Currency Derivatives; MCX

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Context:

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

What are currency derivatives?

  • 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 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 a go-ahead to start cross currency contracts as well on euro-dollar, pound-dollar and dollar-yen.

Why were such derivatives introduced on exchange platforms?

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 mostly 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.

About MCX

  • Multi Commodity Exchange (MCX) as the name suggests is an exchange like BSE and NSE where commodities are traded.
  • It is a platform for commodity traders that facilitate online trading, settlement and clearing of commodity futures transactions, thereby providing a platform for risk management (hedging).
  • It was established in November 2003 under the regulatory framework of FMC (Forward Markets Commission).
  • In 2016, the FMC was merged with SEBIand MCX as an exchange falls under the regulatory purview of SEBI.

Source:TH