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Difference Between Rupee Forward & Futures Market

Introduction

Many retail traders prefer dabbling in the derivatives market to strengthen and diversify their portfolios, hedge their positions, and benefit from the underlying asset's price movement.Rupee Forward and Future Market are associated with derivative trading. A thorough understanding of the difference is crucial if you wish to start your investment journey.

What are Futures and Forwards in Derivative Trading?

Futures and Forwards are the most common derivative types that get traded. A Futures Contract is a structured financial one that gets traded on exchanges.  These contracts get regulated by the SEBI under stocks and commodities and the RBI in the Currency Futures.

Currency futures: These are Exchange-Traded Contracts that specify the price at which one Currency can be bought or sold in another currency at a future date. These contracts speculate about the price fluctuation in currencies. They help hedge currency risks like fluctuations in the exchange rate.

In India, Currency Futures Contracts are available in four pairs of Currency. These are Indian Rupee and US Dollar, Indian Rupee and Pound Sterling, Indian Rupee and Euro, and Indian Rupee and Japanese Yen.

Forward contracts: At the other end of the spectrum lies the Forward Contract, which is like Future Contracts but gets traded over the counter. Unlike the Future Market, Forward Contracts are not structured, and buyers or sellers are free to customise the terms and settlement process of the contract without involving any intermediary. 

Since these contracts are between private parties, there is always a risk that one of the parties may not fulfil their contractual obligations. This is called counterparty risk. To mitigate the risk, the party in the Forward Contract agrees to enter a performance bond, usually provided by a third-party. Such a bond ensures full payment even if one of the parties fails to fulfil contractual obligations.

Currency Forwards are Over The Counter (OTC) traded Forward Contracts that lock the exchange rate for purchasing or selling a currency in the future. Rupee Forward Contracts are a type of Currency Forward popular among exporters and importers as they help protect them against fluctuations in the rupee's exchange value.

Banks, Mutual Funds, and other such financial instruments are among the participants in the Future Market. Banks offer two types of Rupee Forward Contracts:  Fixed Date Delivery contracts that get settled on a specific future date and Optional Delivery Contracts that are paid any time within 12 months.

Here's a table showing the differences between Rupee Forward and Future Market difference:

 

Future contract

Forward contract

Maturity

On a pre-decided date

As per the agreement between parties

Collateral

As per the rules of the stock exchange

No requirement of collateral

Settlement

Daily

As decided by the parties

Mode of trade

Exchange-traded

Over The Counter

Risk

The Clearing Corporation of exchange guarantees all trades. No counterparty risk

Technically speaking, there is counterpart risk as there is no guarantee. Since participants are banks, Mutual Funds, etc., practically no counterparty risk

Size

Small compared to Future Market

Usually, lot size is significant for economic viability

Conditions on underlying Currency

No condition

A Forward Contract requires an underlying open currency position, either foreign Currency receivable or a foreign currency payable

Delivery norms

All transactions get settled in cash and, therefore, much easier to speculate here

All transactions result in actual delivery

Now that you know the differences, you can start trading. You only need a Trading Account and explore the world of Currency Futures and Forward Contracts.

Keywords:

Rupee forward - 3 times

Futures market - 4 times

rupee forward and future market differences - 1 time

Disclaimer - ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.

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