Is Currency Futures Market at NSE India Informationally Efficient?

Abstract

In a perfectly efficient and frictionless market, futures price should move concurrently with the underlying spot price without any lead or lag in price movements across markets. Futures price should be an unbiased estimator of the future spot price at the expiration date. Traders, exporters, importers and MNCs are exposed to foreign exchange risk to hedge their foreign currency exposures. They enter in to currency future contract. The hedging effectiveness depends on the efficiency of currency future market. In this paper, we analyse the efficiency of currency future market at National Stock Exchange (NSE) of India for sample period. The various parametric and non-parametric tests have been applied to test the efficiency of US $ currency futures market at NSE in India. Johansen’s Cointegration reports that US dollar futures and spot series are cointegrated and possess long run equilibrium with each other. From Granger Causality results, we find that there is one-way causality from US dollar futures to spot market. Therefore, we conclude that currency future market at NSE India is informationally efficient. Hence, US dollar futures can be used to hedge against US dollar denominated foreign exchange exposure.