CURRENCY FUTURES: AN INNOVATION IN CAPITAL MARKET

ABSTRACT

Over time, the foreign exchange market in India achieved some sophistication and vibrancy. However, the volatility in exchange rates remained an issue. With global trade and business increasing exponentially, Indian companies had to find ways of hedging currency risk. The only instruments available were forward, swap and option contracts but all were customized and OTC. However, when the sub-prime crisis hit the US, Europe and other major economies of the world, the exchange rates went away. Indian companies were unable to realize the full value of their business dealing abroad. Worse still, the forward contracts they had entered into for hedging their currency risks themselves turned into risks. To cover the risk involved in currency exchange, the RBI and SEBI jointly formed a committee which recommended starting currency future trading in India, consequently NSE started in dealing currency futures from August, 2008.

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