What are Currency Derivatives?
Currency Derivatives are exchange-traded contracts deriving their value from their underlying asset, i.e., the currency. The investor buys or sells specific units of fixed currency on a pre-specified date and rate. These contracts are actively traded on the stock exchanges and are mainly used by importers and exporters to hedge against domestic currency fluctuation.
Here are four popular currency pairs that are underlying assets for the actively traded Currency Derivatives:
USD – INR
GBP – INR
EUR – INR
YEN – INR
Holistic Risk
Currency derivative contracts are standardised through a foreign regulatory exchange with an intermediary clearing house. Since derivatives are traded in a regulated market, the contract does not leave a window for buying or selling current assets at a specific date and rate, expelling the chance of counterparty risk.