India might soon launch currency futures that would enable corporates, mutual funds and individuals to trade in currency derivatives.

The Reserve Bank of India [Get Quote] has set up an expert working group for examining issues related to the launch of currency futures in the country.

The moves comes close of the heels of the launch of Indian Rupee futures by the Dubai Gold and Commodities Exchange (DGCX) earlier this month.

DGCX, the first exchange in the world to trade a rupee derivative, already trades in three currency contracts such as euro/US dollar, pound sterling/US dollar and Japanese yen/US dollar.

Each DGCX Indian rupee contract represents two million Rupees. Prices will be quoted in US Cents per 100 Indian Rupees, with a minimum price fluctuation of 0.000001 US Dollars per Rupee ($2 per contract). At any point in time DGCX will list the current and next two calendar months, plus the next three calendar quarterly months.

As per the RBI move, the currency futures will enable individuals and companies to have the opportunity to hedge and trade their Indian rupee risk on transparent and equal basis that an exchange provides.

Individuals planning to spend large sums of foreign exchange on overseas travel or education will also be able to hedge against currency fluctuation risks.

Officials said RBI has asked foreign banks operating in India to make presentations, highlighting the feasibility of currency futures and how it can help corporates and mutual funds in the country.

Once a decision is taken, the RBI will make a recommendation to the finance ministry in this regard.

A currency future is similar to a forward contract. It is a futures contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the last trading date.

Typically, one of the currencies is the US dollar. The price of a future is then in terms of US dollars per unit of other currency. This can be different from the standard way of quoting in the spot foreign exchange markets. The trade unit of each contract is then a certain amount of other currency, for instance Euro 125,000.

Most contracts have physical delivery, so for those held at the end of the last trading day, actual payments are made in each currency. However, most contracts are closed out before that.

Investors use these futures contracts to hedge against foreign exchange risk. They can also be used to speculate and, by incurring a risk, attempt to profit from rising or falling exchange rates. Investors can close out the contract at any time prior to the contract's delivery date.

Currency futures were first created at the Chicago Mercantile Exchange (CME) in 1972, less than one year after the system of fixed exchange rates was abandoned along with the gold standard. Some commodity traders at the CME did not have access to the inter-bank exchange markets in the early 1970s, when they believed that significant changes were about to take place in the currency market.

They established the International Monetary Market (IMM) and launched trading in seven currency futures on May 16, 1972.

Today, the IMM is a division of CME. In the second quarter of 2005, an average of 332,000 contracts with a notional value of $43 billion were traded every day. Currently most of these are traded electronically.