InvestorQ : What is meant by trading of currency spreads?
Mahima Roy made post

What is meant by trading of currency spreads?

Answer
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Aditi Sharma answered.
3 years ago
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Spreads are an interesting way of trading on widening or narrowing of spreads between two months. For example, if you expect that the spreads between the December contract and the November contract will widen due to a Fed meet outcome, then the best way is to trade long on current month and short on the next month. But that would be double the time, cost and transaction management. That is not optimal. Easier still is to directly buy the spread where you expect the spread to widen or sell the spread the spread where you expect it to narrow. The spread contract also acts as a indicator of future movement of futures prices.

Contract

Best Bid

Best Ask

Volume

LTP Difference

USDINR

SPNOV18DEC18

1000

0.185

0.19

56

5,77,840

0.19

SPNOV18JAN19

1000

0.365

0.4225

300

14,396

0.4025

SPNOV18FEB19

500

0.485

-

-

1,038

0.575

SPNOV18MAR19

1000

0.71

-

-

-

-

SPNOV18APR19

1000

0.71

-

-

-

-

SPNOV18MAY19

1000

0.71

-

-

-

-

SPDEC18JAN19

1000

0.2125

0.2175

300

4,306

0.22

SPDEC18FEB19

100

0.42

0.4375

100

-

-

SPDEC18MAR19

-

-

-

-

-

-

SPDEC18APR19

-

-

-

-

-

-

SPDEC18MAY19

-

-

-

-

-

-

SPDEC18JUN19

1500

0.7125

-

-

-

-

SPJAN19FEB19

250

0.2025

0.215

1000

144

0.21

In the above if you expect the USDINR DEC-Jan spread to widen from 0.2 to 0.25, then you just buy this spread contract and then you can book the profits when your profit target is reached. It is as simple as that.

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