Currency futures
Also written Currency future · Exchange traded currency futures
A standardised exchange-traded contract to buy or sell one currency against another on a future date at a price fixed today; in India, cash-settled in rupees, USD 1,000 a lot for USDINR.
In plain language
A currency future is a foreign exchange forward made standard and put on an exchange.
The workbook's definition: a standardised foreign exchange derivative contract traded on a recognized stock exchange to buy or sell one currency against another on a specified future date, at a price specified on the date of contract, but does not include a forward contract.
The exchange fixes everything except the price — underlying pair, lot size, expiry dates, tick size — and the clearing corporation guarantees settlement. In return for giving up customisation, the participant gets price transparency, no counterparty credit risk, small lot sizes and easy entry and exit.
Two features stand out for Indian currency futures:
- They are cash settled in Indian rupees. No dollars change hands; only profit or loss is paid.
- They are regulated by both SEBI and RBI, as part of the exchanges' currency derivatives segment.
How it works
History. NSE launched currency futures in August 2008 on USD-INR; EUR-INR, GBP-INR and JPY-INR followed in February 2010; cross-currency futures on EUR-USD, GBP-USD and USD-JPY came in 2018.
Key specifications (Chapter 3, section 3.3):
| INR pairs | Cross-currency pairs | |
|---|---|---|
| Lot | USD / EUR / GBP 1,000; JPY 1,00,000 | EUR / GBP / USD 1,000 |
| Tick | Rs 0.0025 | USD 0.0001 (EURUSD, GBPUSD); JPY 0.01 (USDJPY) |
| Trading hours | 9.00 am – 5.00 pm | 9.00 am – 7.30 pm |
| Cycle | 11 serial weekly and 12 serial monthly | 12 serial monthly |
| Expiry (monthly) | Two working days before the last business day, 12.30 pm | Same |
| Operating range | ±3% of base price (tenure up to 6 months), ±5% (beyond) — no daily price band | Same |
| Daily settlement price | VWAP of last half hour across exchanges, or theoretical price | Same |
| Final settlement price | FBIL reference rate on last trading day | FBIL-based |
| Settlement | Daily MTM T+1; final T+2; cash in INR | Same, converted at FBIL rates |
Theoretical price for base price on day one and for illiquid contracts: F = S × e^((r − rf) × t), where r is the quote currency rate and rf the base currency rate.
Limitations for hedgers (Chapter 5, section 5.7): fixed lot sizes cause over- or under-hedging; fixed expiries cause maturity mismatch; cash settlement means the actual currency must still be bought or sold with an AD bank; maturities generally run only up to one year.
The formula
Contract value = Futures price × Lot size
Value of one tick (USDINR) = 0.0025 × 1,000 = Rs 2.50
Theoretical price F = S × e^((r − rf) × t)
A worked example
1. Contract values (the workbook's table):
| Pair | Price | Lots | Contract value |
|---|---|---|---|
| USDINR | 83.0000 | 5 | 83 × 5 × 1,000 = Rs 4,15,000 |
| EURINR | 89.0000 | 10 | Rs 8,90,000 |
| GBPINR | 104.00 | 15 | Rs 15,60,000 |
| JPYINR (per 100 JPY) | 55.00 | 20 | 55 × 20 × 1,000 = Rs 11,00,000 |
One tick on one lot of any INR pair is Rs 2.50.
2. A cross-currency position in rupees. 5 lots of EURUSD at 1.08 = USD 5,400. At an FBIL USD-INR rate of 82.95:
5,400 × 82.95 = Rs 4,47,930
3. Hedging an import. Illustrative importer; workbook contract terms. Joshi Electronics must pay USD 50,000 in two months. It buys 50 lots of USDINR futures at 83.2000. At expiry the FBIL reference rate is 84.1000.
Gain on futures = (84.1000 − 83.2000) × 50 × 1,000 = Rs 45,000 (received in cash, T+2)
Cost of USD from bank at, say, 84.1000 = 50,000 × 84.10 = Rs 42,05,000
Net cost = 42,05,000 − 45,000 = Rs 41,60,000 → Rs 83.20 per USD
The futures gain arrives in rupees; the dollars themselves come from the bank. If the bank's rate differs from the FBIL rate, the hedge is slightly imperfect — one of the workbook's listed limitations.
Why NISM asks about it
Chapter 3 (Exchange Traded Currency Futures) is built around this term: definition and history (3.1), terminology (3.1.1), payoffs (3.2), contract specifications (3.3), contract value (3.4), comparison with forwards (3.5) and pricing via interest rate parity (3.6). Chapter 5 uses futures for hedging and arbitrage and lists their limitations; Chapter 7 covers their MTM and final settlement. Specification numbers are heavily examined.
Common exam traps
- Cash settled in INR. No physical delivery of currency on exchange-traded currency futures.
- Final settlement price = FBIL reference rate; daily settlement price = last-half-hour VWAP across exchanges.
- JPYINR lot is JPY 1,00,000, quoted per 100 JPY; the other INR lots are 1,000 units.
- Daily MTM is T+1; final settlement is T+2.
- No daily price band — only operating ranges of ±3% or ±5%.
- Contract cycle — the workbook is inconsistent. Its Chapter 3 terminology says futures contracts "can be weekly, monthly and quarterly" and extend up to one year; its specification table lists 11 serial weekly and 12 serial monthly contracts for INR pairs and 12 serial monthly for cross pairs, with no quarterly series. Learn the specification table.
- Trading on the expiry day stops at 12.30 pm, not 5 pm or 7.30 pm.
Check yourself
1.If the open interest in a currency futures contract is 50,000 contracts, how many long and short positions are outstanding?
- a)25,000 long and 25,000 short
- b)50,000 long and 50,000 short
- c)50,000 in total, split in an unknown ratio
- d)1,00,000 long and 1,00,000 short
Show the answer
Answer: (b) 50,000 long and 50,000 short
The number of long positions as well as number of short positions is equal to the Open Interest. This is because the total number of long positions is always equal to total number of short positions. Only one side is considered while calculating/mentioning the open interest.
So 50,000 open interest means 50,000 long contracts and 50,000 short contracts — every contract has one buyer and one seller.
The definition: the open interest is the total number of contracts outstanding (yet to be settled) for an underlying asset.
Option A halves it, which is the intuitive but wrong reading — the figure is not split between the two sides, it applies to each of them.
Option C misses that the ratio is fixed at exactly 1:1 by the nature of a futures contract.
What the number tells you: the level of open interest indicates depth in the market.
Open interest changes only when positions are created or extinguished. Opening a position means either buying or selling a contract, which increases the client's open position (long or short), while closing a position means either buying or selling a contract, which essentially results in the reduction of a client's open position.
A client is said to close a position if he sells a contract which he had bought before or he buys a contract which he had sold earlier — so an identical sell order raises open interest for one trader and lowers it for another.
The chapter's tracked example: if a trader is short 5 contracts of USDINR and long 3 contracts of EURUSD futures and then sells 2 EURUSD futures contracts of the same maturity, his open position would be short 5 USDINR futures contracts and long 1 EURUSD futures contract.
2.What is the underlying of the USDJPY cross currency futures contract?
- a)The exchange rate in Indian Rupees for 100 Japanese Yen
- b)The exchange rate in US Dollars for 100 Japanese Yen
- c)The exchange rate in Indian Rupees for US Dollars
- d)The exchange rate in Japanese Yen for US Dollars
Show the answer
Answer: (d) The exchange rate in Japanese Yen for US Dollars
"The underlying for cross currency futures may be the exchange rate in US Dollars for Euro and Pound Sterling and exchange rate in Japanese Yen for US Dollars."
So in USDJPY, USD is the base and JPY the quote. The specification table confirms it: "The exchange rate in Japanese Yen for 1 US Dollar. The outstanding position in USD."
Indian Rupees for 100 Japanese Yen is the JPYINR quotation, a rupee pair: "for JPYINR it is the exchange rate in Indian Rupees for 100 Japanese Yen."
US Dollars for 100 Yen inverts the pair — the workbook never quotes it that way.
Indian Rupees for US Dollars is USDINR's underlying, one of the pairs where the value is "the exchange rate in Indian Rupees for US Dollars, Euro, Pound Sterling, Japanese Yen."
3.Among monthly currency futures contracts, the contract expiring in the NEXT month (after the immediate month) is called the:
- a)Near month contract
- b)Far month contract
- c)Mid-month contract
- d)Serial weekly contract
Show the answer
Answer: (c) Mid-month contract
"In the case of monthly contracts, the contract maturing in the immediate month is called 'near month contract', the contract expiring in next month is called 'mid-month contract' and those expiring in subsequent months are called 'far month contracts'."
The near month contract is the one maturing in the immediate month.
Far month contracts are all those beyond the mid-month — and "these contracts can extend up to one year."
Weekly contracts are a separate cycle, not a name within the monthly ladder: rupee futures have an "11 serial weekly cycle" alongside the "12 serial monthly trading cycle."
Where this is taught
Free preparation for NISM Series IRelated terms
- Counterparty credit riskThe risk that the other party to an OTC derivative fails before the settlement date. It does not arise in exchange-traded derivatives, where the clearing corporation becomes central counterparty.
- Daily Settlement PriceThe price at which every open futures position is marked and reset at the end of each day — the last 30 minutes' volume weighted average price of that contract, computed separately for each expiry.
- Expiry dateThe last trading day of a currency futures or options contract — for monthly contracts, two working days before the month's last business day; for weekly, every Friday — with trading stopping at 12.30 pm.
- FBIL reference rateThe daily USD/INR (and EUR, GBP, JPY vs INR) benchmark rate published by Financial Benchmarks India Pvt Ltd around 1.30 pm; it is the final settlement price of INR currency futures and options.
- Futures contractA standardised forward traded on an exchange, where the exchange fixes every term except the price and the clearing corporation guarantees settlement, so neither side carries the other's default risk.
- Interest rate parityThe principle that a currency pair's forward or futures price differs from spot by the two currencies' interest rate differential, so borrowing in one and lending in the other earns no riskless profit.
- Mark to MarketThe daily settlement of a futures position at that day's closing price, so gains and losses are paid in cash every evening instead of accumulating until expiry.
- Base priceThe reference price a contract starts each trading day from — the theoretical futures price on the day it is introduced, and the previous day's daily settlement price on every day after.
- Base currencyThe first currency in a pair, fixed at one unit and priced in the second (quotation) currency. In USDINR the base is USD, so the quote is the rupee price of one dollar.
- Calendar spread tradingTaking opposite positions in two maturities of the same currency futures (or options) contract to trade the change in the spread between them, rather than the direction of the currency.
- Spread order facilityAn exchange order type that trades a calendar spread as one order — priced as the difference between far and near months — so both legs execute together at once.
- Cash flow hedgeA hedge of the variability of future cash flows — such as a highly probable foreign currency receipt — whose effective gains and losses are held in equity until the hedged cash flow hits profit and loss.
- Net investment hedgeA hedge of the foreign exchange risk on a net investment in a non-integral foreign operation, with the effective gains and losses on the hedging instrument recognised directly in equity.
- Currency Derivatives SegmentThe separate stock exchange segment where exchange-traded currency futures and options, and interest rate derivatives, are traded — with membership separate from the exchange's other segments.
- RBI-SEBI Standing Technical CommitteeThe joint committee constituted after an RBI-SEBI meeting on 28 February 2008 to coordinate the regulators on exchange-traded currency and interest rate futures; its May 2008 report launched currency futures.
- IRRA platformInvestor Risk Reduction Access — a joint exchange platform that lets individual investors square off open positions and cancel pending orders when their trading member's services are disrupted by a technical glitch.
- Foreign exchange derivative contractUnder the FEMA regulations, a financial contract that derives its value from a change in the exchange rate of two currencies, at least one of which is not the rupee, and settles later than the spot date.
- Foreign exchange forwardAn OTC derivative involving the exchange of two currencies on a specified future date more than two business days away, at a rate agreed on the date of the contract.
- Currency optionAn option giving the buyer the right, but not the obligation, to buy or sell an agreed amount of one currency against another at a specified exchange rate, on or before a specified future date.
- Cross currency derivativesIn the exchange traded context, derivatives on a currency pair not involving the Indian rupee — EURUSD, GBPUSD and USDJPY futures and options, introduced from 2018.
- Effective priceThe rate a hedger actually ends up with: the price realised or paid in the spot market, adjusted by the payoff on the hedge — added for a receiver, subtracted for a payer.
- Partial hedgeCovering only a fraction of an exposure with derivatives, leaving the rest open — so the effective rate is a weighted average of the hedged rate and the spot rate.
- Base and quoting currencyIn a currency pair like USD/INR, the first currency is the base currency and the second is the quoting currency — the rate shows units of the quoting currency per one unit of the base currency.