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Understand the basics of currency market and its structure
Apart from equity, we have another high-potential market that most individuals are not well aware of, which is the growing currency market or the forex market. Here, forex stands for foreign exchange. As the name suggests, the currency trading market in India, is a place of exchange for the trading of international currencies. The participants involved in this market comprise of banks, corporations, central banks, that is the RBI, investment management firms, hedge funds, retail forex brokers, and retail investors like you and me.
The market helps participants to buy, sell or simply speculate and take advantage of currency trading for wealth creation. Based on the growing needs, the Currency Derivative segment was made available on both NSE and BSE from the year 2008. The currency market in India is still evolving, and is steadily picking up pace among small and medium-sized investors. In India, exchanges like the NSE, BSE and MCX offer currency futures and currency options, which are all cash-settled. This means, that currency is not physically settled, or in other words, there is no actual delivery of the currency on expiry. So, currency trading in India refers to currency futures trading. To begin trading in the currency, you need to open a currency trading account with your broker, and deposit a certain amount as the margin amount, to buy currency in your trading account.
Once that is done, you can take either a “long” or “short” position, according to your prudence. In India, the currency contracts must get settled in domestic currency, that is, the Indian rupee or INR. Unlike trading in equity and commodities, wherein only one particular stock or commodity is involved, currency trading involves taking a position in two currencies, known as currency pairs.
That is, USD/INR, EUR/INR, GBP/INR and JPY/INR. A currency pair indicates the value of one currency being quoted against the other. The first currency of the currency pair is called the base currency, and the second one is known as the quote currency. It shows how much of the quote currency is required to buy one unit of the base currency. Simplifying this further, when a currency pair is bought, you buy the base currency and sell the quote currency. T
he bid or buy price shows how much of the quote currency is needed to get one unit of the base currency. On the other hand, when a currency pair is sold, you sell the base currency and receive the quote currency. The ask or sell price for the currency pair indicates how much you will receive in the quote currency for selling one unit of the base currency.
The currency derivative instrument, not only facilitates an additional income avenue, but also, greater flexibility to investors and corporates in India, to hedge against currency fluctuations, especially by corporations having a significant exposure to imports or exports. Though the segment is still in its nascent stage, we anticipate it to occupy a prominent position both in terms of value and volume in the near future.