What is Currency Trading?
Currency trading is a platform where different currency pairs are being traded (Buy and Sell) or in other terms the mechanism of buying and selling of different currency pairs is called currency trading.
The currency market, also known as the FOREX market is the biggest investment market across the world and continuously growing every year. In India also the currency market is growing every year and is one of the top investment platforms with wide popularity.
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Basics of Currency Trading In India
Currency trading in India wasn’t that popular since the beginning, but with the introduction of currency futures the demand increases rapidly. So in this post we are going to learn the basics of currency trading in India.
How Does The Currency Market Work in India?
In India investors can buy or sell derivatives only and currency futures are cash-settled. This implies currency trading in India is actually not physically settled which means there is no delivery of the currency on expiry. So currency trade in India means currency future trading.
You can trade in currency future in exchanges like NSE, BSE, and MCX-SX in India. The currency market hour is usually 9.00 am to 5.00 pm. In order to trade in the currency market you need to open a currency trading account from an Indian broker.
Currencies are always traded in pairs. In order to determine the currency price, you always need another currency to compare, where one is the base currency and the other one is the quote currency.
The first currency of the currency pair is the base currency and the other one is quote currency or counter currency. In India among the four pairs of currency USD/INR, EUR/INR, GBP/INR, and JPY/INR, in all of them quote currency is INR and USD (US Dollar), EUR (Euro), GBP (Pound) and JPY (Japanese Yen) are the base currencies.
What Drives The Currency Market In India?
Values of currencies change regularly and many traders buying and selling a different set of currencies. As a result of which currency of some countries goes higher and some move slower.
Currency price movement also depends upon global news and global events like GDP growth figures, job data, commodity prices, and more like that. Domestic news like monetary policy, currency intervention by RBI, political stability, and other economic data drives the currency market in India.
Currency Derivatives in India
Like equity f&o, the currency market has a future and option segment through the exchange. These currency f&o contracts are used for hedging and trading purposes. Investors can trade in different contracts of currencies depending upon different expiry.
In India you can trade four currency pairs, which are USD/INR, GBP/INR, EUR/INR, and JPY/INR. The major and most traded currency pair in India is USD/INR where a lot of this contract has a value of $1000. Traders have to pay 2 to 3 percent margin to the broker for trading in these currency pairs.
Currency futures are the exchange-based futures contracts for currencies that have a specific price at a future date. The exchange rate for currency futures is derived from the spot rates of the currency pair. The currency futures are mostly used to hedge the risk of getting payments in a foreign currency.
Like other option contracts, the currency option contract gives the buyer the right, but not the obligation, to buy or sell a certain currency at a specific expiry date and at a specific price.
What Are The Risks Involved In Currency Trading?
The risks involved in currency trading are
- Exchange Rate Risk: Exchange rate risk is a currency trading risk that exists when a financial transaction of a country is denominated in a currency other than the domestic currency of the country.
- Interest Rate Risk: With the change in the domestic interest rate the value of currency changes dramatically.
- Credit Risk: Credit risk involves the nonpayment of outstanding currency position by the counter-party voluntary/involuntary. Although, the risk is quite low for individual traders.
- Liquidity Risk: Lower liquidity leads the gap between bid and asks price, which may lead to some loss for the trader.
- Transactional Risk: Error in communication or network failure or some misunderstanding may lead to a loss in the currency trade, the risk involved in it is called transactional risk.
- Marginal or Leverage Risk: Unlike equity, currency trading offers a higher margin, and traders can take a large number of positions because of that. A small change in currency trade may lead to some huge losses.
The Benefits of Currency Trading In India
As compared to other investment platform currency market is quite big and margin requirement and volatility is very low. Due to the low margin requirement it is very easy to hedge and creating a certain position.
The liquidity risk in the currency market is also quite low and most of the counters are highly liquid, so entry and exit are also not an issue.
Despite all this feature, there are certain risk involves in all kind of tradings. So, currency trading with proper knowledge is quite profitable, but without proper knowledge it may lead you to losses.