First, what are currency derivatives?
Derivatives are financial contracts that derive their value from changes to the value of one or more variables also referred to as underlyings. An underlying could be a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, or other variable including the occurrence or non-occurrence of a specified event. An underlying may be a price or rate of an asset or liability but is not the asset or liability itself. Today, currency derivatives are available in India as over-the-counter (OTC) instruments from banks. Derivatives available today include forwards, options, swaps and other exotic instruments involving a combination of these instruments and related underlyings. Generally, companies are required to demonstrate the underlying exposures to ensure that these instruments are used for hedging risks and not for speculative purposes. These instruments can be used effectively to manage risks and exposures and contain costs. The need to balan
