1
CONTENTS
CHAPTER 1: DERIVATIVES AS A RISK MANAGEMENT TOOL.................................................4
1.1
What is risk?
..........................................................................................................................................................4
1.2
Risk Management
...............................................................................................................................................5
1.3
Types of Traders in the Derivatives Markets
......................................................................................5
1.3.1
Hedgers
...............................................................................................................................................................5
1.3.2
Speculators
.......................................................................................................................................................5
1.3.3
Arbitrageurs
......................................................................................................................................................6
CHAPTER 2: INTRODUCTION TO CURRENCY MARKETS...........................................................7
2.1
Exchange Rate
.........................................................................................................................................................7
2.2
Fixed Exchange Rate Regime and Floating Exchange Rate Regime
.......................................8
2.2.1
Fixed exchange rate regime:
...................................................................................................................8
2.2.2
Floating exchange rate regime:
.............................................................................................................8
2.3
Factors Affecting Exchange Rates
...............................................................................................................8
2.4
Quotes
..........................................................................................................................................................................9
2.5
Tick-Size
....................................................................................................................................................................10
2.6
Spreads
......................................................................................................................................................................10
2.7
Spot Transaction and Forward Transaction
.........................................................................................11
CHAPTER 3: CURRENCY FUTURES………………………...............................................................12
3.1
Forward Contracts
...............................................................................................................................................12
3.2
Futures Contracts
................................................................................................................................................13
3.3
Pricing of Futures Contracts
..........................................................................................................................13
CHAPTER 4: STRATEGIES USING CURRENCY FUTURES ........................................................17
4.1 Hedging using Currency Futures
................................................................................................................18
4.1.1
Short-Hedge
.....................................................................................................................................................18
4.1.2
Long Hedge
.......................................................................................................................................................19
4.2 Speculation in Currency Futures
...............................................................................................................20
CHAPTER 5: NSE’S CURRENCY DERIVATIVES SEGMENT .......................................................22
5.1
Product Definition
...............................................................................................................................................22
5.2
Trading underlying versus trading futures
...........................................................................................23
5.3
Uses of Currency Futures at NSE
...............................................................................................................25
5.3.1
Hedging:
.............................................................................................................................................................25
5.3.2
Speculation: Bullish, buy futures
........................................................................................................25
5.3.3
Speculation: Bearish, sell futures
.......................................................................................................26
5.3.4
Arbitrage:
..........................................................................................................................................................26
2
CHAPTER 6: TRADING… … … … … … … … … … … … … … … … … ........................................................27
6.1
Membership
.............................................................................................................................................................27
6.1.1
Categories of membership (NSE)
.......................................................................................................27
6.1.2
Participants
.......................................................................................................................................................28
6.1.3
Eligibility Criteria for Membership
.......................................................................................................28
6.1.4
Who cannot become a member?
.........................................................................................................31
6.1.5
Banks as Trading / Clearing Members
.............................................................................................32
6.2
Future Contract Specifications
.....................................................................................................................32
6.2.1
Permitted lot size
..........................................................................................................................................33
6.2.2
Tick Size
.............................................................................................................................................................34
6.2.3
Quantity Freeze
..............................................................................................................................................34
6.2.4
Base Price
..........................................................................................................................................................34
6.2.5
Price Dissemination
.....................................................................................................................................34
6.2.6
Price ranges of contracts
........................................................................................................................35
6.3
Trading System
.....................................................................................................................................................36
6.3.1
Order Matching Rule
...................................................................................................................................36
6.3.2
Order Conditions
...........................................................................................................................................36
6.4
The trader workstation
.....................................................................................................................................38
6.4.1
The market watch window
......................................................................................................................38
6.4.2
Inquiry window
...............................................................................................................................................38
6.4.3
Placing orders on the trading system
...............................................................................................39
6.4.4
Market spread order entry
......................................................................................................................40
6.5
Basis of trading
.....................................................................................................................................................41
6.5.1
Corporate hierarchy
....................................................................................................................................41
6.6
Client Broker Relationship in Derivatives Segment
........................................................................43
CHAPTER 7: CLEARING, SETTLEMENT AND RISK MANAGEMENT........................................45
7.1
Clearing entities
....................................................................................................................................................45
7.1.1
Clearing members
..........................................................................................................................................45
7.1.2
Clearing banks
..................................................................................................................................................45
7.2
Position Limits
........................................................................................................................................................45
7.3
Margins
.......................................................................................................................................................................46
7.3.1
Initial Margins
.................................................................................................................................................46
7.3.2
Calendar Spread Margins
.........................................................................................................................46
7.3.3
Minimum Margins
..........................................................................................................................................46
7.3.4
Futures Final Settlement Margin
.........................................................................................................47
7.3.5
Extreme Loss margins
...............................................................................................................................47
7.3.6
Imposition of additional margins
.........................................................................................................48
3
7.3.7
Mode of payment of margin
...................................................................................................................48
7.3.8
Payment of margins
....................................................................................................................................48
7.4
Settlement of contracts
...................................................................................................................................48
7.4.1
Settlement Price
............................................................................................................................................48
7.4.2
Settlement Schedule and Procedure
.................................................................................................49
7.4.3
Calculation of daily mark to market settlement
.........................................................................50
MODEL TEST…………………………… … … … … … … … … … … … … … … … … … … … … … … … … … … … 51Distribution of weights in theCurrency Derivatives: A Beginner’s Module CurriculumChapterNo.Title Weights (%)
1 Derivatives as a Risk Management Tool 102 Introduction to Currency Markets 103 Currency Futures 104 Strategies using Currency Futures 205 NSE's Currency Derivatives Segment 206 Trading 207 Clearing, Settlement and Risk Management 10Note: Candidates are advised to refer to NSE’s website: www.nseindia.com, click on ‘NCFM’ link and then go to ‘Announcements’ link, regarding revisions/updations in NCFM modules orlaunch of new modules, if any.Copyright © 2009 by National Stock Exchange of India Ltd. (NSE)Exchange Plaza, Bandra Kurla Complex,Bandra (East), Mumbai 400 051 INDIAAll content included in this book, such as text, graphics, logos, images, data compilation etc.are the property of NSE. This book or any part thereof should not be copied, reproduced,duplicated, sold, resold or exploited for any commercial purposes. Furthermore, the book in itsentirety or any part cannot be stored in a retrieval system or transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording or otherwise.
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