Mastering Forex Futures and Options Trading on NSE: Strategies and Insights

– All hail the king of Forex

Outside of India, the largest market that traders partake in is the Foreign Exchange (Forex) Futures market. From individual to corporate investors, everyone enters this market. On closer examination, one will see that the dominant currency futures traded are –

  1.     Euro against the US Dollar – EUR USD
  2.     GBP against the US Dollar – GBP USD also called ‘The Cable.’
  3. US Dollar against the Japanese Yen – USD JPY

Previously, if you wished to trade any foreign currency pairs, you needed an account with a foreign broker, likely based in Cyprus or the Isle of Man. Funds had to be wired to the broker’s bank account, and trading was dependent on their rate. As there was no regulatory framework in India this could often be questionable.

No longer any of these steps are necessary. The National Stock Exchange, with comprehensive regulatory oversight, has finally enabled the trading of cross-currency futures and options through its platform.

In this chapter, I will provide details on how to structure currency futures when trading on NSE, making it easier for you to trade.

Take a look at this BIS survey – https://www.bis.org/statistics/rpfx19_fx.htm – and you will discover that an amazing 88% of international Forex trades are associated with the US Dollar, of which 50% are composed of EUR-USD, USD-JPY and GBP-USD. Get a good sense of how big these transactions are!

Anyway, let us brush through some basics before we proceed.

When looking at a currency pair, like EUR/USD, the first one is known as the Base Currency and the second referred to as the Quote Currency. All currency pairs are quoted in terms of their Quote Currency.

The EUR/USD exchange rate of 1.23421 shows that one Euro equals 1.23421 US Dollars.

Have a look at the table below –

Also, here is a typical order book, assume this is for EUR USD,

If you desire to purchase EUR USD, you will be paying USD 1.2431 for 1 EUR. To sell, you would be ready to offer 1 EUR in exchange for 1.2429 USD.

– The Futures Contracts

NSE has recently introduced both futures and options for international currencies. While it might take some time for the options to gain traction, I anticipate that the near month futures will be attractive to traders instantly.

The lot size of the three currency pairs is set to 1000 units of the base currency. This means that…

It is essential to remember the lot size convention, and you will become aware of its importance further on.

The minimum price action that can be traded on the exchange is 0.0001 for EUR/USD and GBP/USD, as well as 0.01 for USD/JPY.

12 contracts can be traded each month, and the near-month ones will terminate two days prior to the last trading day of that month.

·        A Future Trade

The P&L for cross-currency trades will be stated in the quote currency, as opposed to normal equity, commodities and currencies traded within India that are expressed in INR. To get a better understanding of this concept, let us look at an example for each of these three categories.

The Profit and Loss for the position is converted to Indian Rupees (INR) at the end of the trading day, using the Reference rate released by RBI at 12.30 PM. The conversion rates for EURUSD and GBPUSD will be USDINR and USDJPY with JPYINR, respectively.

For positions held open, the ‘marked to market’ settlement will be at the daily settlement price (calculated as a weighted average of the last 30 minutes’ trading).

·        The Options Contract

Options contracts, like those already traded on the exchange for USDINR, feature these contract specifications.

Option expiry style – European

Premium – Quoted in the quote currency (USD for GBPUSD EURUSD and JPY for USD JPY)

Contract cycle – There will be 3 monthly and 3 quarterly contracts. There will be three continuous monthly contracts, followed by a quarterly contract every 3 months.

Strikes available – 12 In the Money, 12 Out of the Money, and 1 Near the money option. So this is roughly 25 strikes available for you to pick and choose from.

·        Expiry

Near-month contracts will expire two days prior to the last day of trading for the month and be settled at their conclusive settlement price at 12.30 PM.

The last transaction rate of the currency pair shall be used to calculate its cross-currency value with reference to Indian Rupee. This shall make up the ultimate settlement rate.

At the end of the contract period, futures will be pegged to the final settlement price and paid out in cash within two days.

The intrinsic value of all in-the-money contracts will be calculated at the final settlement price. Let us understand this with an example.

·        Margins

All positions taken on contracts traded shall require an initial margin of 2% of the contract’s value plus an extreme loss margin of 1%. Margin blocked will be in Indian Rupees, however the currency traded will be quoted in either USD or JPY; and so the margin blocked will be exchanged to this quotation. Trades executed before 2:00 PM shall use the reference rate from the preceding trading day to determine margins, whilst after this time the current trading day’s reference rate will apply.

·        Calendar Spreads

A calendar spread involves taking a futures position in one expiry month and balancing it out with an offsetting position in another. The exchange determines the margins needed to cover the spread.