MCX plans currency derivatives foray

The Multi Commodity Exchange of India (MCX), the country’s largest commodity bourse in terms of market share, plans to enter the currency derivatives segment.

The exchange has been mulling an entry in the currency arena for a while now and the idea has even been discussed among the board of directors who are not averse to the idea, said a person familiar with the matter.

Currency derivatives are exchange-based futures and options contracts that allow one to hedge against currency movements.

Simply put, one can use a currency future contract to exchange one currency for an another at a future date at a price decided on the day of the purchase of the contract.

In India, one can use such derivative contracts to hedge against currencies like the dollar, euro, U.K. pound, and yen. Corporates, especially those with a significant exposure to imports or exports, use these contracts to hedge against their exposure to a certain currency.

While all such currency contracts are cash-settled in rupees, the Securities and Exchange Board of India (SEBI), early this year, gave the go-ahead to start cross currency contracts as well on euro-dollar, pound-dollar and dollar-yen.

Prior to the introduction of currency derivatives on exchanges, there was only the OTC – over the counter – market to hedge currency risks and where forward contracts were negotiated and entered into. It was kind of an opaque and closed market where most banks and financial institutions traded. Exchange-based currency derivatives segment is a regulated and transparent market that can be used by small businesses and even individuals to hedge their currency risks.

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