Efficiency of Currency Derivatives in Price Discovery Process: Evidences from India

Abstract

The present study investigates the efficiency of currency derivatives market by assessing its contribution towards price discovery process using spot and future prices of four currencies (USD/INR, EURO/INR, GBP/INR and JPY/INR) traded on the National Stock Exchange (NSE), India. As per the investigation, it can be concluded that there is a long run equilibrium relationship between spot rates and future rates, with unidirectional causality running from future rates to spot rates for all currencies under consideration. As the futures markets contribute more to the price discovery, this implies that more investors are attracted to it. This in turn leads to more rational price discovery.