Interplay between Exchange Traded Currency Futures Markets, Spot Markets and Forward Markets: A Study on India
Department of Economic Affairs, Ministry of Finance
August 1, 2010
Indian Economic Review, Vol. 45, No. 1, pp. 111-130, 2010
Exchange traded currency futures, in the Indian Rupee-Dollar currency pair, have recently been introduced in the country last year. This paper empirically tests the impact of currency futures trading on volatility and returns of underlying spot exchange rates. The informational advantage in exchange traded currency futures contracts relative to OTC contract is also tested. Results indicate that both speculative and hedging activities in the futures market for currency have no influence on the volatility in the underlying exchange markets. The returns in futures markets are seen to be driving the returns in spot markets, indicating the information advantage of the futures markets. Further, results indicate that the information content of futures markets is higher than that of forward markets.
Keywords: Exchange traded currency futures, Over-the-Counter derivatives, domestic forwards markets
JEL Classification: G14
Date posted: September 20, 2010