Theoretically, a currency futures is a contract to exchange one currency for another at a specified date in the future at a price that is fixed in advance. The system was originally designed to protect against the risk of volatile currencies, especially for businesses having receipts or outgo of foreign currency as a part of their routine operations. However, today, currency futures are most commonly used by traders to speculate on the rate of the dollar and other currencies at a future date.
Who can profit from it?
Suppose an edible oil importer wants to import edible oil worth $100,000 and places his import order on January 15, 2010, with the delivery date being four months ahead in April. At the time when the contract is placed, one US dollar was worth, say, Rs 45.50 in the spot market. Now, suppose the rupee depreciates to Rs 45.75 per US dollar when the payment is due in April 2010, the value of the payment for the importer goes up correspondingly. If the importer locks in a particular rate for April 2010 (by buying a currency futures contract) he is not affected by this rise in rate.
The same is true for a jeweller who is exporting gold jewellery, and fears an appreciating rupee. But we repeat, currently the product is mostly being used by individual traders who make money every time their prediction on the rate of the dollar is proved right.
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