair is bought or sold on a pre-fixed price and date in the future. Currency derivatives are different from currency trading, as it allows you to trade the price movements of various types of currency pairs.
Here we talk about the reasons why you should trade currency derivatives in India. But before that, let’s take a brief look at what currency derivatives are in India.
What are Currency Derivatives in India?
If you are thinking of starting your trading journey in currency derivatives in India, you should know the basics. Unlike stock derivatives that use equity as the underlying asset, currency derivatives use different types of currency pairs.
Here are the most popular currency pairs in India.
- Indian Rupee and US Dollar (INR-USD)
- Indian Rupee and Euro (INR-EUR)
- Indian Rupee and Japanese Yen (INR-JPY)
- Indian Rupee and Great Britain Pound (INR-GBP)
In addition to the above, there are three more currency pairs available for trading in India.
- Euro and US Dollars (EUR-USD)
- Great Britain Pound and US Dollars (GBP-USD)
- US Dollars and Japanese Yen (USD-JPY)
Additionally, India has majorly two kinds of currency derivatives at present. These are currency futures and options.
- Currency Futures- These derivative contracts enable the trader to buy or sell currency pairs on a particular date in the future and an exchange price fixed today.
- Currency Options- These call or put contracts provide traders with the right but not the obligation to buy or sell INR-USD currency pairs upon or before expiry.
Among the currency pairs tradable in India, currency options are only available for the INR-USD pair. However, currency futures are available for all the seven pairs listed here.
In recent years, currency trading in derivatives has become easier in India. With registered forex derivatives platforms like Dhan, traders can create an account and start trading currency futures and options quite easily. Now, let’s dive into why you should trade currency derivatives in India.
Why Trade Currency Derivatives in India?
Here are the reasons you should start trading different types of currency pairs in India today:
1. Allows Hedging
Hedging protects against adverse movements in the price of currency pairs. For example, if you have the perspective that a certain currency pair you have exposure to will fall, you can buy a put contract for that pair and hedge the downside risks.
2. Better Profit Opportunities
With the high liquidity feature of the forex market, you make a decent profit from even the smallest price movements. For instance, if you believe that oil prices will rise and will affect India’s import bill, you can buy USD-INR, and reap decent profits when INR depreciates.
3. Benefit of Leverage
Top forex derivatives brokers offer decent leverages for trading currencies. Instead of paying full value for a currency pair like in currency trading, you can buy it fractionally with derivatives based on your outlook to lower your risk and maximize your gain on currency pairs. This improves your purchasing power while trading currency derivatives.
Currency futures and options are great alternatives to traditional currency trading. You can take positions in different types of currency pairs to generate profits from price movements. Dhan provides a feature-rich interface to help you start trading currency derivatives effortlessly.