Basics of a dollar-rupee futures contract.

The rupee has depreciated to below 70 against the US dollarNSE -1.99 %. The depreciation makes items like petrol, diesel, gold and a host of other items costlier for us. Exchanges like NSE, BSE have launched currency derivatives segment which allows you to punt or hedge against rupee risk. Here are the basics of the dollar-rupee futures 

1. What is a dollar-rupee futures contract? 

A dollar-rupee futures contract allows you to buy or sell the dollar at a predetermined price for delivery on a future date. In India, exchange traded currency futures are cash settled in rupees. 

2. Who regulates this segment? 

Sebi, along with RBI.

The USD-INR futures near month contract closed at 71.22 on Friday. It was down 18 paise from Thursday, which means the dollar weakened or the rupee gained by 18 paise to the dollar. Now, if you feel the rupee will weaken further, or the dollar will strengthen, in the short term you buy a dollar -rupee futures contract expiring on Aug 28. Assume the buy price was Rs 71.22. If before or by expiry the dollar strengthens by say 50 paise, you make money. If it weakens by the same amount, you lose money since you were long USD-INR. The contract size is 1,000 USD. So a 50 paise strengthening of the dollar translates into contract value changing by 0.50X1,000= Rs 500. If the dollar weakens, you lose Rs 500. This doesn’t factor in brokerage and relevant taxes, like STT, GST on brokerage, etc. 

4. How does one take exposure? 

Your equity broker must have taken registration for offering currency segment trading. Like equity F&O, you have to place a margin, which is a fraction of the contract cost to trade. This margin could differ from broker to broker, based on client net worth. Normally, it is 5 per cent overnight. So if dollar is Rs 71.22 and the contract is 1,000 USD , the value is Rs 71,220 and the margin will be Rs 3,561. A Rs 500 gain is a 14 per cent return.

5. How many contracts can I take exposure to? 

Client limit is fixed at 6 per cent of total open, buy-sell positions or $10 million, whichever is higher. As this is leveraged trading, loss or gain could be huge. 

6. Who are the participants? 

Foreign portfolio investors, clients, non-bank stock brokers and banks.