What is currency or forex trading? Can a retail investor participate in this investment class? Here’s an overview

Oct 01, 2018 | 1 year ago | Read Time: 3 minutes | By iKnowledge Team

Trading in currency futures takes place in pairs and in India, there are only a few permitted currencies against which the rupee is benchmarked such as the US Dollar, Euro, British Pound and the Yen.

This might be hard to believe but do you know the market for currency trading is much bigger than the combined market for trading in equities and commodities? In fact, more than $5 trillion worth of currencies are traded every day, across the world.

This is because every big corporation in the world has something to do with currencies; being a medium of exchange the velocity of trades in currencies is mind-boggling. Mostly seen as a preserve of institutional investors, ordinary investors are also now making an entry into this market with the intention of investing in different types of financial investments and having a diversified risk portfolio.

What is currency or forex trading? - Aegon Life

What is the currency or the forex market all about?

The currency market that we are talking about is the derivatives market, where people hedge, i.e.  protect any movements in their home currency against other world currencies. In the Indian context, under Reserve Bank of India regulations, Indian investors can trade only in those currencies that are benchmarked against the Indian rupee (INR).

The currency pairs that are allowed are – US Dollar to INR, Euro to INR, British Pound to INR and Japan’s Yen to INR. Trading in currency futures are allowed on the BSE and NSE.

Unlike commodities and stocks, currency trading is done in pairs, since the movement of one is expressed in terms of the other. For example in the case of the US dollar and the Indian rupee, the movement of the latter is against the former, which is the base currency. However, in the case of rupee movements with the Japanese Yen, the Indian rupee is the base currency.

A majority of the trading in currencies occurs for hedging purposes to reduce currency risk. From an Indian point of view, for an importer a rise in the dollar is bad news because it means the importer will have to spend more rupees on buying goods from overseas. If an importer expects the dollar to rise from Rs 67 to Rs 70 in the next three months, he will buy USD/INR futures to the extent of his exposure (or the value of the goods he is importing).

If the dollar does rise as expected, the importer makes a loss on what he has to pay for imports, but that is offset by the profit he makes on the currency futures. For exporters, a fall in the rupee is good news, because they get more rupees to the dollar on their export sales.

How to trade in currencies

What traders generally do is they take a call on the rupee rising or falling against the dollar (or any other currency) and accordingly take positions. For instance, if an investor expects the dollar to strengthen (that is the rupee value against the dollar to rise), then the investor will buy USD/INR futures. Alternatively, if the investor takes a call that the rupee will rise (its absolute value against the dollar falls), then the investor will sell USD/INR futures.

In order to trade in the forex market, an investor will have to open a brokerage account with a dealer or a broker who offers currency trading. The advantage of the currency market is that it is open at all time and because of the different time zones across the world, somewhere some currency will be trading.

However, currency trading is not for everyone. If you do not wish to enter this market and are looking for a lower effort option, consider a low risk investment  cum protection product such as Aegon Life’s iMaximise, It is a unit-linked insurance plan which secures you and your family. It allows you to choose from as many as 6 different funds. You can pick one that best matches your risk-return profile.

II/Sep 2018/4436


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