Currency futures – Definition
A futures contract is a contract traded on an exchange, and it is a standardized contract, to buy or sell a certain underlying asset or an instrument at a certain date in the future, at a specified price. When the underlying asset is a commodity, e.g. Gold or Silver and oil, the contract is termed a “commodity futures contract”. When the underlying asset is an equity share, e.g. Reliance Industries Ltd., ONGC, the contract is termed a “Equity futures contract”. When the underlying is an currency exchange rate, the contract is termed a “currency futures contract”. Both parties of the futures contract must fulfill their responsibilities on the settlement date.
Currency futures are a linear product, and calculating profits or losses on these instruments is similar to calculating profits or losses on Index futures. In determining profits and losses in futures trading, it is essential to know both the contract size (the number of currency units being traded) and also the “tick” value.
A tick is the minimum changeable price. The market price will change only in multiples of the tick. Tick values differ for different currency pairs and different underlyings. For e.g. in the case of the USDINR currency futures contract the tick size shall be 0.25 paise (1/4 paise) or 0.0025 Rupee. To demonstrate how a move of one tick affects the price, imagine a trader buys a contract (USD 1000 being the value of each contract) at Rs. 64.7500. One tick move on this contract will translate to Rs.64.7475 or Rs.64.7525 depending on the direction of market movement. The contract amount (or “market lot”) is the minimum amount that can be traded. Therefore, the profit/loss associated with change of one tick is: tick x contract amount. The value of one tick on each USDINR contract is Rupees 2.50 (1000 X 0.0025). So if a trader buys 5 contracts and the price moves up by 4 ticks, he makes Rupees 50.00 (= 5 X 4 X 2.5) (Note: The above examples do not include transaction charges/ taxes and any other fees, which are essential for calculating final profit and loss).
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