InvestorQ : Can you throw some light on how retail investors and also corporates can benefit from currency trading?
Mahil Khan made post

Can you throw some light on how retail investors and also corporates can benefit from currency trading?

Answer
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Abhisha Yadav answered.
1 year ago


Traders who want to take a view on currency can trade currency futures. For example if you expect the US dollar to strengthen versus the INR then you can buy USD/INR futures. Conversely, if you expect the INR to appreciate then you can sell USD/INR futures. Also, the margins on currency trading are much lower than equity or commodities trading. This makes less of your capital tied up in trades. Even individuals can hedge their currency risk in case they have their children studying abroad by purchasing currency options / futures.

Let us now turn to how corporates and businesses can use currency options. Like in case of commodity futures, currency futures can be used by companies that have currency risk. Let us assume that you are an importer who has an amount of $5 million payable in dollars after 3 months. You can hedge this risk by buying USD/INR pair. This is how it works… You have a payable of $5 million in March 2018. Your risk is that if the dollar appreciates from 67 to 70 then you end up paying higher in rupee terms. So you can hedge your risk by buying equivalent USD/INR futures. If the dollar appreciates to Rs.70 then the loss on your import payable will be compensated by your profit on the currency futures position. For example, if you an exposure of $1 million then you can get a perfect hedge with 1000 lots of US-INR pair since the lot size is $1000. That is how currency trading in India works.