Impact of Derivative Trading on Currency Market Volatility in India

The paper is aimed at examining the impact of introduction of currency derivatives on exchange rate volatility of Euro. The data used in this paper comprises of daily exchange rate of Euro in terms of Indian rupees for the sample period April 2006 to December 2014. To explore the time series properties Unit Root Test have been employed and to study the impact on underlying volatility GARCH (1, 1) model has been employed. The results indicate that the introduction of currency futures trading has helped in reducing the exchange rate volatility of the foreign exchange market in India. Further, the results are also indicative of the fact that the importance of recent news on spot market volatility has increased and the persistence effect of old news has declined with the introduction of currency futures trading