There are many derivatives available in the market today, but if you are new in the industry and planning to invest in derivatives, considering currency derivatives is possible. If you do not know yet, this kind of derivative is explained as the Options and Futures contracts where one can sell or buy a specific number of a specific currency pair dated in the future. This is most of the time not listed, hence if you want to trade such derivatives, consider over the counter or OTC.

In India, these derivatives are possible on 4 currency pairs, Euro (EUR), US Dollar (USD), Japan Yen (JPY) and Great Britain Pound (GBP).

Types of currency derivatives

Before you get too excited buying contracts, it is important that you know the different types of currency derivatives available in the market.

  • Currency option

This gives the traders the right, but completely no obligation, to sell or buy currency in exchange to another currency at a date and price arranged and agreed.

  • Currency forward

This on the other hand is a contract between 2 parties to sell or buy an underlying asset at a price already determined today at a future date.

  • Currency swap

This contract agrees on exchanging payment flows in 2 different currencies with each other on different dates.

Advantages and disadvantages of Currency Derivatives you need to know

Meanwhile, just like any derivatives in the market, this type of derivative has advantages and disadvantages you must look into before deciding on pursuing such investment.

  • To keep your investment from risk

This is one of the most effective ways to use for risk management. By investing in such, you are minimizing the possible risk of loses due to foreign exchange changes.

What made this a good choice for traders is its transparency.

It gives possible profit to both short or long term fluctuations

Investors can take advantage of the exchange rate fluctuation. This is a good idea not only to secure asset but gain profit too.

  • Thorough understanding is necessary before venturing to such derivatives

It is necessary that you have impeccable knowledge about the trade before pursuing it. Apart from the initial understanding about currency, you need to focus on monitoring the currency movement to know when and where to make a trade.

  • Loss is also possible

There is possible risk especially when issuing options. Hence, to ensure that this is avoided you need to know the basics of the trade.

To any types of derivatives there are risks and benefits you need to consider. There are available third party professionals who offer their services and perform trading on your behalf. Although currency derivative is not as complicated as its counterparts, it is very important that you know the basic of it before investing your hard earned money. As previously discussed, you need to watch the movement of currencies closely to ensure that you will not lose in this type of investment.