MUMBAI: Treasuries at top Indian companies and banks will have a new avenue to raise their earnings after the market regulator permitted three new pairs of currencies to trade on local exchanges that are seeking to bring a larger portion of overseas business in local financial assets back home.
Individuals and institutions can now trade in euro-dollar, pound sterling-dollar, and the dollar-yen in the exchanged trade futures and options until 7.30PM. Trading begins Tuesday on the National Stock Exchange (NSE) and the competing Bombay Stock Exchange (BSE).
“Companies and banks may tap arbitrage opportunities as they access global markets easily through this platform,” said Huzan Mistry, Chief – Business Development (Currency and Debt Markets), NSE. “Introduction of the majors like euro, pound sterling and Japanese yen will likely give corporate India the opportunity to access these currencies at finer prices as compared to interbank rates.”
Trading volumes, too, are expected to scale up fast as those global currencies have greater transaction values globally. Trade volumes are expected to rise at least 25% in the next six months.
Here’s how it is likely to work:
If the euro gains against the dollar, a company will sell euros in the domestic futures/options market to have more stock of dollars. Then, it will use the same dollar stock to buy euro in other markets like over-the-counter or non-deliverable forwards market where euro value would be relatively less to the dollar.
For example, when euro-dollar six-month futures are quoting 1.2, the trader will get 1.2 dollars for buying a single Euro currency. Hypothetically, the exchange rate then trends lower at 1.19 in the non-deliverable forwards market, which is the overseas derivative currency market or even local interbank forward (OTC) market.
So, investors sell the euro to get higher dollar stock in the exchange traded futures, which will be used to buy more euros in the offshore derivative market or the domestic OTC market. They gain from the nearly 1 percent gap between the two markets.
“Companies will tap the likely arbitrage opportunity from those cross currencies,” said Anindya Banerjee, currency analyst, Kotak Securities. “All those foreign currencies are globally traded at much larger volumes with frequent swings. This should cater to arbitrage opportunities frequently.”
“With the expanding scope of participation, wealthy individual investors and banks will seek to gain from the move,” he said.
The latest move by SEBI has also given the competitive edge to NSE and BSE. Cross-currency futures are now available in various pairs including euro-rupee, sterling-rupee, yen-rupee and dollar-rupee. Now, the first three pairs have been permitted to be traded in options segment as well.