Basics of Forex Trading

Currencies can be used in any country, but they are usually unique. Barter was a way to exchange goods for goods. There was never a need for a currency. Currency was originally created in the form gold, stones, or cotton bales. Each currency is unique because the issue of currency is a sovereign right of any country. A currency's value is an indicator of its economic strength as well as its trade surplus. Countries with high trade surpluses are likely to have strong currencies.

There was not a market that allowed currency trading or futures trading for a long time. The rupee forward market was the only market for forex trading in India. This market was largely inter-bank. After the introduction of currency futures on stock exchanges like NSE or the BSE, India currency was popular among small- and medium-sized investors. The global currency trading volume is greater than $5 trillion, but India's currency market remains small.

What are the most hard currencies around the globe?

Hard currencies are currencies that can be traded freely around the globe and are supported by strong national economies.

Examples of hard currencies include the US Dollar, Euro, Pound and Japanese Yen. They are widely accepted and can be traded.

Is every country able to issue its own currency

Each country has its own currency. It is issued by its central bank. RBI for India, Federal Reserve in the USA, Bank of England for the UK, etc.

Only the Euro region uses the Euro as its currency. Large nations such as Germany, France and Spain have all abandoned their currencies and now use the Euro.

I understand how equities trade, but how does currency trade?

1. This is true for both equities as well as commodities.
2. In currency trade, there are two currencies. So how does the trading price get determined?
3. We have all seen the US Dollar exchange rate as Rs.67/$. This is technically known as a currency pair.
4. In India's currency markets, you can trade pairs. The currency market in India, however, is still developing.

What are currency pairs? How can they be traded?

1. There are two distinct pieces to a currency pair: the base currency and the quotation currency. The base currency and the quote currency are the two pieces of a currency pair
2. Base currency is always expressed in 1 unit
3. These currency pairs are the base for currency trading in India
4. Forex market trading hours are restricted on the currency futures exchange, but globally the currency market operates 24 hours a day

Is it possible to understand the difference between base currency and quotation currency more clearly?

Understanding the base and quotation currencies is essential to understanding currency trading basics in India.

The rupee/dollar trade uses the USD as the base currency, and the INR as the quotation currency. When we write USD 1/INR, it becomes the base currency. = Rs.67. The USD is the base currency. The INR is the quotation currency. Rs.67 is its value. Base currency is always expressed as 1 unit.

Is the US Dollar required to be the base currency for currency trading?

Not necessarily. It is possible for any currency to be the base currency.

In Euro / Dollar trades for example, the Euro is usually the base currency while the US dollar is used as the quotation currency. Similar to the above, if we write INR 1 / Yen= 1.95, the INR becomes a base currency, and the Japanese Yen becomes a quotation currency with Yen 1.95.

How to trade forex in India (for investors).

1. The NSE and BSE in India offer currency futures as well as currency options.
2. The USD/INR currency pair is by far the most liquid, but other contracts are also starting to catch up
3. Structurally, currency options and currency futures operate in the same way as the equity and commodity derivatives market.
4. Currency futures can be traded by traders who wish to have a view of currency.

If you believe the US dollar will strengthen against the INR, then you can purchase USD/INR futures. You can also sell USD/INR options if the INR appreciates. The margins for currency trading are also much lower than those of commodities or equity trading.

For companies, how to trade forex in India

1. Companies that are exposed to currency risk can use currency futures.
2. Imagine that you're an importer with a $5 million amount payable in dollars within 3 months.
3. This risk can be hedged by purchasing the USD/INR pair
4. In March 2018, you have a $5 million payable
5. The risk is that the dollar will appreciate from 67 to 70, and you will end up paying more in rupee terms. You can hedge your risk by purchasing equivalent USD/INR futures.
6. Your loss on import payables will be offset by the dollar's appreciation to Rs.70.

This is how currency trading works in India.

Currency Basics: Key Takeaways

1. You can use currency futures to hedge currency risk and trade with it.
2. Both individual investors and companies can benefit from it.
3. India's currency futures market is still in its infancy.
4. In the currency futures market, currencies are usually traded in pairs.