Margins have an important role to play when it comes to derivatives trading, be it equity F&O or currency trading. Lower the margin, higher the leverage and vice versa. Many of us might be aware that currencies have the least margin requirement (2.5%* to 5%*) of all the products (equity, commodity and currencies) that gets traded on Indian exchanges, but many of us would not be aware that currency segment also offers similar margin benefit on hedge portfolio, as in equity derivatives.

While a lot has been written and talked about how margins can get reduced on a hedged portfolio in equity derivatives, not much is there to show the same benefit in currency segment with an illustration. Margins given in the table below are indicative and can be different at the time of actual transaction, depending upon strikes and volatility.Also, the margin benefit can be better, if hedges are tighter. In the example below, have taken all the hedges at 0.50p spread.

Indicative Margin on USDINR 1 lot
Sr. No Trade Details Strategy Expiry Total Margin
1 Buy futures at CMP Buy Naked Futures 28-Jul-21 1887
2 Naked Call short - 74.50 CE Strike Naked Short Call - ATM 28-Jul-21 2042
3 Naked Call short - 75.00 CE Strike Naked Short Call - OTM 28-Jul-21 1608
4 Call Spread - 74.50 and 75.00 Buy Call Spread 28-Jul-21 733
5 Sell Straddle – Sell 74.50 call & Put Sell Straddle 28-Jul-21 2699
6 Sell Strangle - 74 PE and 75 CE Sell Strangle 28-Jul-21 2235
7 Buy futures at CMP and Buy an OTM 74 Put Buy Futures + Buy OTM Put 28-Jul-21 1163
8 Buy futures at CMP and Sell OTM Call Buy Futures + Sell OTM Call 28-Jul-21 2440
9 Sell straddle and Buy OTM Call & Put Iron Fly 28-Jul-21 1694
10 Sell strangle and Buy OTM Call & Put Iron Condor 28-Jul-21 1581

Source: PC SPAN

As can be seen from the table above, highest margin is in case of straddle and the lowest in case of call spread. It is to be noticed that total margin is inclusive of both SPAN + Exposure margin. Given that USDINR also has liquid weekly options contract along with monthly, it gives more flexibility to a trader to use the instrument.

Not only this, if one compares the statutory cost, currency has the lowest charges. Most of us would be aware that there is no STT/CTT applicable in currency but at the same time might not be aware that stamp duty is also the lowest in currency – just Rs. 10 per crore and that too only on buy side, making currency a perfect product for trader and hedger.

Statutory Cost Futures (per crore) Options (per crore)
Equity Futures Currency Futures Equity Options Currency Options
Exchange Turnover* 190 90 5000 3350
STT^ 1000 NA 5000 NA
Stamp Duty# 200  10 300 10
IPF** 10 5 100 200
Total 1400 105 10400 3710

* in case of options, applicable only on premium amount
^ STT applicable only on sell leg in futures and on sell side on option premium
# Stamp duty applicable only on buy leg in futures and on option premium
** In case of options applicable only on premium amount

Happy Trading with Kotak Securities !!!

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