Abstract
The current study aimed to examine the causal relationship between the NSE currency future rates and currency spot rates in order to identify the price discovery mechanism at NSE market and its integration with foreign exchange market (spot market). To study the causal relationship between the said markets, we have considered daily closing rates for NSE currency futures and currency spot rates for selected pairs of currencies, i.e. USD/INR, GBP/INR, JPY/INR and EURO/INR. The data was obtained from www.nseindia.com and www.investing.com for the period from Jan-2010 to Sep-2017, which makes approximately 1750 observations for each currency pair in each market. It is found that the spot rate for JPY/INR leads the future rate. It is also identified that the spot rate for USD/INR does not cause the changes in futures. It indicates that the market integration between spot and futures at NSE for currency pair USD/INR is strong compared to other selected currency pairs. From the variance decomposition test we found that there is almost no impact of variance in USD/INR spot rate on future rate variance forecast errors. It implies that the causal relationship between for USD/INR spot and future rates is strong and mature compared to the measured causal relationships for the remaining currency pairs. This study concludes that the price discovery process for currency pair USD/INR is better at NSE currency futures among the selected currency pairs.
Highlights
Foreign exchange market is the world‟s largest market in terms of trade value is estimated at $5.09 trillion (Bank for International Settlements) in the year 2016
The current study aims to examine the causal relationship between the NSE currency future rates and currency spot rates in order to identify the price discovery mechanism at NSE market and its integration with foreign exchange market
To study the causal relationship between the said markets, we have considered daily closing rates for NSE currency futures and currency spot rates for selected pairs of currencies, i.e. USD/INR, GBP/INR, JPY/INR and EURO/INR
Summary
Foreign exchange market is the world‟s largest market in terms of trade value is estimated at $5.09 trillion (Bank for International Settlements) in the year 2016. A currency derivative comes in handy for the traders and can be used as a tool for mitigating future exchange rate risk. Though the magnitude of exchange traded currency derivatives against over the counter trade is very small, the currency derivatives are exceptionally doing well at NSE F&O segment. Total traded turnover of Currency derivatives at NSE for the year 2016 stood at Rs 48, 57,075 Cr. with the average daily turnover of Rs 19,394.83 Cr. World federation of exchanges reports that the currency derivative trade volume has increased significantly during the period of 2015-2016 in both futures and options. The report validates that the currency derivatives on NSE, i.e. both futures and options available on USD/INR are most traded currency derivatives in the world for the year 2016-17 after USD/RUB futures that are traded on the Moscow Exchange.
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