HEDGING EFFECTIVENESS OF CURRENCY FUTURES

Tulsi Lingareddy

Abstract


India’sforeign exchange market has been witnessing extreme volatility trends for thepast three years. In this context, foreign exchange derivatives becomeimportant tools for market risk management. While the over the counter (OTC)derivatives, forwards, are widely used in the post liberalisation period,exchange traded currency futures are also available for trading since Aug 2008.An attempt is made to study the hedging effectiveness of exchange tradedfutures and OTC traded forwards. The results indicated that the hedgingeffectiveness of forwards is significantly higher than that of exchange tradedfutures. This could be one of the reasons for the less popularity of thefutures among hedgers compared to OTC forwards.

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ISSN : 2251-1555