CURRENCY FUTURE & OPTIONS IN INDIA

Atul Ghadigaonkar Aditya Mhatre Brijesh Pal Neelam Pawar Supreet Shetty Mangesh Borse
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What is currency futures

A transferable futures contract that specifies the price at which a specified currency can be bought or sold at a future date. Currency future contracts allow investors to hedge against foreign exchange risk.

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History of Currency futures

Currency futures were first created at the Chicago Mercantile Exchange (CME) in 1972 International Monetary Market (IMM) launched trading in seven currency futures on May 16, 1972.

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Rohit thakur

Currency futures in India

Currency futures trading was started in Mumbai August 29, 2008. With over 300 trading members including 11 banks registered in this segment, the first day saw a very lively counter, with nearly 70,000 contracts being traded. The first trade on the NSE was by East India Securities Ltd Amongst the banks, HDFC Bank carried out the first trade. The largest trade was by Standard Chartered Bank constituting 15,000 contracts. Banks contributed 40 percent of the total gross volume.
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Fundamentals of Indian currency futures

Exchange-traded options on the rupee-dollar spot rate were allowed by Sebi on 30 July 2010. At Rs.30,000 crore, the currency futures market is nearly 10 times the size of the options market, according to latest data. On the National Stock Exchange (NSE), over 3 lakh contracts (USD 300 million) were traded during the day with an open interest of about 95,000 contracts (USD 95 million).

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 August 2008 Launch of Currency Derivatives February 2010 Launch of Currency Futures on additional currency pairs
Product class(Jan 2009) Index futures Index options Stock futures Stock options Currency futures Currency options 8/14/2011 Total Turnover (Billion rupees) 353 1981 391 48 178 30 2981

Fundamentals of Indian currency futures

Currency futures can be traded between Indian rupees and US dollar (US$ -- INR) The trading of Indian currency futures can be done between 9 am to 5 pm The minimum size of currency futures is US$ 1000 periodically the value of the contract can be changed by RBI and SEBI The currency future can have maximum validity of 12 months The currency futures contract can be settled in cash 8/14/2011

Trade exchanges for currency futures

There are 3 trade exchange that trades in currency futures 1. National Stock Exchange (NSE) 2. Bombay Stock Exchange (BSE) 3. Multi-Commodity Exchange (MCX)
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Importance of currency futures

According to market analysts, introduction of currency futures in the Indian market will give companies greater flexibility in hedging their underlying currency exposure and will bring in more liquidity into the market as currency future Forex derivative contract will enable a person, a bank or an institution to buy or sell a particular currency against the other on a specified future date, and at a price specified in the contract.
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FUTURES CONTRACTS
Advantages of futures:

1.) Smaller contract size 2.) Easy liquidation 3.) Wellorganized and stable market.

Disadvantages of futures:

1.) Limited to 7 currencies 2.) Limited dates of delivery 3.) Rigid contract sizes.
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PART II CURRENCY OPTIONS

I.OPTIONS A. Currency options 1. offer another method to hedge exchange rate risk. 2. first offered on Philadelphia Exchange (PHLX). 3. fastest growing segment of the hedge markets.
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CURRENCY OPTIONS
4. Definition: a contract from a writer ( the seller) that gives the right not the obligation to the holder (the buyer) to buy or sell a standard amount of an available currency at a fixed exchange rate for a fixed time period.

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CURRENCY OPTIONS STYLES

European option an option that may only be exercised on expiration. American option an option that may be exercised on any trading day on or before expiry. Bermudan option an option that may be exercised only on specified dates on or before expiration. Barrier option any option with the general characteristic that the underlying security's price must pass a certain level or "barrier" before it can be exercised. Exotic option any of a broad category of options that may include complex financial structures.[7] Vanilla option any option that is not exotic.

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Over-theOver-the-counter
Currency trading market is one of the largest amongst any other types of trading market so They are traded over the counter Over-the-counter options (OTC options, also called "dealer options") are traded between two private parties, and are not listed on an exchange. The terms of an OTC option are unrestricted and may be individually tailored to meet any business need. In general, at least one of the counterparties to an OTC option is a well-capitalized institution In such bilateral contract, each party should have credit risk concerns with respect to the other party.

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Rohit thakur

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CURRENCY OPTIONS IN INDIA

Exchange-traded currency options were introduced on 29 October 2010, after NSE received approval from market regulator Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI). The average daily turnover in the currency options market rose from Rs630 cr in November 2010 to Rs1,915 cr in February 2011 and further to Rs3,095 cr in the first week of March.
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Fundamentals of Indian currency options

Exchange-traded options on the rupee-dollar spot rate were allowed by Sebi on 30 July 2010. At Rs.30,000 crore, the currency futures market is nearly 10 times the size of the options market, according to latest data. On the National Stock Exchange (NSE), over 3 lakh contracts (USD 300 million) were traded during the day with an open interest of about 95,000 contracts (USD 95 million), the bourse said in statement.

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 Standard Chartered Bank, India's largest international bank, was amongst the first to transact in the currency options market on the NSE . The first trade in the currency options was executed by East India Securities Ltd. About 130 members, including State Bank of India, Axis Bank, IDBI Bank, Standard Chartered Bank and IndusInd Bank actively participated in the trading.
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IMPORTANCE OF CURRENCY OPTIONS

Buying currency options is a more flexible form of hedging than setting up a forward foreign exchange contract - but it's also more expensive. To enjoy this flexibility you'll have to pay a premium The exact amount will depend on the amount of currency involved, the exchange rate, the length of the option and may typically be in the region of 1 or 2 per cent of the face value of the contract.

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This option suits businesses that:

want to protect themselves from unfavourable rate changes while retaining the flexibility to benefit from advantageous ones are entering into a deal but there's a fair chance of it not going ahead eg a tender situation have a foreign exchange exposure in excess of 500,000 per trade, although this may vary between banks

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Rohit thakur

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IMPORTANCE OF CURRENCY OPTIONS

Currency trading is a risky business highly volatile in comparison to other financial markets Currency trading market is one of the largest amongst any other types of trading market so They are traded over the counter

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Currency Trading Market

The currency trading market is termed to be the simplest of all and it is very easy to understand. the currency trading market is extremely unpredictable and volatile at the same time.

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Rohit thakur

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CURRENCY OPTIONS
Advantages You're protected from any adverse movements in the exchange rate. Your business can benefit if the exchange rate moves in your favour. Disadvantages The expense of setting the option up. Only available to companies with large foreign exchange exposures.
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Currency Option Vs Currency Future

Like all options, when you buy an option your risk is limited to the premium paid for the derivative. Options also carry the "right" to take delivery (exercise) of the underlying asset if so desired. When you buy a futures contract you are "obligated" to take delivery (or cash settle) the underlying asset upon expiration. With risk not being limited to a premium (as is the case with buying options), a futures contract's risk profile is more aggressive...having loss potential on both up and downside of the market. Buying futures contracts also requires the deposit of an "initial margin" upfront that can be much larger than an option premium, which fluctuates on a variety of factors. The initial margin also earns interest whereas an option premium doesn't - the option premium is paid to the seller, who earns the interest on the amount paid.
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