Hedge Benefits in Currency Derivatives: An Illustration

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  • 27 Apr 2023

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.

Trade Details

Strategy

Expiry

Total Margin

Buy futures at CMP

Buy Naked Futures

28-Jul-21

1887

Naked Call short - 74.50 CE Strike

Naked Short Call - ATM

28-Jul-21

2042

Naked Call short - 75.00 CE Strike

Naked Short Call - OTM

28-Jul-21

1608

Call Spread - 74.50 and 75.00

Buy Call Spread

28-Jul-21

733

Sell Straddle – Sell 74.50 call & Put

Sell Straddle

28-Jul-21

2699

Sell Strangle - 74 PE and 75 CE

Sell Strangle

28-Jul-21

2235

Buy futures at CMP and Buy an OTM 74 Put

Buy Futures + Buy OTM Put

28-Jul-21

1163

Buy futures at CMP and Sell OTM Call

Buy Futures + Sell OTM Call

28-Jul-21

2440

Sell straddle and Buy OTM Call & Put

Iron Fly

28-Jul-21

1694

Sell strangle and Buy OTM Call & Put

Iron Condor

28-Jul-21

1581

Indicative Margin on USDINR 1 lot
Sr. No Trade Details Strategy Expiry Total Margin
1Buy futures at CMPBuy Naked Futures28-Jul-211887
2Naked Call short - 74.50 CE StrikeNaked Short Call - ATM28-Jul-212042
3Naked Call short - 75.00 CE StrikeNaked Short Call - OTM28-Jul-211608
4Call Spread - 74.50 and 75.00Buy Call Spread28-Jul-21733
5Sell Straddle – Sell 74.50 call & PutSell Straddle28-Jul-212699
6Sell Strangle - 74 PE and 75 CESell Strangle28-Jul-212235
7Buy futures at CMP and Buy an OTM 74 PutBuy Futures + Buy OTM Put28-Jul-211163
8Buy futures at CMP and Sell OTM CallBuy Futures + Sell OTM Call28-Jul-212440
9Sell straddle and Buy OTM Call & PutIron Fly28-Jul-211694
10Sell strangle and Buy OTM Call & PutIron Condor28-Jul-211581

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.

Currency Futures

Currency Options

90

3350

NA

NA

10

10

5

200

105

3710

Statutory Cost Futures (per crore) Options (per crore)
Equity FuturesCurrency FuturesEquity OptionsCurrency Options
Exchange Turnover*1909050003350
STT^1000NA5000NA
Stamp Duty#2001030010
IPF**105100200
Total1400105104003710

*-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

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