Long Term Relationship between Currency Futures and Volatility in Organized Spot Market – Perspectives

The prime objective of using currency futures as a derivative is to combat currency risk volatility. The study describes the benefits of currency futures, how currency futures work in the Indian context, and various reasons for fluctuation in currency. The objective of the study is to analyse the changes in the daily value of Rupee compared to the Dollar, Pound, Euro and Yen respectively. Data was collected from multiple observation points separately for every month for a 3 year period from Financial Year 2010 – 11 to 2012 -13. (April 2010 to March 2013). Kolmogorov Smirnov test was subsequently used to test the author's null hypothesis that the returns are normally distributed; which in turn was accepted. The paper uses the augmented Dickey – Fuller test (ADF) and the Phillips-Perron test as a unit root test. This analysis tests the stationary of variables which in turn has implications on to understand market volatility. The analysis showed that the null hypothesis of non–stationarity was rejected. Johansen's Cointegration test was applied to Dollar, Pound, and Euro and the null hypothesis of no integration was accepted and it showed that there is no long-term relationship among Dollar, Pound, and Euro.