A new era in the history of Indian Financial Markets is going to start from next month with the introduction of Currency Futures trading on exchanges. India is the one of the few countries having not tried the exchange traded currency futures and options till now. Currency futures were traded in India in the OTC market, where banks and financials institutions were permitted to trade on or on behalf of their clients. The latest move to have exchange traded currency futures market in India will have positive impacts on exporters and importers to a large extend. As mentioned earlier OTC trades are carried through the institutions, they charge excess money as service charge. After the introduction of currency derivatives in an organized exchange exporters, importers, hedgers, arbitrageurs, speculators and even the small retail participants can also have the opportunity to trade themselves and can trade according to their will and wish.

Currency futures in India will be introduced in $ 1000 lot size. Exporters who are expecting the dollar receivables can hedge the currency risk in their business by selling the currency futures. On the other hand an importer likes to buy the currency futures in anticipation of an appreciation in rupee dollar rates.

It is also helpful to the stock market traders and commodity market traders. The risks associated with IT stocks can be partially eliminated through proper currency hedging. If the Rupee depreciates the IT stocks will move up and vise versa.

Correlation that exists between Gold, Crude and Infosys with Rupee:

Investors who are holding the refinery stocks can take hedge positions in the currency futures markets. Apart from this, currency futures are interest rate sensitive. Due to this if an investor would like to reduce interest rate risk in the Government securities and Bonds, he can hedge the risks through the currency futures trading.

Traders in the commodity markets are always disturbed by the unusual movements in currency prices, which will not be a serious issue after the introduction of the exchange traded currency futures. Crude prices normally will increase if the dollar prices fall and vise versa.

Currency futures market can be a speculators paradise, because of small movements in the currency due to lower volatility comparing with the stocks. The currency futures trading in India starts at 9 A.M and closes at 5 P.M. But international OTC markets rates are available for traders instantaneously through various websites which will be helpful to traders who can take counter hedge positions in other underlings.

Currency fluctuations have direct and indirect impacts on stock prices, commodity prices, Bond prices and interest rate sensitive instruments. A proper knowledge on the futures will reduce the risk associated with currency of an investor or the corporate to a great extent. According to my estimates we may see highly liquid market in India, where volumes may quadruple in the initial months itself. The retail participation would be encouraged by conducting seminars on the proper hedging of the asset risk.