Impact of Currency Futures Issuance on Foreign Exchange Rate Volatility in India

Abstract

This article examines the effect of currency futures on foreign exchange rate volatility in India focusing on USD-INR, EUR-INR, GBP-INR and JPY-INR.For the period from February 2002 to February 2020, the daily exchange rate values of all the four currencies against the Indian rupee (INR) were collected.The Augmented Dicky Fuller (ADF) test of the unit root was performed to check the stationarity of the time series data utilized in the study.After verifying the presence of heteroskedasticity with the ARCH LM test, GARCH (1, 1) modelling is employed to assess the impact of the launch of currency futures on the volatility of India's foreign exchange rate.The findings clearly depict that presence of volatility persistence is there for USD-INR, GBP-INR, EUR-INR, and JPY-INR.The volatility of returns of exchange rate before and after currency futures was discovered to be different as it is higher in pre futures period for USD-INR, and GBP-INR whereas for EUR-INR and JPY-INR it is higher in post futures period.The major implication is that when constructing hedging strategies, investors must account for volatility persistence between currency futures and spot markets.