Currency Futures: MCX joins the fray

2008-10-06 15:57:07

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India’s largest commodity bourse, Multi Commodity Exchange of India ( MCX ) will kick start Currency Futures trading from Tuesday.

It is the third bourse in the country to offer this facility. Let’s find out some facts about the MCX and the MCX-SX, which starts live trading from Tuesday.

The MCX may not be as popular as NSE and BSE in India. Primary reason can be attributed to the fact that Indian investors are less aware about commodity investment unlike investors in USA and Europe.

Nevertheless, MCX is the most favorite exchange for the knowledgeable Indian investors who frequently indulge in commodities trading.

MCX, having started its operations in 2003 in the commodities futures trading, has become the top exchange in the commodities trading in India with 85% market share. Globally MCX ranks among the world’s top 10 commodity futures exchanges.

MCX has its alliances with world’s leading commodity exchanges like NYMEX, LME, TOCOM, NYSE Euronext and Chicago Climate Exchange.

MCX is a venture of FTIL (Financial Technologies of India Limited), which is a global leader and super specialist provider in technology IP (Intellectual Property) and domain expertise in financial markets.

Besides MCX, FTIL has established DGCX (Dubai Gold and Commodities Exchange), IEX (Indian Energy Exchange), NSEL (National Spot Exchange of India) and few other commodities exchanges in India and abroad. ODIN, the number 1 trading platform and brokerage solution with 80% market share in India is the product of FTIL.

MCX SE (Stock Exchange) is a venture of FTIL. MCX SE is the second exchange in India after NSE that has been permitted to launch exchange-traded currency futures in India. MCX SE would soon commence currency trading in USD-INR future contract.

It is expected that MCX stock exchange might surpass other exchanges in currency futures trading due to its popularity in commodities trading.

Most actively traded commodities like Gold, Silver, Copper, Crude Oil and Natural Gas track the international prices of NYMEX and LME. USD-INR exchange rate plays a vital role in the balance sheet of commodity traders. Commodity traders would find it convenient to hedge their currency risks with currency futures trading in MCX stock exchange.

How to trade Currency Futures in MCX Stock Exchange:

You can trade in currency futures in MCX stock exchange through members of the exchange after opening a trading account with broker member. As an investor, you will take a view on currency strength over short/medium term. Hedging is a process of covering the risks associated with fluctuations in the exchange rate.

Here’s an example on how does hedging help in covering the risks arising out of exchange rate volatility.

An exporter wants to protect himself from the likely appreciation in Rupee. He has dispatched the consignments on 5th September and he is expecting the payment of $25,000 by December end. Current spot rate of USD-INR is 44.80. How should he go about?

On 5th September sell 25 numbers of USD-INR future contracts (each of $1000) of December month at the prevailing rate of 44.95
On 28th December cover sell position by purchasing 25 contracts of December month at the then prevailing rate of say 44.45.
Simultaneously sell $25,000 (receipt from overseas party) in the spot market at the rate of 44.45
Profit from future contracts = 25,000 x (44.95 – 44.45) = Rs. 12,500
Loss due to currency appreciation from 44.80 in September to 44.45 in December = 25,000 x (44.8 – 44.45) = Rs.8,750

Contracts Specifications (Proposed) of Currency Futures in MCX SE

Underlying	USD – INR
Lot Size	1000 USD
Maturity Period	12 monthly contracts
Exchange Timings	9.00 am to 5.00 pm
Quote price	INR per USD
Initial Margin	As decided by the exchange from time to time based on the Var margining system. Minimum margin shall be at the rate of 1.75% on the first day of trading and at the rate of 1% there after.
Position Limits	At Client Level – Gross open positions of the client across all the contracts shall not exceed 6% of the total open interest or $5 million whichever is higher. At Trading Member Level – Gross open positions of the trading member across all the contracts shall not exceed 15% of the total open interest or $25 million whichever is higher.
Final Settlement	Final settlement would be in INR based on RBI reference rate. The contract would expire on the last working day (excluding Saturdays) of the month.