Context:
RBI defers Exchange Traded Currency Derivatives (ETCDs) norms.
Currency Derivatives:
- Currency Derivatives – Exchange-traded contracts deriving their value from their underlying asset (the currency)
- Important Features –
- Investor buys or sells specific units of fixed currency on a pre-specified date and rate.
- Actively traded on the stock exchanges and are mainly used by importers and exporters to hedge against domestic currency fluctuation.
- Currency derivative contracts are standardized through a foreign regulatory exchange with an intermediary clearing house.
Exchange Traded Currency Derivatives (ETCD):
- ETCD – Standardized financial contract that is traded in stock exchanges in a regulated manner.
- These contracts derive values from the price fluctuation of their underlying assets.
- Regulation – Subject to the rules framed by market regulators such as SEBI in India.
- 2 types of derivatives –
- Exchange Traded Derivatives (ETDs) – Derivatives subject to standardized terms and conditions, and hence being traded in the stock exchanges.
- Over the Counter (OTC) derivatives – Derivatives traded between private counter-parties, in the absence of a formal intermediary.
- 5 types of ETDs – Stock ETDs, Index ETDs, Currency ETDs, Commodity ETDs, and Bond ETDs.
- Working – Work on the principle of buying at a low price and selling at a higher price.
- ETDs are always bought in pairs –
- Indian Rupee vs United States Dollar (USD-INR)
- Indian Rupee vs Euro (EUR-INR)
- Indian Rupee vs Great Britain Pound (GBP-INR)
- Indian Rupee vs Japan’s Yen (JPY-INR)
Source: The Indian Express
Previous Year Question
In the context of finance, the term ‘beta’ refers to:
[UPSC Civil Service Exam – 2023 Prelims]
(a) the process of simultaneous buying and selling of an asset from different platforms
(b) an investment strategy of a portfolio manager to balance risk versus reward
(c) a type of systemic risk that arises where perfect hedging is not possible
(d) a numeric value that measures the fluctuations of a stock to changes in the overall stock market
Answer: (d)
