A STUDY ON “CURRENCY DERIVATIVES”

A Project Report Submitted in Partial Fulfillment for the Award Of POST GRADUATE DIPLOMA IN MANAGEMENT (Batch 2011-2013)

SUBMITTED BY Mr. Deepak sharma PGDM 2011-13 Regd. No.-7024 (Faculty guide) Dr. P. Chakravarthi (Director Academics) Prof. Mir Irfan ul Haq

VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD

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Declaration

I, Deepak Sharma hereby declare that this short-term project titled “A STUDY ON CURRENCY DERIVATIVES” is an original work done by me under the supervision of Mr. Naveen Dhonte, Branch Manager of Future Capital Holdings Hyderabad. This project report or any part thereof has not been submitted for any other degree to any other institute or college. This project is the result of sincere efforts by me, wherein the Endeavour to complete up with best possible result.

Signature of the student (Deepak Sharma) Date:

VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD

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Certificate from the organization

VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD

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__________________that the work done and the training undertaken by him/her is genuine to the best of my knowledge and acceptable.Faculty Guide Certificate I Prof. Signature Date : VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 4 . __________________ certify Mr/Mrs.

a vivacious and enviable personality whose contribution is praiseworthy. I am very grateful to my institution who has invariably been the beacon of my advancement through their timely appreciation. I cannot express my gratitude in words to Naveen Dhonti (Manager of FUTURE CAPITAL HOLDING) my company guide for the rigorous proof reading and sharing his precious time. I believe that anyone can take a leaf from his book. of Vishwa Vishwani Institute of System & Management Hyderabad) who has firmly inculcated the everlasting and invaluable teachings in me and made me get the deeper insight of knowledge and inspiration to realize this unprecedented project work. chakravarthi (Prof. P. Ineffable are my feelings desperately indebted to him.Acknowledgement I deeply acknowledge the guidance of my faculty guide Dr. suggestion and motivated me to embark on this strenuous project. He is the person who has given me timely feedback. Signature of the student (Name of the student) Date : Place: VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 5 .

No. Content Page No.INDEX Chapter. Chapter 1 Chapter 2 Introduction Company Profile Industry Profile Literature Review About Topic 7-10 11-21 22-25 26-27 28-50 Chapter 3 Chapter 4 Research Methodology 51 Data Analysis & Interpretation 52-67 Chapter 5 Findings Recommendations Conclusions 68 69 70 Bibliography Books / Articles referred Websites referred 71 VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 6 .

It means that the borrowed foreign currency brought in the country will be converted into Indian currency. Since the fixed exchange rate system has been fallen in the early 1970s. All the international business transactions involve an exchange of one currency for another.CHAPTER – 1 INTRODUCTION TO CURRENCY DERIVATIVES Each country has its own currency through which both national and international transactions are performed. the currency units of a country involve . and when borrowed fund are paid to the lender then the home currency will be converted into foreign lender‘s currency. For example. facilitating transfer of purchasing power from one country to another. so the firms are exposed to the risk of exchange rate movements. With the multiple growths of international trade and finance all over the world. The price of one currency in terms of other currency is known as exchange rate. If any Indian firm borrows funds from international financial market in US dollars for short or long term then at maturity the same would be refunded in particular agreed currency along with accrued interest on borrowed money. As a result the assets or liability or cash flows of a firm which are denominated in foreign currencies undergo a change in value over a period of time due to variation in exchange rates. Since the exchange rates are continuously changing. an exchange of one currency for another. This variability in the value of assets or liabilities or cash flows is referred to exchange rate risk. VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 7 Thus. trading in foreign currencies has grown tremendously over the past several decades. and thus. The foreign exchange markets of a country provide the mechanism of exchanging different currencies with one and another.

As a result. increasing the risk of doing business.  To analyze different currency future derivatives.  To analyze the hedging in currency future. The FX contract capitalized on the U. and gained credibility through endorsement of Nobel-prize-winning economist Milton Friedman. proprietary VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 8 .S. OBJECTIVES OF THE STUDY: The basic idea behind undertaking Currency Derivatives project is to gain knowledge about currency future market. which were the main derivative contracts traded at CME until then. commodity trading advisors (CTAs). financial managers. By creating another type of market in which futures could be traded.The contracts were created under the guidance and leadership of Leo Melamed. CME currency futures extended the reach of risk management beyond commodities. The abandonment of the Bretton Woods agreement resulted in currency values being allowed to float. Today. abandonment of the Bretton Woods agreement. The concept of currency futures at CME was revolutionary.  To understand the ways of considering currency future price. these firms are increasingly turning to various risk hedging products like foreign currency futures. CME Chairman Emeritus. foreign currency options. HISTORY OF CURRENCY DERIVATIVES Currency futures were first created at the Chicago Mercantile Exchange (CME) in 1972. Traders of CME FX futures are a diverse group that includes multinational corporations. all of which trade electronically on the exchange‘s CME Glob ex platform. investment banks.Specifically in developed countries. It is the largest regulated marketplace for FX trading. foreign currency forwards. CME offers 41 individual FX futures and 31 options contracts on 19 currencies. commercial banks. which had fixed world exchange rates to a gold standard after World War II. the currency risk has become substantial for many business firms. and foreign currency swaps. hedge funds.

or to speculate on rate fluctuations. expecting to sell the appreciating currency at a high future rate. they may wish to obtain a foreign currency forward buying contract. The most commonly used instrument among the currency derivatives are currency forward contracts. They trade in order to transact business. These are large notional value selling or buying contracts obtained by exporters. importers. or to a joint venture with a foreign partner. Alternatively. willing to protect their earnings from the foreign currency depreciation by locking the currency conversion rate at a high level. investors and speculators from banks with denomination normally exceeding 2 million USD. A high degree of volatility of exchange rates creates a fertile ground for foreign exchange speculators. They want to guarantee the rate of purchasing foreign currency for various payments related to the installation of a foreign branch or subsidiary. In either case. hedge against unfavorable changes in currency rates. Their use by importers hedging foreign currency payables is effective when the payment currency is expected to appreciate and the importers would like to guarantee a lower conversion rate. they are exposed to the risk of currency fluctuations in the future betting on the pattern of the spot exchange rate adjustment consistent with their initial expectations. UTILITY OF CURRENCY DERIVATIVES Currency-based derivatives are used by exporters invoicing receivables in foreign currency. The contracts guarantee the future conversion rate VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 9 . thus defending their revenue from the foreign currency depreciation.trading firms. Their objective is to guarantee a high selling rate of a foreign currency by obtaining a derivative contract while hoping to buy the currency at a low rate in the future. Multinational companies use currency derivatives being engaged in direct investment overseas. Investors in foreign currency denominated securities would like to secure strong foreign earnings by obtaining the right to sell foreign currency at a high conversion rate. currency overlay managers and individual investors.

Investment in foreign securities induced by higher foreign interest rates and accompanied by the forward selling of the foreign currency income is called a covered interest arbitrage VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 10 . Their transaction costs are set by spread between bank's buy and sell prices. although the banks may require Compensating deposit balances or lines of credit. A similar foreign currency forward selling contract is obtained by investors in foreign currency denominated bonds (or other securities) who want to take advantage of higher foreign that domestic interest rates on government or corporate bonds and the foreign currency forward premium.between two currencies and can be obtained for any customized amount and any date in the future. They are willing to protect themselves from the currency depreciation by locking in the future currency conversion rate at a high level. They normally do not require a security deposit since their purchasers are mostly large business firms and investment institutions. Exporters invoicing receivables in foreign currency are the most frequent users of these contracts. They hedge against the foreign currency depreciation below the forward selling rate which would ruin their return from foreign financial investment.

from 18% of the loan portfolio to 45% as of now. The VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 11 .CHAPTER -2 COMPANY PROFILE COMPANY INTRODUCTION: Future Capital Holdings Limited (FCH) is a provider of financial services across retail businesses and wholesale credit business. The company believes that MSMEs are largely underserved in India and hence this is a large business opportunity. The company is preferred partners in helping its clients succeed in their businesses by providing innovative product solutions. The company is also capitalizing on the growing consumption in India through financing Consumer durables and two wheelers. The company also provides financing in the form of term loans to promoters of select corporate with proven track record against security of listed stock with adequate liquidity and value. which is over 40% of the company's business. investments. The company also provides Gold Loans. and Home Loans. insurance and broking. the company has significantly increased retail portfolio as a percentage of the total portfolio. Future Capital also provides debt finance and working capital finance to corporate against identified projects against security of receivables and inventories of the company. provides for ample diversification over a larger pool of customers. and finally gives us the opportunity to meet multiple needs of the customer across lending. Hence over the last 2 years. The company has a team of over 1000 employees. The company further believes that retail business provides ample opportunities for growth. Financing of MSMEs is the largest component of the businesses done by the company. and plans to grow this further. high level of convenience & service supported by robust technology. Vehicle loans. who are experienced in the financial industry. The cash flows from the projects are escrowed to Future Capital.

high level of convenience & service supported by robust technology. FCH has invested in People. corporate loans.company's senior management has excellent track records and each of them have between 15-20 years of experience in financial services. the key driver of the Indian economy and support the growth of the MSME enterprises  To grow into a significant financial conglomerate and build businesses of retail loans. Processes and Technologies and has placed a strong Credit and Risk Management Team. and processes files after checking credit performance with credit bureaus.& Growth Path VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 12 . The credit team is a separate vertical within the organization. which undertakes detailed credit analysis. Wealth Management & Equity broking  To be a preferred partner in helping our clients succeed in the rapidly evolving financial markets by providing innovative product solutions. Company’s Vision:  To capitalize on growing ―consumption‖ in India.

LEADERSHIP IN FUTURE CAPITAL HOLDINGS INDEPENDENT DIRECTORS Shailesh Haribhakti Pradeep Mukharjee Anil Singhvi GN Bajpai NC Singhal Executive management V.Retail Finance services) Shailesh Srirali (CEO-Wholesale credit) Aahok Shinkar (CEO & Head corporate center) Pankaj Sanklecha (Chief Risk Officer) VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 13 .Vaidyanathan (vice-chairman and Managing Director) Apul Nayar (CEO.

Borrowing Needs: Protection Needs: Mortgages (for SMEs) Gold Loans Consumer Durable Loans Two Wheeler Loans Home Loans Auto Loans Life Insurance General Insurance Auto Insurance Health insurance Personal accident insurance Travel insurance Investment Needs: Gold Coins Property Broking Mutual Funds Structured products Real Estate Funds Equity Broking Commodity Broking Planning Needs: Estate Planning. SERVICES AND DISTRIBUTION OF COMPANY Through Comprehensive Products and Services Suite.PRODUCT. FCH has been able to address the Four Key Needs of a Consumer.Creation of Private Trust Wills Creation Real estate Advisory Wealth Management Financial Planning VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 14 .

FCH-Lines of Business Loan Against Property Loan Against Gold Consumer Durable Loan Home Loan Two Wheeler Loan Auto Loan Wealth Manager & Broking Wholesale Credit Wholesale Loan Syndication WHOLESALE BUSINESS BBUSINESS RETAIL BUSINESS VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 15 .

FCH has been able to reach to the Customers across most of the states and major cities (Tier -1. Branch City  Delhi & NCR  Bhopal  Chandigarh:  Dehradun  Jaipur  Jalandhar:  Jodhpur  Lucknow  Ludhiana  Udaipur  Ahmadabad  Ajmer  Amritsar:  Kotta Branch City  Mumbai& Thane  Pune  Bangalore  Hyderabad  Baroda Kolkata  Bhubaneswar  Coimbatore  Indore  Nasik  Nagpur  Raipur  Rajkot  Surat:  Salem  Vellore Chennai Vizag VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 16 . 2012) Through the Extensive Branch Network. There are total 185 branches of future capital across the country. Tier -2) in India.Future Capital Branch Network (By Feb 29.

Growth of branches over the quarters 200 180 160 140 120 100 80 61 60 40 20 0 Q3 FY 11 Q4 FY 11 Q1 FY 12 Q2 FY 12 Q3 FY 12 27 89 134 173 185 Q4 FY 12  The Company intends to expand the branch network up to ~350 branches by FY12-13  The branch network will continue to be dominated by the Gold Loan branches  The expansion focus will be concentrated around tier-1 and tier-2 cities VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 17 .

Manpower: Growth of Manpower 1200 1043 1000 843 800 600 435 400 200 0 299 455 579 497 510 636 748 970 895 Business Function Wise Employee Breakup 120 90 6 827 Retail Business Corporate function Whole sale Business Risk Functin VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 18 .

20% 61% Promoters FII Others Individuals Mutule funds Bodies Corporates Financial Institutions VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 19 .30% 22.20% 1.60% 2.90% 0.70% 11.Employee growth has been driven by the Business Aspirations of growing the loan book in a steady manner and the Expansion in the Retail Business – Reach & Operations Shareholding (Shareholding Pattern as of 31 Dec 2011) 0.

798.87  Financial Institutions include Banks.484 1.47.20 EPS-FY10-11  The Individuals include Non Residential Indians (Repatriable) and Non Residential Indians (Non-Repatriable) 4. Insurance Companies and other Financial Institutions  Others include Clearing Members and Trusts The stock is listed on NSE (stock code: FCH) and BSE (stock code: 532938) VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 20 .603 Facevalue of Shares • EPS-H1-FY11-12 10 12.Particulars No of Shares • No of Shareholders Value 64.

797.17 47.LIST OF COMPETITORS There is the list of competitors is given below which is made on the basis of market capital.423.00 1.50 VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 21 .08.19 1.80 994.95 603.95 Market cap.26 Total Assets 17.919.30 -0.98 1.929. (Rs.91 3.43 1.23 46.09 651.) 7.557.26 206.58 660.65 Motilal Oswal Delta Corp Pilani Invest Future Capital 101.13 1.64 63.469.30 56.01 1.467.55 1.840.15 4.554.303.76 55.75 Cap India Infoline 63.49 238.79 68.65 Edelweiss 33.00 153.54 Net Profit 723. In Cr. net profit and total assets and current share price of the company.51 512.19 2.66 Sales Turnover 2. (As on 22nd June 2012) Name Indiabulls Last price 224.161.71 42. sales turn over.10 63.

These paper bills represented transferable third-party payments of funds. the forex market went through a series of changes. After WWI. if any. These changes greatly affected the global economies at the time and speculation in the forex markets during these times was little. Speculation in the forex market was not looked on as favorable by most institutions and the public in general. However. but Middle Eastern moneychangers were the first currency traders who exchanged coins from one culture to another. During the middle ages. dollar.INDUSTRY PROFILE INTRODUCTION OF FOREIGN EXCHANGE MARKET The foreign exchange market (fx or forex) as we know it today originated in 1973. The Great Depression and the removal of the gold standard in 1931 created a serious lull in forex market activity. the need for another form of currency besides coins emerged as the method of choice.S. making foreign currency exchange trading much easier for merchants and traders and causing these regional economies to flourish. 1971 Smithsonian Agreement established to allow for greater fluctuation band for currencies. the forex markets became very volatile and speculative activity increased tenfold. the forex markets were relatively stable and without much speculative activity. From 1931 until 1973. From the infantile stages of forex during the Middle Ages to WWI. The Babylonians are credited with the first use of paper bills and receipts. Timeline of Foreign Exchange 1944 – Bretton Woods Accord is established to help stabilize the global economy after World War II. VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 22 . money has been around in one form or another since the time of Pharaohs. 1972 European Joint Float established as the European community tried to move away from its dependency on the U.

US Dollar (USD). dollar. 1978 Free-floating system officially mandated by the IMF. The list includes following currencies: Euro (EUR). CADUSD and USDCHF.1973 Smithsonian Agreement and European Joint Float failed and signified the official switch to a free-floating system. Japanese Yen (JPY). Canadian Dollar (CAD). 1993 European Monetary System fails making way for a world-wide free-floating system Major currency pairs The most traded currency pairs in the world are called the Majors. According to Bank for International Settlement (BIS) survey of April 2010. AUDUSD. Pound Sterling (GBP).S. Amongst these currencies the most active currency pairs are: EURUSD. GBPUSD. 1978 The European Monetary System was introduced so other countries could try to gain independence from the U. the share of different currency pairs in daily trading volume is as given below: CURRENCY EURUSD USDJYP GBPUSD AUD/USD USD/CHF USD/CAD SHARE(%) 28 14 9 6 4 5 Page 23 VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD . and the Swiss Franc (CHF). Australian Dollar (AUD). USDJPY. These currencies follow free floating method of valuation.

9 VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 24 .Dollar CHF. Looking at the most recent Bank of International Settlements foreign-exchange report. Many of the usual suspects like the UK and USA are found at the top of the list for the largest fx trading centers while others such as Singapore may be more surprising to many.Japanese Yen SGD.Swiss franc HKD. published every three years. All totals in US dollars) S.US Dollar JPY.USD/OTHERS OTHERS/OTHERS TOTAL 18 16 100 Top Foreign Exchange Trading Center in the World Forex market trading is truly a global phenomenon as well as the largest financial market in the world with over $4 trillion changing hands on a daily basis. we get a clear view of where most of the daily forex trading volume takes place.N.Dollar EUR. Below is a list of the 8 largest forex trading centers in the world.Dollar AUD. Country Currency (symbol) Average daily Trading volume ($ in billions) 1 2 3 4 5 6 7 8 9 United Kingdom United States Japan Singapore Switzerland Hong Kong Australia France India GBP – Pound USD. (Data from Bank of International Settlements (BIS) foreign-exchange report as of April 2010.Euro INR.India Rupee 1854 904 312 266 263 238 192 150 Percentage of daily Global Forex volume (%) 37 18 6 5 5 5 4 3 0.

though there is an unmistakable downward trend in that proportion. The Sodhani Committee set up in 1994 recommended greater freedom to participating banks. though. The inter-bank forex trading volume has continued to account for the dominant share (over 77%) of total trading over this period. from 2000-01 to 2005-06. In the last 5 years. allowing them to fix their own trading limits. a self regulatory association of dealers. Since 2001. clearing and settlement functions in the foreign exchange market are largely carried out by the Clearing Corporation of India Limited (CCIL) that handles transactions of approximately 3. The growth of the foreign exchange market in the last few years has been nothing less than momentous. interest rates on FCNR deposits and the use of derivative products. growing at a compounded annual rate exceeding 25%. The growth of foreign exchange trading in India between 1999 and 2006. about 80% of the total transactions. (Part of this dominance. result s from double-counting since purchase and sales are added separately. trading volume in the foreign exchange market (including swaps.) This is in keeping with global patterns. The liberalization process has significantly boosted the foreign exchange market in the country by allowing both banks and corporations greater flexibility in holding and trading foreign currencies. Trading is regulated by the Foreign Exchange Dealers Association of India (FEDAI). and a single inter-bank transaction leads to a purchase as well as a sales entry. VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 25 . Today over 70% of the trading in foreign exchange continues to take place in the inter-bank market. The market consists of over 90 Authorized Dealers (mostly banks) who transact currency among themselves and come out ―square‖ or without exposure at the end of the trading day.5 billion US dollars a day.INTRODUCTION TO INDIAN FOREIGN EXCHANGE MARKET The foreign exchange market in India started in earnest less than three decades ago when in 1978 the government allowed banks to trade foreign exchange with one another. forwards and forward cancellations) has more than tripled.

trading of rupee future started on Dubai Gold and Commodities Exchange prompting the RBI to set up a Committee to look into this possibility for India. Kamashetty (2008) threw a light on trading mechanism of currency future with the average daily traded volume in the global forex market and in India as well. B. in June 2007. VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 26 . He also mentioned the guidelines for the currency future trading with its flip slide and shortcomings. but the suggestions based on the material published so far are mentioned hereunder: V D M V Lakshmi (2008) have quoted the decision taken by RBI to allow exchange traded currency future in India as a gift to traders and investors as well since it is a standardize and transparent instrument to hedge their exposure to the currency risk. He concluded with stated the RBI role should be of macroeconomic management not microeconomic details if India is serious about financial sector development. S. so there were no restriction on trading and participation beyond those that would be normal for an exchange and it clearly seemed that the new market was being used for short-term hedging.LITERATURE REVIEW So far researchers have carried out a little work on the prospectus and problems of currency future in India. The paper described that during 2007 rupee future trading on DGEX and despite the fact that it was not controlled by the RBI. He also described how the currency future can be used by market participant to cover the risk due to fluctuation in exchange rates in currency market besides the legal framework and sanction approval procedure from authorized agencies. probably by parties engaged in international trade. Nirvikar Singh (2008) stated that off-shore non-deliverable forward markets have existed in India and Reserve Bank of India also oversees domestic currency forward trading but exchange traded currency future were simply banned. in which India has strong underlying traded. The author also suggested granting the permission in dealing with threefour major currencies besides USD. However.

Padmalatha Suresh (2010) has admitted that currency future helped the undernourished Indian financial markets in a big way and described how exchange traded futures are the answer to preventing systematic risks in the future. He also reviewed the performance of currency futures in December. as natural extension at the currency future market. operational aspect and new developments of currency future in India. VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 27 . The paper also suggested introducing the currency option in the market.Krishnan Sitaraman and Satish Prabhu (2010) described the currency future with mitigating exchange Rate risk with illustrative support. They have also showed the progress. and presents some interesting insights i. Frictions caused by taxes and suggested that currency futures are not an end in themselves but more positive actions from the regulators and government are expected to nourish the market without being overprotective. 2009 since the inception of trading. Regulators and structured barriers. The paper also quoted some reasons for inefficient and illiquid market in India such as inadequacy of financial firms. He also thanked to the RBI decision to extend the currency futures market to include three more currency pairs as earlier stated financial advisors were saying and appears that currency options.e. both OTC markets ( INR and other currencies ) and currency futures ( only INR/USD ) traded on NSE and MCX showed a remarkable increase in the turnover of derivatives as a percentage of OTC forward turnover. are also on the anvil.

NSE is the first exchange in India to have obtained an in principle approval from Security and Exchange Board of India to set up currency derivatives segment. India is the 16th largest market in the world. 2008  Multi Commodity Exchange started its operation on October 7.9% in 2010. 2008. The Bombay Stock Exchange (BSE) and MCX Stock Exchange (MCX-SX) started offering Currency Futures trading in September and October 2008 respectively. The National Stock Exchange of India (NSE) was the first to launch Currency Futures on 29 August 2008. National Stock Exchange and Multi Commodity Exchange. 2008  Bombay Stock Exchange started its operation on October 1. In brief the history of Trading in Currency Future contracts in India can be traced back to the year 2008 when various stock exchanges started trading in currency futures on the following dates:  National Stock Exchange started its operation on August 29. As per Latest RBI Data.CURRENCY FUTURE IN INDIA In India the Forex future currency trade can be carried out through recognized stock markets – Bombay Stock Exchange. 2008  United Stock Exchange launched its operations on September 20. Indian Currency Futures Market The Reserve Bank of India permitted Exchange Traded Currency Futures in 2008. About Indian forex market: In terms of daily turnover in 2010. National Stock Exchange has started Forex future currency trading from August 29. (MCX got the approval from SEBI before BSE but it could start trading in Currency future after BSE) This shows that trading in currency futures in India is not very old rather it is at the stage of infancy. India‘s market share in World FX Market increased from 0.1 % in 1998 to 0. 2010. VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 28 . BSE is the third exchange in India to have obtained an in principle approval from Security and Exchange Board of India after NSE and MCX. Daily FX Indian Market volumes are $50 Billion in 2009.

Federal Bank. VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 29 . The FX market in India is regulated by The Foreign Exchange Management Act. Presently Daily Turnover on both exchanges averages Rs. The Forex market offers unmatched potential for profitable trading in any market condition or any stage of the business cycle. 35000 crores. Policy-makers in India are keeping a close eye on Currency Futures. Banks are active participants on the exchanges. 1999 or FEMA. Considering these developments. has created a huge international market for Forex rendering investors another exciting avenue for trading. there are concerns that excessive speculation may adversely affect both Futures and the underlying Spot markets. NRIs & FIIs are not permitted to trade as of now. attempts need to be made to study the pattern of trade and the impact of Futures on Forwards and Spot. The global increase in trade and foreign investments has led to inter-connection of many national economies. This and the resulting fluctuations in exchange rates. MMTC & Jaypee Capital along with 9 other banks. With speculation increasing. Currency markets offer investors a step into the world of Forex.―United Stock Exchange of India‖ is the upcoming exchange promoted by Bank of India. The obvious reasons are to keep a tab on the speculative activities by traders and arbitragers who do not have any underlying physical exposure in this market and trade purely for speculation.

US Federal Reserve Bank VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 30 . loan. or index of prices. According to the Securities Contract Regulation Act.a process that has undoubtedly improved national productivity growth and standards of livings. stock and market index. an interest bearing security or a physical commodity. (1956) the term ―derivative‖ includes: (i) A security derived from a debt instrument. temperature and even volatility. around the world. weather. (ii) A contract which derives its value from the prices. whether secured or unsecured. Today. ―By far the most significant event in finance during the past decade has been the extraordinary development and expansion of financial derivatives…These instruments enhances the ability to differentiate risk and allocate it to those investors most able and willing to take it. derivative contracts are traded on electricity. share. Risk instrument or contract for differences or any other form of security. The underlying asset could be a financial asset such as currency. of underlying Securities.INTRODUCTION TO FINANCIAL DERIVATIVES The term ‗Derivative‘ stands for a contract whose price is derived from or is dependent upon an underlying asset.‖ Alan Greenspan. Former Chairman.

Potatoes. it means that some things have to be derived or arisen out of the underlying variables. coffee and what you have. soybeans. bond. rupee dollar exchange rate. changes in the interest rates. The Underlying Securities for Derivatives are:  Commodities: Castor seed. to manage such risks. etc. this word has been arisen by derivation. the demand for the international money and financial instruments increased significantly at the global level. crude oil. to buy or sell an asset in future. market. exchange rate and stock market prices at the different financial market have increased the financial risks to the corporate world. index. As a result. In this respect. DEFINITION OF FINANCIAL DERIVATIVES A word formed by derivation. the new financial instruments have been developed in the financial markets. Pepper. cotton. which are also popularly known as financial derivatives. The price of curd depends upon the price of milk which in turn depends upon the demand and supply of milk. These assets can be a share. It is therefore. These contracts are legally binding agreements.” A very simple example of derivatives is curd.  Precious Metal : Gold. “Derivatives are financial contracts whose value/price is independent on the behavior of the price of one or more basic underlying assets. interest rate. It means. sugar. Something derived. which is derivative of milk. Grain.The past decades has witnessed the multiple growths in the volume of international trade and business due to the wave of globalization and liberalization all over the world. made on the trading screen of stock exchanges. Silver  Short Term Debt Securities : Treasury Bills  Interest Rates VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 31 A financial derivative is an indeed derived from the financial .

standardized or organized exchange traded. called as the underlying. Swaps 2. In the simple form. are available in the market. Forwards 2.Exotics (Non STD) VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 32 . the basic financial derivatives which are popularly in the market have been described. simple or straightforward. Common shares/stock  Stock Index Value : NSE Nifty  Currency : Exchange Rate TYPES OF FINANCIAL DERIVATIVES Financial derivatives are those assets whose values are determined by the value of some other assets. OTC traded. Options Complex 1. the derivatives can be classified into different categories which are shown below: DERIVATIVES Financials Commodities Basics 1. etc. Due to complexity in nature. composite. synthetic. mildly leveraged. Futures 3. joint or hybrid. For example. Presently there are Complex varieties of derivatives already in existence and the markets are innovating newer and newer ones continuously. plain. it is very difficult to classify the financial derivatives. so in the present context. leveraged. various types of financial derivatives based on their different properties like.

cotton. Derivatives are traded at organized exchanges and in the Over The Counter ( OTC ) market : Derivatives Trading Forum Organized Exchanges Over The Counter Commodity Futures Financial Futures Options (stock and index) Stock Index Future Forward Contracts Swaps VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 33 . or both. such derivatives are effectively derivatives of derivatives. foreign exchange. Another way of classifying the financial derivatives is into basic and complex. natural gas. corn.4. In this. It is to be noted that financial derivative is fairly standard and there are no quality issues whereas in commodity derivative. cost of living index etc. the underlying instrument may be treasury bills. stock index. forward contracts. pepper. In financial derivative. The basic difference between these is the nature of the underlying instrument or assets. sugar. crude oil. stocks. the quality may be the underlying matters. the underlying instrument is commodity which may be wheat. turmeric. Warrants and Convertibles One form of classification of derivative instruments is between commodity derivatives and financial derivatives. futures contracts and option contracts have been included in the basic derivatives whereas swaps and other complex derivatives are taken into complex category because they are built up from either forwards/futures or options contracts. gold. bonds. silver and so on. jute. In commodity derivatives. In fact.

DERIVATIVES INTRODUCTION IN INDIA The first step towards introduction of derivatives trading in India was the promulgation of the Securities Laws (Amendment) Ordinance. SEBI approved trading in index futures contracts based on S&P CNX Nifty and BSE-30 (Sensex) index. Futures contracts on individual stocks were launched in November 2001. VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 34 . In contrast.C. the risk is controlled by exchanges through clearing house which act as a contractual intermediary and impose margin requirement. A major difference between the two is that of counterparty risk—the risk of default by either party. The committee recommended that the derivatives should be declared as ‗securities‘ so that regulatory framework applicable to trading of ‗securities‘ could also govern trading of derivatives. OTC derivatives are customized contracts that enable the parties to select the trading units and delivery dates to suit their requirements. To begin with.Derivatives traded at exchanges are standardized contracts having standard delivery dates and trading units. submitted its report on March 17. The trading in index options commenced in June 2001 and the trading in options on individual securities commenced in July 2001. 1995. 1998. Gupta on November 18. which withdrew the prohibition on options in securities. With the exchange traded derivatives. OTC derivatives signify greater vulnerability. SEBI set up a 24 – member committee under the chairmanship of Dr. 1996 to develop appropriate regulatory framework for derivatives trading in India. L.

which is usually sometime in the distant future. only and the currency pair is exchanged on the delivery date. stock. the underlying asset is currency. VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 35 . are set by the futures exchange. investors can exit their obligation to buy or sell the currency prior to the contract's delivery date. currency future means ―a standardized foreign exchange derivative contract traded on are cognized stock exchange to buy or sell one currency against another on a specified future date. Because currency futures contracts are marked-to-market daily. the price is determined when the contract is signed. The remaining specifications. Washington. but does not include a forward. only the exchange rate can be negotiated by the buyers and sellers. so most contracts do not tend to last until the date of delivery. Like all futures contracts. It is a futures contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the date of purchase. most participants in the futures markets are speculators who usually close out their positions before the date of settlement. Currency Futures market means the market in which currency futures are traded. The Chicago Mercantile Exchange is the world's largest and most successful exchange for trading in currency futures. currency futures are standardized contracts too. Unlike the stock. The futures exchange sets the contract specifications. London and Tokyo. However. It is also known as foreign exchange future or FX future. The value of the currencies determines the value of currency derivatives. contract‖. at a price specified on the date of contract. such as defining the underlying currency. index etc. As per the guidelines of RBI. with offices in Chicago. just as it is in the forex market.INTRODUCTION TO CURRENCY FUTURE Currency futures are contracts just like any other derivatives. However. With currency futures. The trading can be done either on the floors of these futures exchanges or these exchanges can facilitate electronic trading for its members. Currency futures are traded according to the rules and regulations that are drawn by the futures exchanges. It is a forex derivative. trading unit and delivery month. New York. This is done by closing out the position.

the currency futures market is used by some companies for hedging. Retail investors with their limited resources would find it tremendously beneficial to take positions in standardized USD INR futures contracts. These companies either purchase currency futures for their future payables. clearing and settlement process of currency futures trading . currency futures carries low costs for investors .Low Transaction Cost – As opposed to the high pay-out of commissions in overseas forex trading. Speculators may also buy or sell futures on a foreign currency as a protection against the strengthening or weakening of the US dollar.Easy Affordability – Margins are very low and the contract size is very small . So.Transparency .The following are the obvious benefits of currency trading in India: . NSCCL (National Securities Clearing Corporation Limited) carries out all the notation.Counter-party default risk . VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 36 .Easy Accessibility – Small Investors would get an easy access to currency futures trading on the popular exchanges .Standardized Contracts .It is possible for you to verify trade details on NSE if you have a doubt that the broker has tried to cheat you .All the trades done on the recognized exchanges are guaranteed by the clearing corporations and hence it eliminates the risks associated with counter party default. Moreover. speculators may be able to earn profit from the rise or fall of these exchange rates. or sell the futures on currencies for their future receipts.Exchange Traded currency futures are standardized in respect of lot size ($1000) and maturity (12 monthly contracts).

• Only resident Indians are allowed to trade in currency futures.Features • Standardized foreign exchange derivative contract. • Transparency in pricing • Settlement through clearing house. • Future price = spot price + cost of carry. • The maturity of the contracts shall not exceed 12 months. • Contracts are quoted and settled in Indian Rupees. • Margin Requirements. • The Final settlement price (FSP) would be the RBI reference rate on the last trading day. • No person other than a person resident in India' as defined in section 2(v) of the Foreign Exchange Management Act. • Eliminate counter party risk. 100 crore and above may participate in the designated VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 37 . • Price and date of delivery are predetermined. • Traded in a limited number of currencies. • Traded on a recognized stock exchange. • Settled on a specific future date known as settlement date. • Underlying is the exchange rates. • All non-deposit taking NBFCs with asset size of Rs. 1999 (Act 42 of 1999) shall participate in the currency futures market.

 Futures price: The current price of the specified futures contract. EURINR it is EUR 1000. The last business day would be taken to be the same as that for Inter-bank Settlements in Mumbai. including those for ‗known holidays‘ and ‗subsequently declared holiday‘ would be those as laid down by Foreign Exchange Dealers‘ Association of India (FEDAI). GBPINR it is GBP 1000 and in case of JPYINR it is JPY 100. Since the exchange of securities and cash is virtually immediate.  Contract cycle: The period over which a contract trades. spot value is T + 2. these exchanges will have 12 contracts outstanding at any given point in time. and is two working days prior to the final settlement date. and three-month up to twelve-month expiry cycles. In the case of USDINR it is USD 1000. Hence.  Value Date/Final Settlement Date: The last business day of the month will be termed as the Value date / Final Settlement date of each contract. two-month. Also called as lot size. The transaction in which securities and foreign exchange get traded for immediate delivery.  Expiry date: Also called Last Trading Day. cash market. The currency futures contracts on the SEBI recognized exchanges have one-month.  Contract size: The amount of asset that has to be delivered under one contract. The rules for Inter-bank Settlements. In the case of USDINR. it is the day on which trading ceases in the contract. VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 38 .Futures terminology Some of the common terms used in the context of currency futures market are given below:  Spot price: The price at which the underlying asset trades in the spot market. the term. has also been used to refer to spot dealing.000.

basis will be positive. This is somewhat lower than the initial margin. This is set to ensure that the balance in the margin account never becomes negative. If the balance in the margin account falls below the maintenance margin. the margin account is adjusted to reflect the investor's gain or loss depending upon the futures closing price. This reflects that futures prices normally exceed spot prices.  Marking-to-market: In the futures market. Basis: In the context of financial futures. In a normal market. usually about 75 percent of the initial margin.  Initial margin: The amount that must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin. For equity derivatives carry cost is the rate of interest. the investor receives a margin call and is expected to top up the margin account to the initial margin level before trading commences on the next day. There will be a different basis for each delivery month for each contract. is called the maintenance margin.  Maintenance Margin: Member‘s account are debited or credited on a daily basis. This measures the storage cost plus the interest that is paid to finance or ‗carry‘ the asset till delivery less the income earned on the asset.  Cost of carry: The relationship between futures prices and spot prices can be summarized in terms of what is known as the cost of carry. In turn customers‘ account are also required to be maintained at a certain level. at the end of each trading day. VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 39 . basis can be defined as the futures price minus the spot price. This is called marking-to-market.

in the case of an exchange traded futures contract. efficiency and accessibility. 2007 issued comprehensive guidelines on the usage of foreign currency forwards. On the other hand. yet differ in fundamental ways. An individual entering into a forward contract agrees to transact at a forward price on a future date. Exchange traded futures as compared to OTC forwards serve the same economic purpose. At the same time. On the maturity date. mark to market obligations is settled on a daily basis. no money changes hands. RBI also set up an Internal Working Group to explore the advantages of introducing currency futures. RBI on April 20. the obligation of the individual equals the forward price at which the contract was executed. in an Exchange traded scenario where the market lot is fixed at a much lesser size than the OTC market. The Report of the Internal Working Group of RBI submitted in April 2008. the scope for building up of mark to market losses in the books of various participants gets limited. The transactions on an Exchange are executed on a price time priority ensuring that the best price is available to all categories of market participants irrespective of their size. VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 40 . recommended the introduction of exchange traded currency futures. Further. Other advantages of an Exchange traded market would be greater transparency. equitable opportunity is provided to all classes of investors whether large or small to participate in the futures market.NEED FOR EXCHANGE TRADED CURRENCY FUTURES With a view to enable entities to manage volatility in the currency market. Since the profits or losses in the futures market are collected / paid on a daily basis. Except on the maturity date. which by assuming counterparty guarantee eliminates credit risk. The counterparty risk in a futures contract is further eliminated by the presence of a clearing corporation. swaps and options in the OTC market.

To facilitate liquidity in the futures contracts. A futures contract may be offset prior to maturity by entering into an equal and opposite transaction. A futures contract is standardized contract with standard underlying instrument. April 2008) as follows. a standard quantity and quality of the underlying instrument that can be delivered. Both residents and non-residents purchase domestic currency assets. If the exchange rate remains unchanged from the time of purchase of the asset to its sale.RATIONALE FOR INTRODUCING CURRENCY FUTURE Futures markets were designed to solve the problems that exist in forward markets. The standardized items in a futures contract are: • • • • • Quantity of the underlying Quality of the underlying The date and the month of delivery The units of price quotation and minimum price change Location of settlement The rationale for introducing currency futures in the Indian context has been outlined in the Report of the Internal Working Group on Currency Futures (Reserve Bank of India. (or which can be used for reference purposes in settlement) and a standard timing of such settlement. the exchange specifies certain standard features of the contract. no gains and losses are made out of currency exposures. The rationale for establishing the currency futures market is manifold. the futures contracts are standardized and exchange traded. But unlike forward contracts. A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. the exposure would result in gain (loss) for residents VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 41 . But if domestic currency depreciates (appreciates) against the foreign currency.

44. The value of the contract is Rs. The entity shall sell on August 27.0000. Therefore. Presume that the current spot rate is Rs. Nominal exchange rates are often random walks with or without drift. 2009 is Rs. and applies equally to trade in goods and services. The entity can do so by selling one contract of USD-INR futures at NSE since one contract is for USD 1000. unpredicted movements in exchange rates expose investors to currency risks. 2009. 44. 43 and ‗USDINR 27 Aug 09‘ contract is trading at Rs. while real exchange rates over long run are mean reverting. This in theory should lower portfolio risk. Entity A shall do the following: Sell one August contract today. financial planning horizon is much smaller than the long-run. Currency futures enable them to hedge these risks. As such. 44. there are strong arguments to use instruments to hedge currency risks.Purchasing foreign assets and loss (gain) for non residents purchasing domestic assets. Empirically. there is a strong need to hedge currency risk and this need has grown manifold with fast growth in cross-border trade and investments flows. The argument for hedging currency risks appear to be natural in case of assets. However. changes in exchange rate are found to have very low correlations with foreign equity and bond returns. It wants to lock in the foreign exchange rate today so that the value of inflow in Indian rupee terms is safeguarded. it is possible that over a long – run. The futures contract will settle at Rs. Uses of Currency Futures  Hedging: Presume Entity A is expecting a remittance of USD 1000 on 27 August 09. Let us assume the RBI reference rate on August 27.0000 (final settlement price = RBI reference rate).250.000. which is typically inter-generational in the context of exchange rates. In this backdrop. As such.2500. VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 42 . the incentive to hedge currency risk may not be large. sometimes argument is advanced against the need for hedging currency risks. But there is strong empirical evidence to suggest that hedging reduces the volatility of returns and indeed considering the episodic nature of currency returns. which results in income flows with leads and lags and get converted into different currencies at the market rates. 44.44. USD 1000 in the spot market and get Rs.

44. 44.000. 44. 44.50 against USD. he can profit if say the Rupee depreciates to Rs. i. He expects that the USD-INR rate presently at Rs.10000.250 – Rs. 42.  Speculation: Bullish.000). futures form an attractive option for speculators. 000.4. VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 43 . is to go up in the next two-three months. while spot rate on that date was Rs. 250. As may be observed. This works out to an annual return of around 4. This works out to an annual return of 19 percent.21. it would require an investment of Rs. How can he trade based on this belief? In case he can buy dollars and hold it.42.e. If the INR. If the exchange rate moves as he expected in the next three months. 44. Assuming he buys USD 10000. the futures price shall converge to the spot price (Rs.1000 on an investment of Rs.21. (on the day of expiration of the contract). 42.USD is Rs.76%. The minimum contract size is USD 1000. Three months later if the Rupee depreciates to Rs.2500 (Rs. the margin may be around Rs. 250)/1000. It may please be noted that the cost of funds invested is not considered in computing this return.50. He would like to trade based on this view. (Rs.42 and the three month futures trade at Rs. then he shall make a profit of around Rs. 20. The entity was able to hedge its exposure. by investing the necessary capital.40.42. Let us see how this works.000 + Rs. Because of the leverage they provide.0000.50) and he makes a profit of Rs. 000. The exposure shall be the same as above USD 10000. buy futures Take the case of a speculator who has a view on the direction of the market. Presumably. the effective rate for the remittance received by the entity A is Rs.42. A speculator can take exactly the same position on the exchange rate by using futures contracts.The return from the futures transaction would be Rs. Therefore the speculator may buy 10 contracts.

the spot and the futures price converges. He sells one two-month contract of futures on USD say at Rs. Let us understand how this works. As we discussed earlier. so will the futures price. He has made a clean profit of 20 paise per dollar. the profit being the difference between the market prices. Two months later. then the entity shall buy the product in the cheaper market and sell in the costlier market and thus benefit from the price differential without any additional risk. If the underlying price falls. arbitrage is striking a combination of matching deals that capitalize upon the imbalance.2000. Typically futures move correspondingly with the underlying. For the one contract that he sold. If in one of the markets the product is trading at higher price. when the futures contract expires. On the day of expiration. If the underlying price rises. sell futures Futures can be used by a speculator who believes that an underlying is over-valued and is likely to see a fall in price. as long as there is sufficient liquidity in the market. if any. He pays a small margin on the same. so will the futures price. Speculation: Bearish.42. there wasn't much he could do to profit from his opinion. One of the methods of arbitrage with regard to USD-INR could be a trading strategy between forwards and futures market.  Arbitrage: Arbitrage is the strategy of taking advantage of difference in price of the same or similar product between two or more markets. Today all he needs to do is sell the futures. Such of those entities who can trade both forwards and futures shall be able to identify any mis-pricing VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 44 . Now take the case of the trader who expects to see a fall in the price of USD-INR. If the same or similar product is traded in say two different markets.20 (each contact for USD 1000). How can he trade based on his opinion? In the absence of a deferral product. any entity which has access to both the markets will be able to identify price differentials. That is. 42. this works out to be Rs. the futures price and forward prices are arrived at using the principle of cost of carry. USD-INR rate let us say is Rs.

If one of them is priced higher. the future currencies are also traded at organized exchanges. TRADING PROCESS AND SETTLEMENT PROCESS Like other future trading. actual physical delivery of the underlying assets is very rare and it hardly ranges from 1 percent to 5 percent. This is because most of futures contracts in different products are VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 45 . since both forwards and futures shall be settled at the same RBI reference rate. The following diagram shows how operation take place on currency future market: TRADER (BUYER) TRADER (SELLER) PURCHASE ORDER SALES ORDER MEMBER (BROKER) TRANSACTION ON THE FLOOR (EXCHANGE) MEMBER (BROKER) INFORMS CLEARING HOUSING It has been observed that in most futures markets. If the tenor of both the contracts is same. the transaction shall result in a risk less profit. the same shall be sold while simultaneously buying the other which is priced lower.between forwards and futures. Most often buyers and sellers offset their original position prior to delivery date by taking an opposite positions.

2007 issued comprehensive guidelines on the usage of foreign currency forwards. swaps and options in the OTC market. 4.predominantly speculative instruments. With the expected benefits of exchange traded currency futures. and hence. To coordinate the regulatory roles of RBI and SEBI in regard to trading of Currency and Interest Rate Futures on the Exchanges. REGULATORY FRAMEWORK FOR CURRENCY FUTURES With a view to enable entities to manage volatility in the currency market. The Report of the Internal Working Group of RBI submitted in April 2008. To suggest eligibility criteria for the members of such exchanges. VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 46 . To suggest surveillance mechanism and dissemination of market information. To suggest the eligibility norms for existing and new Exchanges for Currency and Interest Rate Futures trading. To review product design. X party and clearing house and second Y party and clearing house. 2008. It leads to two contracts. first. To begin with. RBI also set up an Internal Working Group to explore the advantages of introducing currency futures. then X is out of the picture and the clearing house is seller to Z and buyer from Y. Assume next day X sells same contract to Z. this process is goes on. For example. X purchases American Dollar Futures and Y sells it. RBI on April 20. 5. that an RBI-SEBI Standing Technical Committee on Exchange Traded Currency and Interest Rate Derivatives would be constituted. The Terms of Reference to the Committee was as under: 1. the Committee would evolve norms and oversee the implementation of Exchange traded currency futures. margin requirements and other risk mitigation measures on an ongoing basis. At the same time. 2. it was decided in a joint meeting of RBI and SEBI on February 28. 3. recommended the introduction of exchange traded currency futures.

Banks. brokers. To consider microstructure issues. Margin deposit required Margins Maturity Standardized Settlement Daily settlement to the market and variation margin requirements Market place At recognized exchange floor with worldwide communications Open to anyone who is in need of hedging facilities or has risk capital to speculate Actual delivery has very less even below one percent Highly secured through margin deposit Accessibility Delivery Secured VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 47 . Open auction among buyers and seller on the floor of recognized exchange. brokers. More than 90 percent settled by actual delivery Secured Risk is high being less secured . arbitrageurs. multinational companies. traders. forex dealers. arbitrageurs.6. etc. institutions. but compensating bank balanced may be required Tailored to needs: from one week to 10 years Actual delivery or offset with cash settlement. small traders. etc. in the overall interest of financial stability COMPARISION OF FORWARD AND FUTURES CURRENCY CONTRACT BASICS Size FORWARD Structured as per requirement of the parties Tailored on individual needs FUTURE Standardized Standardized Delivery date Method of transaction Participants Established by the bank or broker through electronic media Banks. etc. None as such. institutional investors. institutional investors. multinational companies. No separate clearing house Over the telephone worldwide and computer networks Limited to large customers banks. speculators.

including VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 48 . Available contracts All monthly maturities from 1 to 12 months would be made available. Tenor of the contract The currency futures contract shall have a maximum maturity of 12 months. Trading Hours The trading on currency futures would be available from 9 a. the outstanding positions would be in dollar terms. The rules for Interbank Settlements. Size of the contract The minimum contract size of the currency futures contract at the time of introduction would be US$ 1000. Final settlement day The currency futures contract would expire on the last working day (excluding Saturdays) of the month. The methodology of computation and dissemination of the Reference Rate may be publicly disclosed by RBI. Quotation The currency futures contract would be quoted in rupee terms. The contract size would be periodically aligned to ensure that the size of the contract remains close to the minimum size.m. currency futures contracts on US Dollar – Indian Rupee (US$-INR) would be permitted.PRODUCT DEFINITIONS OF CURRENCY FUTURE ON NSE/BSE Underlying Initially. to 5 p. The last working day would be taken to be the same as that for Interbank Settlements in Mumbai. However.m. Settlement mechanism The currency futures contract shall be settled in cash in Indian Rupee Settlement price The settlement price would be the Reserve Bank Reference Rate on the date of expiry.

Those for ‗known holidays‘ and ‗subsequently declared holiday‘ would be those as laid down by FEDAI.

Currency futures contract specification
Currently currency future contracts are permitted on four currency pairs i.e., USDINR, EURINR, GBPINR and JPYINR. The detail of contract design for these currency pairs is given in the table below:

Contract specification: USDINR, EURINR, GBPINR and JPYINR Currency Derivatives Underlying Foreign currency as base currency and INR as quoting currency

Market timing

9:00 AM to 5:00 PM

Contract Size

USD 1000 (for USDINR), EUR 1000 (for EURINR), GBP 1000 (for GBPINR) and JPY 100,000 (for JPYINR)

Tick Size

Re. 0.0025

Quotation

The contract would be quoted in Rupee terms. However, outstanding position would be in USD, EUR, GBP and JPY terms for USDINR, EURINR,GBPINR and JPYINR contracts

respectively

Available contracts Maximum of 12 calendar months from current calendar month. New contract will be introduced following the Expiry of current month contract. Settlement date Last working day of the month (subject to holiday calendars) at 12 noon

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Last trading day 12 noon on the day that is two working days prior to the (or Expiry day) settlement date

Settlement Basis

Daily mark to market settlement will be on a T +1 basis and final settlement will be cash settled on T+2 basis.

Daily settlement Price

Daily mark to market settlement price will be announced by the exchange, based on volume-weighted average price in the last half an hour of trading, or a theoretical price if there is no trading in the last half hour.

Settlement

Cash settled in INR

Final Settlement Price

The reference rate fixed by RBI on last trading day or expiry day.

Final Settlement Day

Last working day (excluding Saturdays) of the expiry month. The last working day will be the same as that for Interbank Settlements in Mumbai. The rules for Interbank Settlements, including those for ‗known holidays‘ and ‗subsequently declared holiday would be those as laid down by FEDAI.

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CHAPTER -3 RESEARCH METHODOLOGY
To fulfill the objectives of the study both primary and secondary data has been collected. In this study primary data was collected through interaction with staff of FUTURE CAPITAL SECURITIES LTD. Secondary data is the data collected previously by someone else for some other purpose which can be analyzed and interpreted according to requirements. For

example, sources of secondary data are government publications, newspapers, worldwide web etc. In this study the Secondary data is mainly taken from  The company‘s training material.  Reconciliation statements.  Other documents generated within the organization

Formulae use in data analysis: 1. F/S = (1+ Rh) / (1+Rf) 2. F = S x e^ (Rh-Rf)T
3. Value of the contract = (Value of currency future per USD*contract size*No of contract).

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VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 52 . if we consider continuously Compounded interest rate then forward rate can be calculated by using the following formula: F = S x e (rh. Let us assume that risk free interest rate for one year deposit in India is 7% and in USA it is 3%. T is the time to maturity e = 2. then there will be an arbitrage opportunity in the market. You could continue to do so and make this transaction as a non ending money making machine. Alternatively. F and S are future and spot currency rate.CHAPTER – 4 DATA ANALYSIS AND INTERPRETATION PRICING OF FUTURES CONTRACT Interest rate parity principle: According to the interest rate parity theory. This will force the futures rate to change so that the relationship holds true. the currency margin is dependent mainly on the prevailing interest rate (for investment for the given time period) in the two currencies. If the following relationship between the futures rate and the spot rate does not hold. Life is not that simple! And such arbitrages do not exist for very long.71828 (exponential). Rh and Rf are simple interest rate in the home and foreign currency respectively. The forward rate can be calculated by the following formula: F/S = (1+Rh)/ (1+Rf) Where. You as smart trader/ investor will raise money from USA and deploy it in India and try to capture the arbitrage of 4%.rf) x t Where rh and rf are the continuously compounded interest rate for the home currency and foreign currency respectively.

We will carry out the above transaction through an example to explain the concept of interest rate parity and derivation of future prices which ensure that arbitrage does not exist. You need to use these proceeds to repay the loan taken in USA.e. To ensure that the transaction does not result VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 53 . convert it in INR and deposit for one year in India. you receive INR 3. Two important things to think before we proceed:  The loan taken in USA was in USD and currently you have INR. One year future rate for USDINR is F 3. At the end of one year. without any taxes etc) You decide to borrow one USD from USA for one year. This 1 USD is converted into INR at the prevailing spot rate of 50. Spot exchange rate of USDINR is 50 (S) 2.5. you return the money back to USA. Risk free interest rate for one year in USA is 3% (RUSD) 4. On start of this transaction. bring it to India.03 USD after one year (including interest of 3 cents). you borrow 1 USD in US at the rate of 3% and agree to return 1. you would lock the conversion rate of INR into USD using one year future price of USDINR.5 (7% of 50) as interest on your deposit and also get back your principal of INR 50 i. After one year. Assumptions: 1. Money can be transferred easily from one country into another without any restriction of amount.. Therefore you need to convert INR into USD  What exchange rate do you use to convert INR into USD? At the beginning of the transaction. You deposit the resulting INR 50 for one year at interest rate of 7%. you receive a total of INR 53. Risk free interest rate for one year in India is 7% (R) INR 5.

interest rate parity says that the spot price and futures price of a currency pair incorporates any interest rate differentials between the two currencies assuming there are no transaction costs or taxes. Therefore.07) / (1+. F/ 50 = (1+. F = S × (1 + RQC × Period) / (1 + RBC × Period) Where F = forward price S = spot price RBC = interest rate on base currency RQC = interest rate on quoting currency VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 54 .03 when converted using one year future exchange rate.03) F= 51. F is equal to the interest rate difference between two currencies i. We will convert the above argument into a formula: S(1+RINR)= F(1+RUSD) Or. A more accurate formula for calculating.into any risk free profit. Alternative way to explain. the money which you receive in India after one year should be equal to the loan amount that you have to pay in USA.e.9417 Approximately.free forward price is as follows. F = S + (RINR.5 received after one year in India should be equal to USD 1.RUSD)*S This concept of difference between future exchange rate and spot exchange rate being approximately equal to the difference in domestic and foreign interest rate is called the ―Interest rate parity‖. F/ S = (1+RINR) / (1+RUSD) Another way to illustrate the concept is to think that the INR 53. the arbitrage .

following formula mentioned above for USDINR currency pair could be used. What is the likely 6 month USDINR futures price? As explained above. Traders use expectation on change in interest rate to initiate long/ short positions in currency futures.0%) and INR interest rate are expected to remain constant say at 7%. The current USDINR spot rate is 50. Therefore approximately 6 month future rate would be: Spot + 6 month interest difference = 50 + 4% of 50 = 50 + 2 = 52 The exact rate could be calculated using the formula mentioned above and the answer comes to 51. The formula is generalized for other currency pair and is given below: F = S + (S × (RQC – RBC) × Period) In above example. Everything else remaining the same.1/12 x 6) / (1+0.98 = 50 x (1+0. the one year future price of USDINR would decline as the interest rate difference between the two currencies has narrowed and vice versa. if USD interest rate is expected to go up (say from 2. a trader would initiate a short position in USDINR futures market.5% to 3. if USD interest rate were to go up and INR interest rate were to remain at 7%.Period = forward period in years For a quick estimate of forward premium. Illustration: Suppose 6 month interest rate in India is 5% (or 10% per annum) and in USA are 1% (2% per annum). future rate is equal to the interest rate differential between two currency pairs. as per interest rate parity.02/12 x 6) VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 55 .

These linear payoffs are fascinating as they can be combined with options and the underlying to generate various complex payoffs. it means that the losses as well as profits for the buyer and the seller of a futures contract are unlimited. In simple words. And therefore future value of INR is at discount to USD.94 when spot price is 50. It means that INR is at discount to USD and USD is at premium to INR. future value of a currency with high interest rate is at a discount (in relation to spot price) to the currency with low interest rate. He has a potentially unlimited upside as well as a VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 56 .. CURRENCY FUTURES PAYOFFS A payoff is the likely profit/loss that would accrue to a market participant with change in the price of the underlying asset. This is generally depicted in the form of payoff diagrams which show the price of the underlying asset on the X-axis and the profits/losses on the Y-axis. Options do not have linear payoffs. you have to pay more INR to buy same 1 USD. Payoff for buyer of futures: Long futures The payoff for a person who buys a futures contract is similar to the payoff for a person who holds an asset. Futures contracts have linear payoffs. Their pay offs are non-linear. think that to buy same 1 USD you had to pay INR 50 and you have to pay 51.e.Interpretation: Future price of USDINR depends upon the interest rate of each country.94 after one year i. currently only payoffs of futures are discussed as exchange traded foreign currency options are not permitted in India. However. Intuitively to understand why INR is called at discount to USD. Therefore in any currency pair. If USD price is appreciated then borrower has to pay more USD in return but if USD is depreciated then borrower has to pay less USD dollar. Interpretation of Concept of premium and discount: Therefore one year future price of USDINR pair is 51.

If the price falls. USD. If the price rises. 57. If the price goes up. Payoff for seller of futures: Short futures The payoff for a person who sells a futures contract is similar to the payoff for a person who shorts an asset. If the price goes down. The Figure below shows the payoff diagram for the seller of a futures contract. when Rupee depreciates. his futures position starts making profit.0000. the long futures position starts making profits. when rupee appreciates.0000. Payoff for seller of future: The figure shows the profits/losses for a short futures position. when rupee appreciates.Potentially unlimited downside. and when the dollar depreciates. it start making losses. his futures position starts making profit. his futures position starts showing losses. his futures position starts showing losses VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 57 . Payoff for buyer of future: The figure shows the profits/losses for a long futures position. Take the case of a speculator who buys a two-month currency futures contract when the USD stands at say Rs. Take the case of a speculator who sells a two month currency futures contract when the USD stands at say Rs. and when the dollar appreciates. it starts making losses.e. the short futures position starts making profits. The underlying asset in this case is the currency. The investor sold futures when the USD was at Rs.57.e.e. He has a potentially unlimited upside as well as a potentially unlimited downside. The underlying asset in this case is the currency. i.e. i.0000. i. When the value of dollar moves down. when rupee depreciates. i. When the value of dollar moves up. USD. The investor bought futures when the USD was at Rs.0000.57.57.

00 00 Interpretation: From the above figure it is clear that when US dollar goes up then long future buyers make profit and when US dollar price goes down then short future sellers make profit. Using the cost-of-carry logic. The cost of carry model used for pricing futures is given below: F=Se^(Rh-Rf) T VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 58 .0000 PRICING FUTURES – COST OF CARRY MODEL Pricing of futures contract is very simple. 57. Every time the observed price deviates from the fair value.57.1 USD Rs. spot price of 1 USD = Rs. Here. This in turn would push the futures price back to its fair value. arbitragers would enter into trades to capture the arbitrage profit. we calculate the fair value of a futures contract.

5082 for Rs. 47726. Of this Rs.61 shall be used to buy USD 1072. An arbitrageur can: 1. rf < rh.52. 44000 and invest the same at 10% (both rates being continuously compounded) 2. 44.5082) USD 1000 converted to Rs.71828 To explain this. i.61 (i.e. let us assume that one year interest rates in US and India are say 7% and 10% respectively and the spot rate of USD in India is Rs. 44000 and invested at 10% pa grow to Rs. 45.5082 has to be repaid. From the equation above the one year forward exchange rate should be F = 44*e (0. the reverse strategy would work and yield risk less profit. The strategy therefore leaves a risk less profit of Rs.e. rf > rh.Where: Rh = Cost of financing (using continuously compounded interest rate) Rf = one year interest rate in foreign T=Time till expiration in years e = 2. 47726. Rs. If the foreign interest is lower than the domestic rate. The value of F shall increase further as time T increases. then F shall be less than S. Borrow 1000 USD at 7% per annum for one year and convert to Rs.50*1072. then value of F shall be greater than S.91 Suppose the rate was greater than Rs. if foreign interest rate is greater than the domesticate i.50.34 Suppose that the one year rate is less than this.07)*1=45. 44. Buy a forward contract for USD 1072. VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 59 .5082 and repay the loan (US Dollars borrowed earlier).34 as given in the equation above. say Rs.e. It may be noted from the above equation. An amount of USD 1072. 900. 44.10-0. The value of F shall decrease further as time T increase.

enter into a 2 years futures contract to buy 1105. If the futures price is more than this . then an arbitrageur can make a profit by:  Borrowing Rs.71 USD at the rate of Rs. 54706 = Rs.50.71 * 49. 48*exp ^(.9600 If the futures price is less than this. the contract exchange rate being Rs. which will help him in repaying the liability on the USD loan. The investor can invest the USD for 2 years at the rate of 5%.2500 per USD.07*2) = Rs. 507 at the end of 2 nd year.07. The investor can get the Rs. F = 48. and converting it to INR thereby getting Rs.a. 48000 in a bank to earn interest @ 7% p.07 . the investment in the bank will mature and the investor will receive Rs.. the spot rate is Rs. 55213 – Rs.71.05) x 2 = 49..07 * 2) = 55213. VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 60 . 1000*48 = Rs. 48.0000 x e^ (0. for 2 years. 48000 * e (0. 1105.05)*2.50. 48000 * e (0. This will create a liability of USD 1000 * e (0.ExampleSuppose.05*2) = 1105. 54706 at the end of 2nd year.a. Also. 49. say Rs. say Rs.71. then an arbitrageur can make a profit by:  Borrowing 1000 USD at 5% p.50 = Rs. the two years futures contract price should be Rs. The investor can pay Rs. 48000 at 7% interest rate for a period of 2 years.  He can invest the Rs.0000 per USD and the prevailing continuously compounded interest rates in India and US are 7% and 5% respectively. From the equation above. 50.17 USD and obtain INR at the end of 2 years.   At the end of two years.50. Simultaneously the investor can enter into the futures contract to sell 1105. 48000 converted to USD at the prevailing spot rate and obtain USD 1000 (48000/48). 54706 to obtain USD 1105. This will create a liability of Rs.25.9589 or 49. So this requires an amount of Rs. This will leave the investor with a riskless profit of Rs. 49. 48000.. 55213.

the firm‘s profit will be affected by change in foreign exchange rates. It is noted that corporate profits are exposed to exchange rate risk in many situation..05*2) = 1105.e. the firm can take long or short position in futures currency market as per requirement. For example. 55213 and make a riskless profit of Rs. buying currency futures contracts) will protect against a rise in a foreign currency value whereas a short hedge (i.the investor can then convert the USD into INR and obtain 1105.17. selling currency futures contracts) will protect against a decline in a foreign currency‘s value. it is possible that anticipated profit in foreign investment may be eliminated. in all these situations. At the end of 2 years the investor will get USD 1000 * e (0.e.  The investor can then repay the liability of Rs.25 = Rs. if the firm is borrowing or lending or investing for short or long period from foreign countries. 322 HEDGING USING IN CURENCY FUTURES Exchange rates are quite volatile and unpredictable. Thus. a long hedge (I. The general rule for determining whether a long or short futures position will hedge a potential foreign exchange loss is: Loss from appreciating in Indian rupee= Short hedge Loss from depreciating in Indian rupee= Long hedge VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 61 . In all these situations. if a trader is exporting or importing any particular product from other countries then he is exposed to foreign exchange risk.17 * 50. 55535 – 55213 = Rs.. in order to hedge this foreign currency risk. 55535. Similarly. rather even may incur loss. For example.. the traders‘ often use the currency futures.

0000 per USD (suppose the 3 month futures price is Rs. who is expecting a receipt of USD in the future will try to fix the conversion rate by holding a short position in the USD-INR contract. Exporter XYZ is expecting a payment of USD 1. If the exchange rate rises to INR 58.000.000 after 3 months.0000 : 1 USD Spot Market: XYZ will get INR 56. Whatever may be the exchange rate after 3-months. Futures Market: VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 62 .000.000 by selling 1 Million USD in the spot market.000. then XYZ will get INR 58.000. XYZ has to take a short position in 1000 contracts. which it can hedge by taking an exposure in the futures market . then XYZ will get INR 56. This can be explained as under: If USD strengthens and the exchange rate becomes INR 58.000 after 3 months. If the spot exchange rate after 3-months remains unchanged. Suppose. An example where this strategy can be used : An exporter. then XYZ will get INR 57. In a currency market.months at INR 57.000 by converting the USD received from the export contract. XYZ will be sure of getting INR 57. Since a USD-INR futures contract size is of 1000 USD. if the exchange rate falls to INR 56. short hedge is taken by someone who already owns the base currency or is expecting a future receipt of the base currency.0000: 1 USD.000. However. Thus. XYZ is exposed to an exchange rate risk.By taking a short position in the futures market. Short hedge strategy through an example.0000 : 1 USD Spot Market: XYZ will get INR 58. the spot exchange rate is INR 57.Short hedge: A short hedge involves taking a short position in the futures market.000. Futures Market: If USD weakens and the exchange rate becomes INR 56.0000: 1 USD.0000: 1 USD.000. XYZ can lock-in the exchange rate after 3.000.000. 57).000.000 by selling 1 Million USD in the spot market.000 thereby losing INR 1. A loss in the spot market will be compensated by the profit in the futures contract and vice versa.

0000: 1 USD. If the exchange rate rises to INR 58. has ordered certain computer hardware from abroad and has to make a payment of USD 1. Net Receipts in INR: 58million – 1 million = 57 million XYZ will gain INR (57 – 56)* 1000 = INR 1000 per contract. VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 63 . The total gain in 1000 Contracts will be INR 1. IMP wants to remain immune to the volatile currency markets and wants to lock-in the future payment in terms of INR. An example where this strategy can be used: An importer who has to make payment for his imports in USD will take a long position in USDINR contracts and fix the rate at which he can buy USD in future by paying INR An Importer. If the spot exchange rate after 3-months remains unchanged then IMP will have to pay INR 57.0000: 1 USD.0000 : 1 USD. of the movement in the exchange rate.000 (INR 1.000. The total loss in 1000 Contracts will be INR 1.000. IMP. then IMP will have to pay more . This strategy is used by those who will need to acquire base currency in the future to pay any liability in the future. the exporter is certain of the cash flow. then IMP will have to pay INR 56. Irrespective. if the exchange rate falls to INR 56. A Long position holder agrees to buy the base currency at the expiry date by paying the agreed exchange rate. However. Long hedge: A long hedge involves holding a long position in the futures market.000 to buy USD to pay for the import contract.XYZ will lose INR (57 – 58)* 1000 = INR 1000 per contract.000.000.000.000 after 3 months.000. Net Receipts in INR: 56 million + 1 million = 57 million An exporting firm can thus hedge itself from currency risk. by taking a short position in the futures market.INR 58.000.000 less). The spot exchange rate as well as the 3month‘s future rate is INR 57.000 after 3 months to acquire USD.000.000. IMP is exposed to currency risk.

000.000.000. IMP will be sure of getting the 1 million USD by paying a net amount of INR 57. INR 58. For example. This can be explained as under: If USD strengthens and the exchange rate becomes INR 58. Futures Market: The importer will lose INR (57–56)* 1000 = INR 1000 per contract.0000 : 1 USD Spot Market: IMP has to pay more i.which it can hedge by taking a long position in the futures market.0000 per USD. A loss in the spot market will be compensated by the profit in the futures contract and vice versa.000.e. INR 56.56 million . Net Payment in INR: . The choice of underlying currency The first important decision in this respect is deciding the currency in which futures contracts are to be initiated. by taking a long position in the futures market.000. Assume that VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 64 . Futures Market: IMP will gain INR (58 – 57)* 1000 = INR 1000 per contract. The total profit in 1000 contracts will be INR 1. Net Payment in INR: – 58 million + 1 million = 57 million If USD weakens and the exchange rate becomes INR 56. IMP can lock-in the exchange rate after 3-months at INR 57.000 for acquiring 1 million USD In the spot market.000 for buying 1 million USD in The spot market.000.1 million = 57 million An importer can thus hedge itself from currency risk. Whatever may be the exchange rate after 3-months. an Indian manufacturer wants to purchase some raw materials from Germany then he would like future in German mark since his exposure in straight forward in mark against home currency (Indian rupee).e. By taking long position in 1000 future contracts. The importer becomes immune from exchange rate movement.0000 : 1 USD Spot Market: IMP will have to pay less i.000. The total loss in 1000 contracts will be INR 1.000.

0000.0250 57. And he will have to pay 100000 USD on 1st OCT 2012.0675.1500 2503 37888 14.2100 58. suppose Indian importer import raw material of 100000 USD on 1st June 2012.3700 132 0.9000 58. Which contract should he choose? Probably he has only one option rupee with dollar.0675 57. Importer predicts that the value of USD will increase more than 58.33 1929 100 57. For example. This is called cross hedge.68 18533 1 57.0700 2967803 646589 101824 43 57.6275 45 0.8625 10279 65179 59.3525 57. Future Value of the USD on MCX-SX as below: Currency future price watch (as on 22 June 2012) Product Buy Qty Buy Price Sell Price Sell Spread Qty LTP Volume OI (in Lots) (in Lots) Value (in Crores) 16839.3600 391933 546173 2234.39 No of Trades USDINR 270612 USDINR 270712 USDINR 290812 USDINR 260912 USDINR 291012 80 57. So what he will do to protect against depreciating in Indian rupee? Suppose spots value of 1 USD is 57.1700 57.7150 57.05 370 26 57.0175 57.8850 4 0.43 124 VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 65 .6025 57.6100 31650 140011 181. Choice of the maturity of the contract The second important decision in hedging through currency futures is selecting the currency which matures nearest to the need of that currency.0700 176 0.1100 5 0.there is no such future (between rupee and mark) available in the market then the trader would choose among other currencies for the hedging in futures.0025 57. And he predicts that the value of USD will increase against Indian rupees nearest to due date of that payment.

4950 59.1000 10 0.7550 59.0950 59.53 122946 No. Value of the currency future of USDINR29102012 is 57.0675*1000*100 = 5706750 Value of the contract = (Value of currency future per USD*contract size*No of contract).0600 570 1284 3.8600 59.8000 10 0.0500 58.0325 59. of contracts.9450 100 0.9000 VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 66 .3000 58.1000 125 6417 0.00 70 15 58.2500 25 0.6000 1162 7986 6.USDINR 271112 USDINR 271212 USDINR 290113 USDINR 260213 USDINR 270313 USDINR 260413 USDINR 290513 102 58.74 5 50 59.4900 58.2400 58.3000 1037 10364 6.5150 59.77 28 15 58.7675 59.21 24 50 59.6300 802 13947 4.7300 1 0.41 17 Total: 3408861 1509605 19356.0675.3500 5 0.0675 Solution He buys 100 contract of USDINR 27062012 at the rate of 57.3408861 ARCHIEVES AS on 27 June 2012 Underlying USDINR RBI Reference Rate 57.5900 871 31299 5.9550 50 0.6100 59.3350 60.78 15 1 59.8000 126 2468 0.5850 58.74 7 15 58. Spot value of the contract = value of currency spot price*contract size*No of contract = 57.

= (57. And (0.93250) is 5706750.0000.90*1000*100) = 5790000. So.5 per contract and the total profit in 100 contracts is Rs. For that he has to pay 5% margin on 5790000. On settlement date payoff of importer will be (58.9325 *100000) = Rs. 00. Means he will have to pay Rs. importer has to pay net payment (5800000 . VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 67 .0000-57.9325per USD.000 for buying 100000 USD. 93250 Interpretation: In Spot market importer has to pay 58.932.299425 at present. 93250. And in future market importer will gain Rs. And suppose on settlement day the spot price of USD is 58.0675) = 0.

The whole function of Exchange traded currency future is regulated by SEBI/RBI.  In India RBI and SEBI has restricted other currency derivatives except Currency future. By applying this I found that the price of any currency future depends upon the interest rate or exchange rate of particular country. And also time reduced in Clearing and Settlement process up to T+1 day‘s basis.CHAPTER – 5 FINDINGS  Interest parity model is useful tool to find out the future price.  New concept of Exchange traded currency future trading is regulated by higher authority and regulatory. VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 68 .  Hedging in currency future helps to lock the standard price that helps to reduce the risk in foreign exchange market that occurs in future trading. and they established rules and regulation so there is very safe trading is emerged and counter party risk is minimized in currency Future trading.  There is a limit of USD 100 million on open interest applicable to trading member who are banks. Currency future of USD/INR shows that if price of USD goes up it means Indian Rupee depreciates then borrower has to pay the more dollars in return and vice versa.  Larger exporter and importer has continued to deal in the OTC counter. even exchange traded currency future is available in markets. And the USD 25 million limit for other trading members so larger exporter and importer might continue to deal in the OTC market where there is no limit on hedges. at this time if any person wants to use other instrument of currency derivatives in this case he has to use OTC.

VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 69 . particularly for retail segment of market.  If FIIs have to be allowed in currency future trading. Ban on NRI‘s and FII‘s and Mutual Funds from Participating. And according to Indian financial growth now it‘s become necessary to introducing other currency derivatives in Exchange traded currency derivative segment.  The market should be efficient with widespread awareness amongst various market players.RECOMMENDATION  Currency Future need to change some restrictions it imposed such as cut off limit of 5 million USD. there should than be a cap on their open interest position in currency future. so this restriction seem unreasonable to exporters and importers.  It is most important that the contract size should be kept at such a level that it facilitates price discovery as well as trading.  In India the regulatory of Financial and Securities market (SEBI) has Ban on other Currency Derivatives except Currency Futures. The positive aspects of the entry of these securities will be that they will bring in huge volumes and liquidity into the market.

It is shows that how currency future covers ground in the compare of other available derivatives instruments. The currency future gives the safe and standardized contract to its investors and individuals who are aware about the forex market or predict the movement of exchange rate so they will get the right platform for the trading in currency future. Because of exchange traded future contract and its standardized nature gives counter party risk minimized.a process that has undoubtedly improved national productivity growth and standards of livings. Initially only NSE had the permission but now BSE and MCX has also started currency future.CONCLUSION By far the most significant event in finance during the past decade has been the extraordinary development and expansion of financial derivatives. These instruments enhances the ability to differentiate risk and allocate it to those investors most able and willing to take it. Exchange between USD-INR markets in India is very big and these exchange traded contract will give more awareness in market and attract the investors. Not only big businessmen and exporter and importers use this but individual who are interested and having knowledge about forex market they can also invest in currency future. VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 70 .

php VISHWA VISHWANI INSTITUTE OF SYSTEM AND MANAGEMENT HYDERABAD Page 71 .moneycontrol.investopedia.forexpros.com/nse-currency-futures.com/charts/real-time-futures-charts http://www.nseindia.com/SitePages/mkt_data.merinews.useindia.com/articles/forex/10/introduction-currencyhttp://www.com http://www.com www.aspx?id=13323 http://www. BCFM: Currency Future Module Report of the RBI-SEBI standing technical committee on exchange traded currency future Websites www.shtml http://www.aspx http://www.rbi.bseindia.aspx http://www.html http://www.com www.com/article/aiming-to-boost-rupee-and-economy-rbiannounces-steps/15871267.com/options-and-futures/currency-forex-futures.in/currency_specifications.smctradeonline.com/sitepages/DayWiseTurnover.mcx-sx.co.dalalstreetwinners.economywatch.org.aspx http://www.BIBLIOGRAPHY NCFM: Currency future Module.in/scripts/PublicationsView.com www.com/currency-derivatives-outlook-for-next-week30april-to-4-may-2012/ http://bullage.mcx-sx.

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