What is Forex?

Foreign exchange is the simultaneous buying of one currency and selling of another. Currencies are traded through a broker or dealer and are executed in currency pairs. For example: the Euro and the US Dollar (EUR/USD) or the British Pound and the Japanese Yen (GBP/JPY). The Foreign Exchange Market (Forex) is the largest financial market in the world, with a daily volume of over $4 trillion. This is more than three times the total amount of the stocks and futures markets combined. Unlike other financial markets, the Forex spot market has neither a physical location nor a central exchange. It operates through an electronic network of banks, corporations, and individuals trading one currency for another. The lack of a physical exchange enables the Forex market to operate on a 24-hour basis, spanning from one time zone to another across the major financial centers. This fact - that there is no centralized exchange - is important to keep in mind as it permeates all aspects of the Forex experience.

Benefits of Trading in Currency Market

• Low Commissions: Brokerage fees are very low as the market is highly competitive.
• No Middlemen : Futures/Options currency trading does away with the middleman and allows clients to interact directly on the exchange platform.
• Standardized Lot Size : In the futures markets, exchanges determine lot or contract sizes which are fixed in nature. This allows traders to trade in multiple lots.
• Low Transaction Cost : The retail transaction cost (the bid/ask spread) is typically less than 0.1% under normal market conditions. In large deals, the spread could be as low as 0.07%.
• High Liquidity : With an average trading volume of over $4 trillion per day, Forex market has high liquidity. It means that a trader can enter or exit the market at will in almost any market condition.
• Instant Transactions:This is a very advantageous by-product of high liquidity.
• Low Margin, High Leverage: These factors increase the potential for higher profits (and losses).
• Online Access: The big boom in Forex came with the advent of online trading platforms.
• Interbank Market: The backbone of the Forex market consists of a global network of dealers. They are mainly major commercial banks that communicate and trade with one another and with their clients through electronic networks and by telephone. There is no organized exchange to serve as a central location to facilitate transactions the way the New York Stock Exchange serves the equity markets. The Forex market operates in a manner similar to that of the NASDAQ market in the United States. Thus, it is also referred to as an over-the counter (OTC) market.
• Self-regulatory: The Forex market is so vast and has so many participants that no single entity, not even a Central Bank, can control the market price for an extended period. Even interventions by mighty Central Banks are becoming increasingly ineffectual and short-lived. Thus, Central Banks are becoming less and less inclined to intervene and manipulate currency prices.
• No Insider Trading: Because of the Forex market's size and non-centralized nature, there is virtually no chance for ill effects caused by insider trading. Fraud possibilities, at least against the system as a whole, are significantly less than in any other financial instruments.
• Limited Regulation: There is limited governmental influence via regulation in the Forex markets, primarily because there is no centralized location or exchange.

Product Specification

Contract Specification Underlying Rate of exchange between 1 USD & INR Pair USD/INR, EUR/INR, GBP/INR, JPY/INR Contract Months 12 consecutive calendar months i.e. a view up to 1 year in future can be taken Expiration date and time / Last trading day & time At 12 noon, two working days prior to the last Mumbai Interbank Settlement day of the month Min Price fluctuation / Tick size 0.25 paise or INR 0.0025 Settlement Daily Interim MTM settlement Final settlement Cash settled in INR Based on daily closing price of the contract Based on LTDs RBI reference rate Margin required for 1 lot USD/INR 1.75% on the first day & 1% thereafter Market timings 9:00 am to 5:00 pm

Indian Currency Futures Market – Present Status

Currency Futures Trading was launched in India on 29th August, 2008 on NSE. 

NSE & MCX’SX are the major 2 exchanges presently. “United Stock Exchange of India” is the upcoming exchange promoted by Bank of India, Federal Bank, MMTC & Jaypee Capital along with 9 other banks. 

The FX market in India is regulated by The Foreign Exchange Management Act, 1999 or FEMA, 

Presently Daily Turnover on both exchanges averages Rs. 35000 crores. 

Banks are active participants on the exchanges. NRIs & FIIs are not permitted to trade as of now. 

Currency markets offer investors a step into the world of Forex. The global increase in trade and foreign investments has led to inter-connection of many national economies. This and the resulting fluctuations in exchange rates, has created a huge international market for Forex rendering investors another exciting avenue for trading. 

The Forex market offers unmatched potential for profitable trading in any market condition or any stage of the business cycle.

Mistakes are Painful