India Strengthens Exchange Traded Derivatives With Currency Options

India’s aim to develop itself as leading financial hub for Asia is on course as the world’s eleventh largest economy

India’s aim to develop itself as leading financial hub for Asia is on course as the world’s eleventh largest economy allows, MCX,  India’s number 1 exchange to launch exchange traded currency options.  The new options product comes four years after currency futures were first launched in September 2008.

India once a closed economy has done remarkably well to position itself as a technologically advanced trading hub for financial instruments, it boasts 4 commodity exchanges and is home to the most liquid gold contract(s) in terms of contracts traded. In addition the exchange is the worlds largest exchange in silver, 2nd largest in natural gas and 3rd largest in crude oil (number of contracts).

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Currency options have been available on the NSE and United Stock exchange however volumes have been poor. MCX has had fierce competition with rival NSE, when currency futures were first launched traders paid zero commission. The battle continued on until last August when the competition commission forced NSE to start charging commission on currency transactions. TO break into to the currency options market MCX-SX has reduced the tick size to 10 paise, compared to 25 paise each on NSE and USE. This means traders will be able to buy and sell in the segment at a price differential of 10 paise.

The INR has had a tough last 12 months, the BRIC nations currency pair has weakened over 25%.

The INR is currently trading at 55.69 against the greenback.

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The OTC market is still heavily used by corporates to mitigate risk. In December 2010, the RBI issued final guidelines on over-the-counter foreign exchange derivatives. The rules came into effect from February this year with companies with a net worth of 1 billion rupees or greater allowed to enter such contracts.

India is a favoured destination for online FX and CFD brokers, with over 20 million traders in the equities market and commodity trading hitting new peaks FX brokers believe India is the next big market for OTC FX. Alpari UK was one of the first brokers to take an active step forward when they launched their India operations. Prior to them UK’s CMC Markets had a formal tie up with Reliance Money. Saxo Bank has had dealings with Karvy a stock broker in 2004.

In the interbank market banks trade G7 pairs, the major platforms are DB’s Autobahn, 360T and FXall, providers need to be approved by FEDAI in order to offer their platforms (products/ services) to Indian banks and institutional investors.

The central bank made formal announcements against the use of OTC FX for investment purposes. Since 2008 online FX trading has had a mini boom across India, the government has been afraid of people offering false returns and scammers taking advantage of people’s limited understanding of high risk products.

Forex Magnates team wrote a detailed article on how FX options are traded and how traders can benefit from them, available in the Q2 quarterly report 2012.

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