Brokerages touting the merits of toxic currency derivatives

Several broking companies are promoting and encouraging individual investors to dabble in highly risky currency derivatives

While most investors would think twice before investing in stock futures or even stocks, the thought of putting their hard-earned money in currency derivatives would simply send a shudder down their spine. In a situation where many investors seem keen on avoiding less complicated stock markets, some online trading platforms are offering their customers a chance to try their luck in currency derivatives.

HDFC Securities and have both come out with their own currency derivatives offerings that is, currency futures. ICICIdirect believes ‘equity retail investors can use this opportunity to hedge their stock market risks’. The offering is supported by highfalutin intellectual arguments.

Anup Bagchi, executive director, ICICI Securities opines, “Firstly, for the retail customer, it will be one more source of diversification of an asset class; secondly, active traders will benefit from the low margin requirements and hence high leverage will be a big attraction and lastly for the SMEs and corporates, there will be an avenue to hedge at a low cost and in a transparent manner.” 
HDFC Securities is of the opinion that ‘the volatility and multiplier effect would make it a significant trading option for traders. Borrowers can hedge foreign currency loans for interest or principal payments’.

If retail investors are not the target, it beats us why these broking companies would target them through emails, as HDFC is doing. While it may make sense for some corporates to hedge their exposures to currency movements, it is certainly a toxic product for retail investors.

Currency futures are a highly leveraged form of trading product that leave very little margin for error. A few basis points fluctuation in exchange rates can leave your trading account short by thousands of dollars. As such, trading in currency futures requires a highly sophisticated and professional approach and a minute-to-minute monitoring. Is this right for retail investors?

Foreign exchange rates—unlike any other asset class—move depending on various factors like demand-supply, interest-rate parity, capital flows and speculators taking positions. Currency derivatives were first introduced to the country by the National Stock Exchange (NSE) in the form of futures contracts. Apart from hedgers, the currency derivatives market is flooded with speculators and arbitrageurs who take bets on exchange rate movements with short-term profits being the sole motivation for trading.



Ashit Kothi

7 years ago

There are no of products available for trading/speculaton. Those who are offering this products is to generate revenue for themselves. It is for the retail investor to decide what is good or bad for them. Do not expect others to offer you only good products. Investor are suppose to know, if they want to trade. WE NEED TO RISE ABOVE THE EXCUSE OF GULLIBEL SMALL INVESTOR. INVESTOR CAN NOT AFFORD TO BE GULLIBEL. IT IS NOT


7 years ago

There being some facts, the retail investors must have a legal window to purchase the underlying currency USD /EURO/YEN/POUND at the prevailing RBI / Inter bank rates.This facility must be provided to retail investors by Govt Of India,otherwise as the authors said it will trap the retail investors. Argument that such retail investors need not buy Cur. future from exchanges has no logic or valid reason as indirectly exchange and govt have introduced it with a view to attract retail investors only.

P. K. Biswas

7 years ago

The article is informative. I wish the two authors would have elaborated on the high risk associated with such products, the regulatory scenario governing such transaction, and advise members of public to not get lured by brokers.

Watch 16,800 for a break

Indian markets were under selling pressure today, erasing early gains and remained volatile for the rest of the day. However, markets recovered towards the end of the day following comments by the prime minister that prospects for the winter crop were quite encouraging, which aided the rebound.

At the end of the day, the Sensex closed at 16,994, gaining 23 points from the previous day’s close, while the Nifty rose 8 points to close at 5,089. Next week we expect Indian markets to continue their uptrend. However, watch out for the 16,800 level for a short-term breakdown.

At the end of the day, Hexaware Technologies Ltd was up 2%. The company has announced a global partnership with eBaoTech, a leading provider of a complete suite of new generation core application software and services for the life and general insurance industries.

Zicom Electronic Security Systems Ltd has announced a strategic restructuring in its business model to refresh its focus on the home and SME electronic security markets and its Middle East operations, while also moving into high-growth sunrise sectors. The stock surged 14%.

PVR Ltd has announced the opening of another multiplex at Vinayak City Centre, Allahabad, Uttar Pradesh. However, the stock was down 1%.

During trading hours, the government said that it would seek Parliamentary approval to spend an extra Rs31,780 crore for the fiscal year to end-March 2010. There is no risk that India will borrow more than planned to fund supplementary spending, said revenue secretary Sunil Mitra. The government will introduce legislation for a direct tax code in the monsoon session of Parliament, Mr Mitra added.

Prime minister Manmohan Singh said that the economy would grow by at least 8% in the year through March 2011. Asia’s third-largest economy would expand 7.2-7.5% in 2009-10, he told Parliament. Mr Singh said that prospects for the winter-sown crop were “very encouraging.” He also said that the government must pay good prices to farmers to ensure higher farm production. The prime minister said that the government would take all practical measures to bring down food prices. He said that the government will continue commitment to pubic and private investment in agriculture. Mr Singh also said that there was a need to find ways and means to stabilise the sugar economy.

Meanwhile, in global fund news, investors pulled money out of Chinese and European equity funds last week following policy risks and fears about Greece's debt problems, EPFR Global said. Emerging equity funds had a third straight week of inflows, with a relatively modest $240 million flowing into the funds while year-to-date net inflows have grown to $2.20 billion. Asia ex-Japan, Latin America and EMEA equity funds had net inflows ranging from $42 million to $169 million. China equity funds had $17 million moving out of the door, while BRIC equity funds enjoyed inflows. The year-to-date average weekly inflow into BRIC funds, however, is less than half of the $190 million averaged in the fourth quarter of 2009.

During the day, Asia’s key benchmark indices in Hong Kong, South Korea, Singapore, Taiwan, Indonesia, China and Japan, rose between 0.25%-2.20%.

As per media reports, Chinese premier Wen Jiabao pledged to maintain economic growth and keep the yuan stable. Mr Jiabao also reaffirmed the government's 8% gross domestic product growth target for 2010. He said that China’s GDP grew 8.7% to 33.5 trillion yuan in 2009. The premier also pledged additional measures to curb speculation in the nation’s housing market, signalling tighter lending to the sector, targeted taxes, and stricter enforcement of real-estate laws.

As per reports, both Bank of England (BOE) and European Central Bank (ECB) left their key lending rates at record low levels amid sluggish and uncertain economic recovery. BOE maintained its key lending rate at 0.5% while ECB left its key lending rate unchanged at 1%.

Economic growth in the 16 countries that use the euro slowed in the fourth quarter, revised official data showed on Thursday, 4 March 2010. Quarterly gross domestic product growth slowed to 0.1% in the final three months of last year from 0.4% in the three months to the end of September, the European Union’s Eurostat statistics agency said. However, the yearly drop in GDP in the third quarter was revised to show a deeper decline of 4.1% from the previous reading of 4%.

On Thursday, 4 March 2010, the Dow Jones Industrial Average was up 47 points while the S&P 500 and the Nasdaq Composite were up 12 points and 4 points respectively.

As per US media reports, initial jobless claims for the week ended 27 February 2010 totalled 469,000 and the continuing claims dropped more than expected to 4.50 million. Factory orders for January 2010 increased 1.7%, which was in tune with the 1.8% increase that had been widely expected. In premarket trading, the Dow was trading 35 points higher.


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