Fx derivatives introduction
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FX derivatives are financial instruments used to speculate on currency exchange rates, engage in arbitrage, or hedge foreign exchange risk. They evolved as a means to manage risks from volatility in world markets like inflation and oil shocks that create uncertainty around profits, cash flows, and costs due to fluctuating exchange rates. In India, FX derivatives developed as the economy gradually liberalized, exchange rates deregulated, and businesses increasingly approached foreign markets, where derivatives help reduce interest costs and protect revenues from currency volatility.
Fx derivatives introduction
- 1. FX Derivatives-Introduction • Financial Derivative • Underlying – Currency – Exchange Rate • Purpose – Currency Speculation – Arbitrage – Hedging Foreign Exchange Risk
- 2. NEED FOR FX DERIVATIVES • Volatility in World Markets – Inflation – Oil Shock • Uncertainty factor – Profits – Cash Flows – Future Costs • Derivatives as means for managing risk – Fluctuating Exchange rates – Volatility in money markets
- 3. EVOLUTION OF FX DERIVATIVES IN INDIA • Gradual Liberalization of Indian Economy – Exchange Rates Deregulated • Indian Business houses started actively approaching foreign markets – With their products – Source of Capital and investment opportunities • Derivative Structures reduce interest costs and protect top lines