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Currencies as Financial Instruments – Forex Exposure

Introduction

Money itself is a commodity that can be bought and sold. This happens in the Foreign Exchange (Forex) market.

1. Currency Pairs

Currencies trade in pairs.

  • USD/INR = 83.50: Means 1 US Dollar costs ₹83.50.
  • Major Pairs: EUR/USD, GBP/USD, USD/JPY.
  • Indian Pairs: USD/INR, EUR/INR, GBP/INR, JPY/INR (Traded on NSE/BSE).

2. Factors Affecting Rates

  1. Interest Rates: Higher interest rates in a country attract foreign capital -> Currency strengthens.
  2. Inflation: Higher inflation purchasing power drops -> Currency weakens.
  3. Trade Deficit: Importing more than exporting -> High demand for Dollar -> Rupee weakens.

3. Managing Exposure (Hedging)

  • Exporters: Fear Rupee appreciation (Receive less rupees for dollars). They Sell USD Futures.
  • Importers: Fear Rupee depreciation (Pay more rupees for dollars). They Buy USD Futures.

Summary

  • Instrument: Currency Derivatives (Futures/Options).
  • Benchmark: USD (Global Reserve Currency).
  • Participants: Importers, Exporters, Central Banks.

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