Written by chinmoymukherjee. Posted in Business Management on 04 February 2010.
Hot 6188 hits 0 favoured

 

The introduction of currency derivatives in India is a landmark decision which is likely to be a boon for importers, exporters and companies with foreign exchange exposure. These derivative products have a wide range with their special features suiting to the needs and requirements of the individuals. As currency derivative is new to India, it is time to have a broad understanding of them which are mostly couched in jargons and technical terms. Thus the very subject raises a kind of aversion for the common people. The currency derivatives are contracts just like any other derivatives viz., Stock, Index etc. Unlike the stock, the underlying in this case is currencies. The value of the currencies determine the values of the currency derivatives.

 

A s it is universally accepted that market risks are ones which can not eliminated in absolute terms. But their management is perfectly possible. The currency derivatives are efficient tools for management of risks in money and forex markets. The need to protect the exposure against unforeseen and unpredictable movement in currency and interest rates have led to the emergence of these kinds of derivatives. Thus external borrowings or receivables or payments in foreign currencies come within the purview of management under it .As we all know the exporters and importers incur huge obligations in terms of foreign currencies and they can guard their interest by buying appropriate products.

 

Derivatives which are based on currency exchange rates are known as forward contracts, forward contracts contain stipulation as to the rate at which exchange takes place between two currencies at a future date. This form derivatives are extensively resorted by the exporters and importers to secure their positions by making contracts with their respective banks. It is important to note that on the appointed date the contracts have to be honoured and the difference between the market rate prevailing on the appointed date and the contracted rate has to be coughed up and if the parties agree to a postponement to a future date the differentical has to be squared up.

 

There is a basic difference between a forward contract and an option. A forward contract is characterized by an obligation as well as a right. But in the case of an option no obligation to perform exists. Thus the buyer of a forward contract can make an upfront gain or loss all depending on the situation of the currency viz., whether it is in premium or discount. But a buyer of a currency option can decide to ignore as he is not placed under any obligation.

 

 


chinmoymukherjee

Author: chinmoymukherjee

244 119401 10
  • No comments found
Powered by CjBlog

Latest Articles

The Chinese Government has, early this week, devalued its currency by 1-2%. This has caused surprise and shock in world capital and stock markets. The
The aim of writing this articles is to throw some light on a critical and less known topic called ' Lead poisoning'. I believe lead is silent killer because
Also known as the “City of Joy” and the “Cultural Hub of India”, Kolkata is amongst few cities in India to still retain its old world charm. Located

Categories

Related Articles

Indian soaps remind us of three things, high drama, lot of make-up and ever going on baseless elongated episodes. Most of us are bored to death by watching
We have to accept that the Television in houses acts a main role for all people. The real situation is that people will live even without food but not
T.V viewing is not a usual phenomenon, if we observe in counties like India where people spend their leisure time in it. As varieties of
The vast number of TV channels in English, Hindi and vernacular languages has brought a wide variety of programs into our drawing rooms. Today the viewer
Where would you find a precise explanation for what species of bird the Bank, Common and Jungle are? If you say it’s Myna, then you are either trying