A Very Easy Guide To Currency Trading In India


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A Very Easy Guide To Currency Trading In India

Like the name suggests, currency trading is the activity of trading currencies to earn profits or to hedge existing positions. Essentially what a currency trader does is trades one currency, like the USD for another currency, like the INR, to capitalise on the price volatility. That said, currency trading is no cakewalk—it’s complex and only investors with a pronounced understanding of financial instruments should engage in this type of trading. 

However, if you’re a beginner, there is nothing wrong with learning about currency trading; just don’t start trading until you have a strong hold of the nuances. So, this is a very easy to follow guide to introduce you to currency trading in India. 

5 Things You Should Know About Currency Trading 

1. Traders trade currency in the currency markets, also  called the foreign exchange or forex markets. That said, there are two types of currency markets: the spot markets and the currency derivatives markets. If you are here, reading this article, you’re probably interested in online currency trading—you’re interested in the currency derivatives markets.

2. In India currency trading takes place over three authorised, regulated currency exchanges in India: The NSE (National Stock Exchange), BSE (Bombay Stock Exchange), and the MSE (Metropolitan Stock Exchange). These three exchanges are regulated by SEBI (Securities and Exchange Board of India).

3. In terms of the currencies you can trade on the exchanges, there are four currency pairs

  1. USD/INR
  2. EUR/INR
  3. GBP/INR
  4. JPY/INR

4. Next, if you want to trade currencies you will require a currency trading account. You can open a currency account with a registered currency broker. If you already have a demat account with a reputed broker, all you may have to do is activate the currency segment. 

5. Lastly, trading in the currency market occurs through the trading of derivative contracts or currency derivatives—like futures and options. So, if you wish to trade currency in the forex market, you understand these two instruments. 

Understanding Currency Derivatives 

When you introduce derivatives to the picture, things get serious; they get complex. But to put it simply, a derivative contract takes its value from an underlying asset; the asset could be a stock, a commodity, or in the case of currencies—a currency pair like the GBP/INR.With these contracts, traders can buy or sell currencies on a future date at a predetermined price. 

There are four types of currency derivatives contracts: futures, options, forwards, and swaps. That said, over the currency exchanges, as a retail trader, you can trade futures and options. The best thing you could do right now if you are unfamiliar with these two types of contracts—and the derivative segment in general—is to go, study these instruments first. That said, here’s the gist. 

Currency Futures: These derivative instruments offer you the opportunity to either purchase or sell a predetermined quantity of an underlying asset on a future date at a set exchange rate. With futures: Once you hold onto the contract until the prearranged date, you’re obliged to settle it. 

However, unlike stock futures, currency futures don’t necessitate taking possession of the underlying currency. Instead, you’re required to settle the difference in Indian Rupees. While speculators actively indulge in trading currency futures, they are likely to close their positions before the contract’s expiry.

Currency Options: Likewise, currency options work in a similar fashion; the main difference is that, unlike futures where both parties are obliged to carry out the transaction, here—the option buyer decides whether or not they want to go ahead and settle the contract on its expiry. 

In other words, the option buyer has the right to buy or sell a specific quantity of the underlying asset on a future date at a predetermined price. That is because there are two types of option contacts:

  1. Calls: Call buyers can buy the underlying asset at predetermined prices.
  2. Puts: Put buyers can Sell the underlying asset at predetermined prices.

However, since the currency derivatives are settled in cash—you either receive the profits in INR or you pay INR if you incur losses. 

2 Reasons Why You Could Trade Currency Derivatives 

The two main reasons why traders trade in the currency market is to hedge their investments or to speculate and earn profits.

Hedging: Investors use currency derivatives as hedging instruments to protect their investments from foreign currency fluctuations. Equity investments may underperform when the US Dollar is surging in value. 

Speculating: On the other hand, some traders who are confident in their risk management abilities, may speculate and earn profits from fluctuations in the value of currencies. 

Conclusion 

In conclusion, currency trading is not for beginners since it requires a high level of skill, but beginners are welcome to learn about it.

  • Currencies can be traded over three exchanges: NSE, BSE, and MSE.
  • The currency pairs trade in India are:USD/INR, EUR/INR, GBP/INR, and JPY/INR.
  • You require a currency account to trade these currency pairs.
  • Currency traders take place through derivative contracts.