Currency derivative contracts on the exchanges have found fewer takers, despite the rupee falling off a cliff since February. This is surprising as these derivatives are meant to help small and medium enterprises (SMEs) hedge against currency risk in volatile markets. The choppy forex market should also have meant more money-making opportunities for traders and speculators.

Between March and May, the rupee lost almost 13 per cent against the dollar. Yet, the currency derivatives turnover on the NSE dipped by around 11 per cent against the same period last year. The NSE is the dominant exchange for currency trades, handling more than half the transactions in the currency futures market and almost all the deals in currency options.

Volumes also fell in the MCX-SX and in the United Stock Exchange (USE), the other two exchanges offering currency derivative products, in the March-May period. Currency futures turnover on the MCX-SX, with a 50 per cent market share, fell around 22 per cent (the exchange has not yet been allowed to offer trades in currency options). On the USE, currency futures and options turnover fell more than 95 per cent.

While the sharp fall in volumes in the USE could be attributed to liquidity drying up following regulatory scrutiny of the exchange, what explains the volume dip on the NSE and the MCX-SX?

Not suited to all

High costs, heavy losses suffered by traders because of increased volatility, and lack of market depth seem to have played a role, feel market observers. Along with traders, SMEs, that usually get unfavourable terms in the over-the-counter (OTC) market, patronise the exchange traded currency derivatives market. While traders may have burnt their fingers and kept away, SMEs perhaps find the market lacking in depth.

Mr Pramit Brahmbhatt, CEO, Alpari (India), explains that the heavy, volatility-fuelled losses borne by traders over the past 9-10 months have led to many exits from the market.

Transaction charges on currency derivatives trading, introduced by the exchanges in July 2011, have eaten into the margins of intra-day traders and affected volumes.

The options market, according to Mr Brahmbhatt, suffers from lack of liquidity in most contracts, with the current month contract being the most actively traded. This makes options contracts unsuitable for businesses that require positions beyond a month.

Costly hedging

High volatility in currency has made hedging a costly proposition too, with option premiums rising. The total cost is at 80-90 paise for a currency option contract for a month, players observe.

With the monthly rupee movement generally not being more than Rs 2, even in volatile markets, many traders find trading uneconomical.

These could also explain why, unlike the equity derivatives segment, where options are much more popular than futures, options currently have a small market share (around 14 per cent) in the exchange traded currency derivatives market in the country. So far in 2012-13, the share of options in the NSE's currency derivative volumes has dipped to around 25 per cent, from almost 28 per cent the previous year.

> anandk@thehindu.co.in

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