Currency Derivatives

Currency derivatives derive their value from exchange-rate movements. They include exchange-traded futures and options and over-the-counter forwards and swaps.

• 7 currency pairs are permitted.
• Tenor can reach 12 months.
• Futures create obligations.
• Options provide a right.
• INR contracts require exposure.
• Derivatives can reduce currency risk.

Currency derivatives can also create losses, margin requirements, and premium costs. The contract size, expiry, settlement method, and underlying exposure determine how a derivative affects your currency risk and cash flow.

Currency derivatives are financial contracts whose value depends on changes in the exchange rate between two currencies. They form part of the broader market for derivative trading.

For example, a USD-INR derivative changes in value when the exchange rate between the US dollar and Indian rupee changes.

Currency derivatives fall into two broad categories:

Exchange-traded contracts follow standardised terms such as contract size and expiry. Over-the-counter contracts can be structured around the permitted terms of an underlying transaction.

Exchange-traded currency derivatives provide a standardised mechanism for managing exchange-rate exposure.

In an over-the-counter transaction, eligible counterparties negotiate the derivative directly. Exchange-traded contracts instead use predefined parameters such as:

• Contract size
• Currency pair
• Expiry
• Price quotation
• Margin requirement
• Settlement method

For example, an Indian importer may have to pay a foreign supplier after three months. If the foreign currency strengthens against the rupee, the importer needs more rupees to make the same payment.

A suitable currency derivative can offset part or all of that currency exposure. However, a hedge does not ensure financial savings. A favourable currency movement can make an existing fixed hedge less beneficial.

The main currency derivatives are futures, options, forwards, and swaps. They differ in their trading venue, contractual obligations, and settlement structure.

Currency futures

A currency futures contract is a standardised exchange-traded derivative linked to a currency pair.

Both parties take on contractual obligations. The futures position changes in value when the underlying exchange rate moves.

Futures also involve margin requirements. Adverse movements can therefore result in losses and additional margin obligations.

Currency options

A currency option gives its buyer the right, but not the obligation, to buy or sell currency exposure at a predetermined strike price.

A call option provides the right to buy. A put option provides the right to sell.

The option buyer pays a premium for this right. The buyer can lose the premium if the option expires without value.

Currency forwards

A currency forward is an over-the-counter (OTC) derivative.

Two eligible counterparties agree on an exchange rate for a future currency transaction. The amount, maturity, and other terms can be structured according to the permitted underlying exposure.

Unlike a futures contract, a forward is negotiated between the counterparties.

Currency swaps

A currency swap is an OTC derivative involving payment streams, principal amounts, or both in different currencies.

The contract specifies when the relevant payments or principal exchanges occur. Its structure depends on the agreement and the applicable foreign-exchange framework.

Currency derivatives create a financial position linked to an exchange rate. The financial outcome depends on the contract terms and subsequent currency movement.

Example 1: Importer using a currency forward

Ravi, 38, runs an importing business in Jaipur. His company must make a payment worth approximately ₹95.02 lakh (US$1,00,000) after three months.

Assume:

• Current exchange rate: ₹95.02 per US$1
• Hypothetical forward rate: ₹96.50 per US$1
• Foreign-currency payment: ₹95.02 lakh (US$1,00,000) at the current rate
• Payment period: 3 months

At today's exchange rate:

₹95.02 × 1,00,000 = approximately ₹95.02 lakh

Ravi enters into a forward contract at ₹96.50 per US$1.

Suppose the spot rate reaches ₹100 per US$1 after three months.

Without the forward

The payment would cost:

₹100 × 1,00,000 = ₹1 crore (US$1,00,000)

With the forward

The payment would cost:

₹96.50 × 1,00,000 = ₹96.50 lakh (US$1,00,000)

The difference is:

₹1 crore − ₹96.50 lakh = ₹3.50 lakh

The forward offsets ₹3.50 lakh of the adverse exchange-rate movement in this example.

However, if the spot rate falls to ₹93 per US$1, the ₹96.50 forward rate becomes less favourable. The hedge reduces uncertainty but does not ensure the lowest eventual cost.

Example 2: Importer using a currency call option

Priya, 32, runs a business in Pune and has a future payment denominated in euros.

At today's exchange rate, ₹1.06 lakh (€1,000) represents the approximate underlying foreign-currency amount.

Assume:

• Current exchange rate: ₹106.06 per €1
• Contract amount: ₹1.06 lakh (€1,000)
• Hypothetical strike price: ₹107 per €1
• Premium: ₹0.60 per €1
• Total premium: ₹600
• Hypothetical settlement rate: ₹112 per €1

The option payoff is:

(₹112 − ₹107) × 1,000 = ₹5,000

After deducting the ₹600 premium:

₹5,000 − ₹600 = ₹4,400

The net option result is ₹4,400 before other applicable costs.

If the settlement rate falls below ₹107 per €1, Priya can allow the option to expire without value. Her cost from the option itself is the ₹600 premium.

These calculations are illustrative and exclude applicable taxes, brokerage, exchange charges, and other transaction costs.

Source: National Stock Exchange of India

Last updated: 27 October 2026.

The Reserve Bank of India (RBI) distinguishes between exchange-traded derivatives involving INR and permitted cross-currency derivatives that do not involve INR.

Recognised stock exchanges can currently offer:

• Foreign-exchange futures
• European foreign-exchange call options
• European foreign-exchange put options

The following 7 currency pairs are permitted:

The maximum tenor for these exchange-traded contracts is 12 months.

Exchange-traded foreign-exchange derivatives are cash-settled in INR. Contracts involving INR can be offered for hedging a contracted exposure.

A contracted exposure means currency risk arising from an eligible transaction that has already been entered into.

Permitted exchange-traded derivatives that do not involve INR can be offered without the same restriction on purpose.

What is the exposure threshold?

For exchange-traded contracts involving INR, a user can take positions up to the equivalent of approximately ₹950.20 crore (US$10 crore) without having to establish the existence of the underlying exposure upfront.

This INR conversion uses the 27 October 2026 rate of ₹95.02 per US$1.

The valid contracted exposure must still exist. It must also not have already been hedged through another derivative contract.

Positions beyond this threshold require the applicable monitoring framework through a designated Authorised Dealer or custodian.

What are the INR contract units?

Using the 27 October 2026 exchange rates stated above, the current INR equivalents of NSE contract units are approximately:

The foreign-currency contract quantity is fixed by the exchange. Its INR equivalent changes when the exchange rate changes.

Sources:

• Reserve Bank of India, Master Direction – Risk Management and Inter-Bank Dealings, updated 1 October 2026;
• National Stock Exchange of India, Contract Specifications – Futures & Options on INR Pairs, updated 22 July 2024;
• National Stock Exchange of India, Contract Specifications – Cross Currency, updated 9 May 2025;

• National Stock Exchange of India, Currency Derivatives – Reference Rates and market information, 27 October 2026.

  
  

Last updated: 27 October 2026.

Exchange-traded currency derivatives are accessed through a registered trading member that provides access to the relevant currency-derivatives segment.

The process involves:

1. Maintain an eligible trading account and complete the applicable Know Your Customer (KYC) requirements.
2. Complete the requirements for access to the relevant derivatives segment.
3. Identify whether the contract involves INR or a permitted non-INR currency pair.
4. For an INR-linked position, ensure that a valid contracted foreign-exchange exposure exists.
5. Select the required currency pair and contract expiry.
6. Check the contract unit and strike price where an option is involved.
7. Review the margin requirement for futures or the premium for an option.
8. Place the order and monitor the position until it is closed or settled.

For INR-linked contracts within the prescribed threshold, you do not have to establish the existence of the exposure upfront. However, a valid contracted exposure must exist and must be capable of being established if required.

Sources:

• Reserve Bank of India, Master Direction – Risk Management and Inter-Bank Dealings, updated 1 October 2026;
• National Stock Exchange of India, Currency Derivatives contract specifications, updated 9 May 2025.

Last updated: 27 October 2026.