Things to Know About Operating in Global Currencies

So far, we’ve been focusing purely on the US Dollar and the USD-INR currency pair. However, that’s not the only pair of currency that you can trade on in India. You also have other global currencies for trading at your disposal, including the Pound Sterling (GBP), the Euro (EUR), and the Japanese Yen (JPY). In this chapter, we’ll take a look at some of these currencies, their details, and some key things that you should keep in mind when dealing with them. 

Operating in global currencies 

In India, there are two different types of global currency pairs that you can trade in. According to your preference, you can choose to trade in INR pairs or cross currency pairs. What’s the difference between these two types of currency pairs, you ask? It's actually pretty simple. 

All the INR pairs have the Indian Rupee as the quote currency, with one of the global currencies as the base currency. For instance, the USD-INR, GBP-INR, EUR-INR, and JPY-INR are all categorised as INR pairs. Cross currency pairs, on the other hand, do not involve the INR at all.  Both the currencies in a cross currency pair pertain to those of other countries. For instance, the GBP-USD, the EUR-USD, and the USD-JPY are all categorised as cross currency pairs.   

What to keep in mind when operating in these global currencies?

Now that you’ve been formally introduced to these global currency pairs, let’s take a look at some of the things that you should keep in mind when dealing with them.   

Derivative specifications of INR pairs (GBP-INR, EUR-INR, and JPY-INR) 

Since you’ve already read all about futures and options in the previous module, you’ll find it easier to understand these derivative specifications. So, here are the details of the derivative contracts of these pairs.

Particulars	GBP-INR	EUR-INR	JPY-INR
Base currency	GBP	EUR	JPY
Quote currency	INR	INR	INR
Lot size	£1,000	€1,000	¥1,00,000
Value expressed as	1 GBP expressed in INR	1 EUR expressed in INR	100 JPY expressed in INR
Tick size	INR 0.0025	INR 0.0025	INR 0.0025
Trade timings	Monday to Friday, from 9AM to 5PM	Monday to Friday, from 9AM to 5PM	Monday to Friday, from 9AM to 5PM
Derivative contracts	You get access to 12 monthly contracts	You get access to 12 monthly contracts	You get access to 12 monthly contracts
Date and time of last derivative trade	Derivative trading stops at 12.30 PM, two days before the last working day of the month	Derivative trading stops at 12.30 PM, two days before the last working day of the month	Derivative trading stops at 12.30 PM, two days before the last working day of the month
Final settlement day	Last working day of the month	Last working day of the month	Last working day of the month
Settlement price	RBI reference rate on the final settlement day	RBI reference rate on the final settlement day	RBI reference rate on the final settlement day

Derivative specifications of cross currency pairs

As with the INR pairs, the cross currency pairs’ derivative specifications have also been tabulated below. Take your time and have a look at them for some insight into these contracts.  

Particulars	EUR-USD	GBP-USD	USD-JPY
Base currency	EUR	GBP	USD
Quote currency	USD	USD	JPY
Lot size	€1,000	£1,000	$1,000
Value expressed as	1 EUR expressed in USD	1 GBP expressed in USD	1 USD expressed in JPY
Tick size	USD 0.0001	USD 0.0001	JPY 0.01
Trade timings	Monday to Friday, from 9AM to 5PM	Monday to Friday, from 9AM to 5PM	Monday to Friday, from 9AM to 5PM
Derivative contracts	You get access to 12 monthly contracts	You get access to 12 monthly contracts	You get access to 12 monthly contracts
Date and time of last derivative trade	Derivative trading stops at 12.30 PM, two days before the last working day of the month	Derivative trading stops at 12.30 PM, two days before the last working day of the month	Derivative trading stops at 12.30 PM, two days before the last working day of the month
Final settlement day	Last working day of the month	Last working day of the month	Last working day of the month
Settlement price	Calculated using the RBI reference rates for EUR-INR and USD-INR on the final settlement day	Calculated using the RBI reference rates for GBP-INR and USD-INR on the final settlement day	Calculated using the RBI reference rates for JPY-INR and USD-INR on the final settlement day

A few other things that you should keep in mind when dealing with INR pairs 

Aside from the details of the derivatives, there are also some other important things that you need to know about operating in these global currency pairs. These might seem very generic, but are nevertheless significant, since they can affect the way you trade in currencies. So again, take your time and read through these pointers.  

1. INR pairs with currencies other than the USD are not as liquid 

In India, the USD-INR pair is king. It is the most preferred and the most traded currency pair. Except for maybe the GBP-INR, the other INR pairs are not very popular. This impacts the liquidity of these currency pairs, making it slightly harder for you to buy or sell those pairs. Due to lower liquidity, there may be instances where you might not be able to sell or buy them at the right prices.

2. They are subject to higher levels of volatility 

Since the other INR pairs are not as liquid as the USD-INR, they suffer from higher levels of volatility. As you know by now, high levels of volatility are not always a good thing. Due to high volatility, you might experience wild swings and unpredictable price movements, which can throw you off or catch you unawares. This is especially true with the JPY-INR currency pair, where you may experience gap ups, gap downs, and swings in the price movement due to low liquidity and high volatility.   

3. The currency spreads are much higher

Again, this boils down to low liquidity. The USD-INR pair, being the most liquid currency pair in India, enjoys currency spreads as low as Rs. 0.0025. However, the same cannot be said about the other INR pairs. Compared to the USD-INR, the EUR-INR and the GBP-INR carry a much larger spread ranging from 0.0100 to 0.0200. Such high spreads can quickly prove to be costly for high-frequency traders, since they tend to increase the transaction costs involved in trading the currencies.  

4. The margin requirements are also quite high

As you know by now, to buy or sell a futures contract, you’re required to deposit a margin. The same concept applies to currency futures as well. For the sake of comparison, let’s take up the margin requirements of USD-INR July futures and that of the JPY-INR July futures. 

• USD-INR July futures margin: Rs. 2,086
• JPY-INR July futures margin: Rs. 2,937

The difference in the margin requirements comes up to Rs. 851. Since you’re required to deposit a higher amount as margin, this can significantly impact the way you trade in currencies.

Wrapping up

Well, that gives you quite a comprehensive introduction to how global currency pairs operate. But the financial markets don’t end with currencies. There’s another huge segment where commodities are traded. Yes, the commodities market. And that’s where our next chapter will take you.

A quick recap 

• In India, there are two different types of global currency pairs that you can trade in. According to your preference, you can choose to trade in INR pairs or cross currency pairs.
• All the INR pairs have the Indian Rupee as the quote currency, with one of the global currencies as the base currency. For instance, the USD-INR, GBP-INR, EUR-INR, and JPY-INR are all categorised as INR pairs.
• Cross currency pairs, on the other hand, do not involve the INR at all.  Both the currencies in a cross currency pair pertain to those of other countries. For instance, the GBP-USD, the EUR-USD, and the USD-JPY are all categorised as cross currency pairs.   
• The derivatives of INR pairs and cross currency pairs all have their own individual specifications.
• While trading, keep in mind that INR pairs with currencies other than the USD are not as liquid.
• Since the other INR pairs are not as liquid as the USD-INR, they suffer from higher levels of volatility.
• Their currency spreads and margin requirements are also higher.