Forex Trading - a profitable investment option in 2020

Of the various investment and trading options available to you, the one option we focus least on is currencies trading or forex trading. For a long time, currency trading was out of bounds for most retail investors. With the introduction of currency futures and later currency options, you can actually and effectively take positions in the future movement of currencies. As Indian markets enter 2020, the markets are more globalised than ever before in history. Hence, currency fluctuations are not only a risk but also a unique opportunity.

In the old scenario, there were dollar forwards but that was only available to a person with an underlying currency exposure; not otherwise. Only exporters and importers could hedge their dollar exposure or Euro exposure through these banks. Typically, in the olden days, an importer would buy forward dollar to protect against rupee depreciation while an exporter would sell forward dollars to protect against rupee appreciation. However, speculation, trading and arbitrage in currency were out of bounds for most investors and traders in India. But, all that changed with the advent of currency futures trading in 2008 on NSE.

Everything you should know about currency futures

Currency futures trading on the stock exchanges started in 2008 and actually picked up steam after the European crisis in 2010. The currencies are tradable in currency pairs; either rupee pairs or cross currency pairs. One can trade hard currencies like the dollar, Yen, Pound and Euro vis-à-vis the rupee or other foreign currencies. Today, online broking accounts give you access to currency futures and currency options on the NSE, BSE and the Metropolitan Stock Exchange. Currency trading in India has become simpler with the advent of currency trading as it enables you to hedge your currency risk through the exchange mechanism itself. Also, being an exchange traded product, these currency futures and currency options are guaranteed by the clearing corporation and hence there is no counter-party risk. This is a big comfort zone for participants.

Why currency futures and currency options could be big in 2020

You can use your existing equity trading account for trading in currencies too. No additional KYC or documentation is required for the same. Also, the margins are the lowest in the currency derivatives markets giving you the best leverage on these products. Here is how you can make the best of currency trading or forex trading in the coming year.

Scenario 1: India could hike interest rates, which could lead to greater FII flows into debt. That means INR will get stronger and the Dollar gets weaker. You can play this view by selling the dollar pair at 71/$ and buy it back when INR appreciates to 68/$. The minimum lot size is $1000 and you make a profit of Rs.3 on each dollar.

Scenario 2: You have to pay the fees for your daughter who got admission into Brown University in the US in dollars at the end of 3 months. Your concern is that the dollar could become stronger and entail a higher burden. You can hedge your risk by buying the dollar pair and locking in the current price in the market.

Scenario 3: You have bought USD/INR at $/70 as you believe that the dollar could strengthen due to higher fiscal deficit. However, you also believe that at $/75, the RBI would intervene and defend the rupee. You can sell USD/INR pair in next month contract and create a substantially risk-free calendar spread.

Scenario 4: The dollar index has gone up sharply in the US but the INR is still strong due to strong FPI flows. You expect that the rupee must weaken due to the dollar strength. You can buy the USD/INR futures to play on the rupee weakness.

Scenario 5: You import from Europe and export to the US. Hence you are interested in a strong dollar and a weak Euro. However, that is not in your control. You can solve the problem by doing a currency pair. You buy a EUR/USD currency pair so you are protected both ways at lower cost.

Year 2020 could see some exciting currency trading opportunities due to uncertainty over the global trade war, outcome of the BREXIT, revival in China and monetary loosening. That will give you plenty of opportunities to play the currency game through currency futures.