Advanced Financial Management · Foreign Exchange Exposure and Risk Management

Currency Futures for CA Final AFM

Updated 5 October 2026 · Fact-checked

A currency future is a standardised exchange-traded contract to buy or sell a fixed amount of a currency pair at a set price on a future date, settled in rupees in India. To solve questions, find the exposure, pick buy or sell, compute contracts, then add futures gain or loss to the spot cash flow.

Understand Currency Futures

A currency future is a contract traded on an exchange. It fixes the price today for buying or selling a set amount of a currency on a set future date. In India the main contracts are USD-INR, EUR-INR, GBP-INR and JPY-INR, quoted in rupees per unit of foreign currency. The standard USD-INR contract size is USD 1,000. Contract sizes for other pairs differ, so always use the size given in the question.

A future is different from a forward. A forward is a private deal with a bank, made for any amount and any date, and it is settled only on maturity. A future is standardised in size and expiry. It is traded on an exchange, and a clearing corporation guarantees it. So you carry little default risk. In India these contracts are cash settled in rupees. No dollars change hands. The final settlement price is based on the RBI reference rate on the last trading day.

You do not pay the full contract value. You deposit an initial margin, a small percentage of the contract value. Every day the exchange does marking to market (MTM). It compares the day's settlement price with the previous one, or with your entry price on day one. The gain or loss is credited or debited to your margin account that day. If your balance falls below the maintenance margin, you must top it up to the initial margin level.

For hedging, take a futures position opposite to your spot exposure. An exporter who will receive USD sells futures. An importer who must pay USD buys futures. If the rupee moves against your spot position, the futures gain offsets it. For speculation, you take a view with no underlying exposure. Buy if you expect the foreign currency to rise, sell if you expect it to fall.

In exams, the hedge is rarely perfect. The futures price and the spot price may not converge exactly, and the contract size may not divide the exposure evenly. That gap is called basis risk. Always state it when the numbers do not match.

Key rules to remember

Number of contracts: Contracts = Foreign currency exposure ÷ Contract size; For USD-INR, the contract size is USD 1,000. Round to a whole number and mention any unhedged balance.
Tick value: Tick value = Contract size × Tick size; USD-INR tick size is ₹0.0025, so one tick is USD 1,000 × ₹0.0025 = ₹2.50 per contract.
Profit or loss on a long position: (Exit price − Entry price) × Contract size × Number of contracts; Buyer of futures gains when the price rises.
Profit or loss on a short position: (Entry price − Exit price) × Contract size × Number of contracts; Seller of futures gains when the price falls.
Daily MTM: MTM = (Today's settlement price − Previous settlement price) × Contract size × Contracts, with the sign flipped for a short position; On day one, use the entry price as the previous price. The sum of all daily MTMs equals the total gain or loss.
Theoretical futures price: F = S × (1 + i₍INR₎ × t) ÷ (1 + i₍USD₎ × t); Interest rate parity form with simple interest. Here t is in years. Use the compounding form only if the question gives it.
Effective rate with a hedge: Effective rate = Spot rate at expiry ± Futures loss or gain per unit; For a perfect hedge this equals the futures entry price.
Margin account balance: Closing balance = Opening balance + MTM gain − MTM loss + Top-up − Withdrawal; A top-up is needed when the balance falls below the maintenance margin.

How to solve Currency Futures questions

Use this order for any currency futures question. It keeps your working clear and earns step marks even if one number slips.

1Identify the exposure. Note the currency, the amount, and whether you will receive it (long exposure) or pay it (short exposure).
2Decide the futures position. Sell futures to hedge a receivable. Buy futures to hedge a payable. For speculation, buy if you expect the foreign currency to rise and sell if you expect it to fall.
3Compute the number of contracts as exposure ÷ contract size. Round sensibly and note any unhedged amount.
4Note the entry price. Then find the exit price: the final settlement price, or the spot rate at expiry as the question directs.
5Calculate the futures gain or loss per unit and in total, using the long or short formula. If daily prices are given, do the MTM day by day and check the sum.
6Add the futures result to the spot cash flow. Importer's net outflow = spot payment − futures gain (or + futures loss). Exporter's net inflow = spot receipt + futures gain (or − futures loss).
7Compute the effective rate, compare it with the entry price, and comment on basis risk or any unhedged portion.
8If margins are asked, update the margin balance daily and flag any top-up against the maintenance margin.

Quickest way: Entry price shortcut for a hedge

When to use it: Use this when the question assumes the futures price converges to spot at expiry and asks only for the net outcome of the hedge.

Work out the contracts: exposure ÷ contract size.
For a perfect hedge, the effective rate equals the futures entry price, so net amount = entry price × exposure.
Check with one scenario only if the examiner asks. Spot payment ± futures gain or loss should give the same figure.
If the exposure does not divide evenly by the contract size, apply the hedge rate to the hedged part. Apply the spot rate at expiry to the unhedged part.
For MTM questions, skip the daily rows only if just the total is asked. Total = (Entry − Exit) × units for a short, or (Exit − Entry) × units for a long.

Common mistakes in Currency Futures

Taking the wrong side of the hedge, such as buying futures for an export receivable.
Students match the direction of the exposure instead of the direction of the risk.
Fix: Ask which way the rupee move hurts you. An exporter loses if the foreign currency falls, so the exporter sells futures. An importer loses if it rises, so the importer buys.
Forgetting the contract size and computing the gain on one unit only.
The price difference looks like the final answer, so the multiplication by units is skipped.
Fix: Always write gain per unit × contract size × number of contracts. Check that this equals gain per unit × total exposure.
Mixing up the sign in MTM for short positions.
Students apply the long-position formula to every position.
Fix: For a short position, a rising price is a loss. Write 'previous − today' for shorts and 'today − previous' for longs.
Treating margin as a cost or as the contract value.
Margin is confused with premium, or with the full notional amount.
Fix: Margin is a refundable deposit that stays in your account. Only MTM gains and losses change its balance. Notional value is contract size × price.
Saying currency futures in India involve delivery of dollars.
Students carry over ideas from forward contracts or from overseas markets.
Fix: Write that USD-INR and similar contracts are cash settled in rupees. The difference between entry and final settlement price is paid or received.
Treating forwards and futures as identical in theory answers.
Both fix a future rate, so the differences get ignored.
Fix: Cover size, expiry, trading venue, counterparty or default risk, margin, daily settlement and flexibility. Give at least four distinct points.

Worked examples

Example 1

An Indian importer must pay USD 2,00,000 in three months. He buys USD-INR futures (contract size USD 1,000) at ₹83.2000 per USD. At expiry the final settlement price and the spot rate are both ₹84.0000. Find the number of contracts, the futures result, and the effective rupee cost. Also show the result if the rate at expiry is ₹82.5000 instead.

Show the solution

Exposure is a payable, so the importer buys futures.
Contracts = 2,00,000 ÷ 1,000 = 200 contracts.
Case 1, rate at ₹84.0000: futures gain = (84.0000 − 83.2000) × 2,00,000 = 0.80 × 2,00,000 = ₹1,60,000.
Spot payment = 84.0000 × 2,00,000 = ₹1,68,00,000.
Net cost = ₹1,68,00,000 − ₹1,60,000 = ₹1,66,40,000. Effective rate = ₹83.20 per USD.
Case 2, rate at ₹82.5000: futures loss = (83.2000 − 82.5000) × 2,00,000 = 0.70 × 2,00,000 = ₹1,40,000.
Spot payment = 82.5000 × 2,00,000 = ₹1,65,00,000.
Net cost = ₹1,65,00,000 + ₹1,40,000 = ₹1,66,40,000. Effective rate = ₹83.20 per USD.

Answer: He needs 200 long contracts. In both cases the net cost is ₹1,66,40,000, an effective rate of ₹83.20 per USD. The hedge removes the rate risk, but it also gives up the benefit of a falling dollar.

Example 2

An exporter sells 10 USD-INR futures contracts (USD 1,000 each) at ₹83.4000 and deposits an initial margin of ₹25,000. Daily settlement prices are: Day 1 ₹83.4250, Day 2 ₹83.3500, Day 3 ₹83.3000. Compute the daily MTM and the margin balance at the end of each day, assuming no top-ups or withdrawals. Then find the total gain or loss.

Show the solution

The position is short, so MTM = (previous price − today's price) × 10 × 1,000 = (previous − today) × 10,000.
Day 1: (83.4000 − 83.4250) × 10,000 = −0.0250 × 10,000 = −₹250 (loss). Balance = 25,000 − 250 = ₹24,750.
Day 2: (83.4250 − 83.3500) × 10,000 = 0.0750 × 10,000 = +₹750 (gain). Balance = 24,750 + 750 = ₹25,500.
Day 3: (83.3500 − 83.3000) × 10,000 = 0.0500 × 10,000 = +₹500 (gain). Balance = 25,500 + 500 = ₹26,000.
Total MTM = −250 + 750 + 500 = ₹1,000.
Check: (83.4000 − 83.3000) × 10,000 = 0.10 × 10,000 = ₹1,000. It matches.

Answer: MTM is −₹250, +₹750 and +₹500 on the three days. The margin balance ends at ₹26,000, and the total gain on the short position is ₹1,000. This gain would offset a fall in the rupee value of the exporter's dollar receivable.

Exam tips

Write the position (buy or sell), number of contracts and entry price first. Examiners give step marks for these even if the final number is wrong.
Always reconcile. Spot flow plus or minus the futures result should equal entry price × exposure for a perfect hedge. Show this check in one line.
In theory questions on forward versus futures, answer in a table-like list of points: size, expiry, venue, default risk, margin, settlement, flexibility. Use the points that fit the marks.
For MTM questions, draw a small day-wise table of price, MTM and margin balance. Flag any day the balance falls below the maintenance margin and show the top-up.
Use the contract size, tick size and rates given in the question. If none are given, state your assumption, such as USD 1,000 per USD-INR contract, before you calculate.

Practice questions from Foreign Exchange Exposure and Risk Management

Currency Futures in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Currency Futures: frequently asked questions

What is the difference between forward and futures contracts in forex?

A forward is a private, customised deal with a bank. It has default risk and is settled at maturity. A future is standardised, exchange traded and guaranteed by a clearing corporation. It needs margin and is marked to market daily.

How do you hedge with currency futures?

Take a futures position opposite to your spot exposure. An exporter with a dollar receivable sells USD-INR futures, and an importer with a dollar payable buys them. At expiry, the futures gain or loss offsets the spot movement, so the effective rate is close to the futures entry price.

What is marking to market in currency futures?

It is the daily settlement of gains and losses. The exchange compares the day's settlement price with the previous one and credits or debits your margin account. If the balance falls below the maintenance margin, you must top it up.

What is the contract size of a USD-INR future?

It is USD 1,000 per contract, quoted in rupees per dollar. The tick size is ₹0.0025, so one tick is worth ₹2.50 per contract. Other currency pairs have different sizes, so use the size given in the question.

Is a currency future settled by delivering dollars?

No. Currency futures in India are cash settled in rupees. The difference between your entry price and the final settlement price is paid or received through the exchange.