Forward Trading

6.Forward Trading: The Reserve Bank of India has recently decided to allow forward contracts in Government Securities (G-secs).

• About forward trading in G-secs: Contract to buy/sell G-secs at a predetermined price on a future date.
• Purpose: Hedge against interest rate fluctuations and speculate on future price movements of G-secs.
• Objective: To develop the market and help financial institutions hedge interest rate risks.
• Benefit for Investors: Long-term investors (e.g., insurance funds) can manage interest rate risks across cycles.
• Impact on Derivatives Pricing: Enhances efficient pricing of derivatives using bonds as underlying instruments.
• Expansion of Interest Rate Derivatives by RBI: Over the years, RBI has introduced various interest rate derivative products, including Interest Rate Swaps (IRS), Interest Rate Options (IRO), Interest Rate Futures (IRF), and Interest Rate Swaptions & Forward Rate Agreements (FRA)