What is Currency Derivatives?
- 22nd July 2025
- 11:15:00 AM
- 6 min read
Most individuals are aware of mutual funds and stocks, but few understand how to protect themselves from currency movements. Currency trading can help you trade currency pairs.
In the Indian currency derivatives market, just USD 2 billion is traded on the National Stock Exchange (NSE) per day on average.
Read this blog to understand the currency derivatives definition and get more insights on how to start currency trading in India.
Understanding the Concept of Currency Derivatives
Currency derivatives consist of futures or options contracts between two parties, which are regularly traded on stock markets. On a predetermined date and exchange rate, the investor purchases or sells particular units of fixed currency. Importers and exporters primarily utilise these contracts as a hedge against fluctuations in the value of their home currencies.
Example of Currency Derivatives
Let us understand this with an example.
- X, an Indian company, plans to import goods worth USD 100,000 from the United States (US).
- The currency exchange rate is USD 1 = INR 85.
- The total cost of the imported goods will be:
INR (85 x 1,00,000) = INR 85,00,000 or INR 85 lakh
However, X thinks that the USD might strengthen against the INR after four months when they have to make the payment. This can increase their costs.
X enters into a forward contract with a bank to hedge against this risk and agrees to buy USD 100,000 at an exchange rate of USD 1 = INR 85. The contract highlights that the exchange will happen after four months, when X will receive the goods.
- After a month, if the USD appreciates to USD 1 = INR 97, X has to purchase the goods at INR (97 x 1,00,000) = INR 97,00,000 or INR 97 lakh.
- However, X holds a forward contract, and it can still purchase the goods at USD 1 = INR 85, and has to pay INR 85 lakh.
With this currency derivatives trading, X can save INR 12 lakh as it has locked in a favourable rate using a forward contract.
4 Different Types of Currency Derivatives in the Indian Market
Now that you know what is currency derivatives, here are the different types of currency derivatives in the Indian market:
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Currency Futures
Currency futures are contracts that let you purchase and sell an underlying currency on a certain date, just like stock futures. Additionally, the buyer and seller have to set the exchange rate at present.
You have to settle the contract if you keep it open until the specified date. However, in contrast to stock futures, currency futures require you to pay the difference in INR rather than allow you to take delivery of the underlying currency.
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Currency Options
Currency options give you the right but not the obligation to buy or sell a particular amount of currency for another currency. This type of currency derivative can be traded at a predetermined price and at a specific timeframe. Currency options are categorised into two types:
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Call Option
When the underlying currency expires, the buyer holds the option but is not required to purchase it.
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Put Option
When the underlying currency expires, the buyer has the option, but not the obligation, to sell it.
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Currency Swaps
Currency swaps are currency derivatives that can assist in converting a lender’s interest rate from one currency to another. Institutional investors trade this type of derivative over-the-counter (OTC). Both parties can change their interest rates from fixed to floating in this way, and vice versa.
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Currency Forwards
Similar to futures contracts, currency forwards are customisable currency derivatives contracts between two parties. Forwards are traded in OTC and give you the flexibility in contract size and expiration date. Businesses use these currency forwards to hedge against currency fluctuations in international transactions.
Advantages of Trading Currency Derivatives
From hedging to speculating, you can avail many benefits from currency derivatives trading. Here are some of them:
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Hedging
Trading currency futures may help you take a hedging position. This allows you to protect your investments from swings in foreign currencies. Importers, exporters, and institutions also hedge to increase profit and reduce losses.
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Trading
You can also trade currency derivatives contracts to capitalise on short-term gains in forex markets. You can use various strategies to maximise your profit. By opening a trading account with PL Capital Group – Prabhudas Lilladher, you can get customised investment strategies based on your financial goals, time horizon, and risk tolerance.
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Arbitrages
Sometimes traders can make a profit on differences in the prices of a certain currency pair between markets. Currency arbitrage allows the buyer to purchase a currency pair and immediately sell it at a higher rate in another market.
How Can You Trade Currency Derivatives in India?
Want to start trading currency pairings like EUR/INR or USD/INR in India? Follow the steps below to trade in currency derivatives:
Step 1: You must create a currency trading account with a licensed broker in India. You can download the PL Capital application and open a trading account with zero annual maintenance charges.
Step 2: Now activate the currency segment and choose your currency pairings like INR/JPY and INR/USD.
Step 3: Make your first trade.
Final Thoughts
Since trading derivatives has significant risks, it is critical to comprehend all of the details before you go for it. However, investors can take advantage of macroeconomic trends and diversify their portfolios by investigating currency derivatives. With the knowledge of it, you can maximise your investment returns and reduce your losses.
Use the PL Capital trading account to get smart alerts for timely and actionable currency trades.
Frequently Asked Questions
1. What are some common uses of currency derivatives?
Some of the common uses of currency derivatives are trading, hedging to protect investments, and making a profit on differences in the prices of a certain currency pair between markets.
2. What are the differences between currency derivatives and traditional forex trading?
Currency derivatives include contracts with standardised sizes and predetermined terms. Contrarily, forex trading involves OTC transactions in the forex market.
3. Is it free to start a currency trading account?
Yes, brokers in India, like PL Capital, allow you to open a currency trading account for free.
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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
