Currency futures impact on the volatility of exchange rate

This article attempts to study the impact of currency futures trading on the volatility of the spot exchange rates where the underlying in the futures contract is the USD-INR exchange rate. Currency futures were introduced in year 2008 on the Indian stock exchange to hedge the risks arising out of the fluctuations in exchange rate and to contain the volatility of the exchange rates. The study has employed USD-INR exchange rate data for 10 year period starting from March 2000 to Dec 2010. Using GARCH (1, 1) framework, the study reports an increase in volatility coefficient of the spot exchange rate of USD-INR. Thus, it can be inferred on the basis of the empirical evidence that currency futures trading has increased the volatility of the exchange rate of USD-INR.