SEBI Mulls Trade in Euro and Yen Futures

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Sept. 4 – As the dominance of the dollar as global currency drops, the Securities and Exchange Board of India (Sebi), India's capital market regulator, said it is mulling the introduction of rupee-euro and rupee-yen contracts in currency futures soon. Currently, only rupee-dollar contracts are allowed for trading in currency futures. Sebi is in the process of studying the market for rupee-yen and rupee-euro and the contracts would be launched after considering the outcome of the study, Sebi Chairman C B Bhave told Business Standard. "Now, it is only rupee and dollar in currency futures. Later, we could see more hard currencies. NRIs and FIIs too can be allowed on this platform," Bhave added.

SEBI also said it would introduce interest rate futures by the beginning of next year. The interest rate futures would enable investors to hedge against interest rate movement. This would be the first cross-regulated product involving two regulatory agencies — the capital market regulator and the central bank. It is expected to be ready within six months.

Interest rate futures are typical futures contracts where the holder agrees to take delivery of a given amount of the related debt security at a later date (usually no more than three years). Futures may be in treasury bills and notes, certificates of deposit, commercial paper, or any other interest-bearing certificates, The Economic Times reported.

Interest rate futures are stated as a percentage of the par value of the applicable debt security. The value of interest rate futures contracts is directly tied to interest rates. For example, as interest rates decrease, the value of the contract increases. As the price or quote of the contract goes up, the purchaser of the contract gains, while the seller loses.

A change of one basis point in interest rates causes a price change. Those who trade in interest rate futures do not usually take possession of the financial instrument. In essence, the contract is used either to hedge or to speculate on future interest rates and security prices. For example, a pension fund manager might use interest rate futures to hedge the bond portfolio position.

Speculators find financial futures attractive because of their potentially large return on a small investment due to the low deposit requirement.