Currency Futures Trading In India

Bh. L Mohanraju

Abstract


Indian Rupee has been witnessing highly volatile trends during the recent past primarily driven by the unstable investment flows into and out of the country. These high volatilities not only exposed the vulnerability of Rupee but also emphasised the need for appropriate risk management measures. While OTC forwards have widely been used for covering the price risk in foreign exchange market in India, introduction of exchange traded currency futures has given new opportunity for hedging. However, early studies indicated there is no notable shift in hedging positions from OTC to exchange traded futures due to the standardisation of contracts in terms of time of maturity, size etc., In this context, an attempt is made to study the effectiveness of futures as an alternative choice for hedging the price risk in foreign exchange markets. Further, an attempt also made to study for the presence of time varying risk premium in the Indian currency futures markets. Results indicated that the hedging effectiveness of currency futures is significantly lower than that of OTC forwards. The study of basis indicated that the UIP holds at shorter maturities


Keywords


Derivatives, OTC, currency futures, interest rate parity, basis, time varying risk premia.

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References


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