Impact of Commodity Futures Trading on Volatility of Spot Prices

Topics: Futures contract, Foreign exchange market, Spot price Pages: 11 (2720 words) Published: June 7, 2012

Shelly Singhal,
Assistant Professor
Maharaja Agrasen Institute of Management and Technology, Jagadhri, Haryana, India, (M) +91-8950213125

Assistant Professor
Maharaja Agrasen Institute of Management and Technology, Jagadhri, Haryana, India, (M) +91-9896005971

Abstract:It is almost two and a half years since the introduction of currency futures under the currency derivatives segment of Indian stock exchanges. The volumes have increased tremendously on NSE and its arch rival MCX-SX, the two dominant exchanges of trading in currency futures; while on BSE practically there have been no volumes in the last six months or so. Trading in currency futures had started by NSE on August 29, 2008. The purpose of this paper is to examine the rationale behind their introduction and to examine whether there is any impact of spot price on trading volume, value and volatility of daily settlement prices of currency future market. The data for this purpose is taken from Stock exchange i.e. NSE & MCX-SX for five quarters The data is collected with respect to traded volume, traded value and trade price. Garch Model basically designed to study the volatility is used in the study. The results exhibited thatafter the introduction of the currency future the market is moving towards the efficiency due to less fluctuations & more efficient dissemination of information. That is good for the health of industry in India. But if we look at the future time period predictions then it can be seen that there will more up & downs in the currency future but along with that some more benefits can be raised. KeyWords: Currency Futures, NSE,MCX-SX, Volatility, Garch Model

INTRODUCTION International experiences have established that the exchange traded currency futures contracts facilitate efficient price discovery, enable better counterparty credit risk management, wider participation, trading of standardized product, reduce transaction costs, etc. 

Accordingly, as a part of further developing the derivatives market in India and adding to the existing menu of foreign exchange hedging tools available to the residents, it has been decided to introduce currency futures in recognized stock exchanges or new exchanges recognized by the Securities and Exchange Board of India (SEBI) in the country. The currency futures market would function subject to the directions, guidelines, instructions issued by the Reserve Bank and the SEBI, from time to time. 

Persons resident in India are permitted to participate in the currency futures market in India subject to directions contained in the Currency Futures (Reserve Bank) Directions, 2008, which have come into force with effect from August 6, 2008. 

Currency Futures means a standardized 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. Broadly Currency Futures market means the market in which currency futures are traded. 


(i) Currency futures are permitted in US Dollar - Indian Rupee or any other currency pairs, as may be approved by the Reserve Bank from time to time. 

(ii) Only ‘persons resident in India’ may purchase or sell currency futures to hedge an exposure to foreign exchange rate risk or otherwise.  Features of currency futures
a. Only USD-INR contracts are allowed to be traded.
b. The size of each contract shall be USD 1000
c. The contracts shall be quoted and settled in Indian Rupees d. The maturity of the contract shall not exceed 12 months
e. The settlement price shall be the Reserve Bank’s Reference rate on the last trading day.


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