Hedge Benefits in Currency Derivatives: An Illustration

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.

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.

*-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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