A Report on Currency Trading System

in India

By

Radha Sulthana

()

Project submitted in partial fulfillment for the

award of the degree of MASTER OF
BUSINESS ADMINISTRATION

By
Osmania University, Hyderabad-500007

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ANNEXURE-I

DECLARATION

I hereby declare that this project entitle “A Report on Currency Trading

system in India” submitted by me to the department of business

management,OU,Hyderabad, is a bonafide work undertaken by me and it is

not submitted to any other university or institution for the award of any

degree diploma certificate or published any time before.

Name of the student: Signature of the student:

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ANNEXURE –II

Certificate

Abstract

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The aim of the projects is how the currency derivatives market is safe and
efficient. Risks are particularly well controlled in the exchange segment, where
central counterparties (CCPs) operate very efficiently and mitigate the risks
for all market participants.

It explains how the currency derivatives market has successfully developed

under an effective regulatory regime in India. All three prerequisites for a well-
functioning market – safety, efficiency and innovation – are fulfilled. While
there is no need for structural changes in the framework under which OTC
Players and exchanges operate today, improvements are possible.
Particularly in the OTC segment, increasing operating efficiency, market
transparency and enhancing counterparty risk mitigation would help the global
derivatives market to function even more effectively.

We f ind that currency derivatives market opens up new window for the
investors in India to go beyond the stereotype equity and commodity market and
enjoy the Currency market.

ANNEXURE-IV

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 ACKNOWLEDGEMENT

It is with real pleasure that, I record my indebtedness to my academic

Guide, Mr. Dilip Kumar for his counsel and guidance during the preparation

of this project.

I am grateful to Branch Manager, Securities Division of JRG wealth

management ltd Mr. Dilip Kumar.

I wish to record my sincere and special thanks to Mr. Venu Gopal

G(HR-Admin).

My special thanks are due to “ “give me great and valuable

support.

Page
Chapter No Content No
1 Introduction 7 - 20

2 Objectives 21-60

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3 Research and Methodology
4 Review of literature
5 Company Profile 61-71
Data Analysis and
6 Interpretation 72-95
7 Findings and Suggestions 96-97
8 Conclusion

9 Bibliography 98

Chapter 1

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 INTRODUCTION

CHAPTER 1 INTRODUCTION TO
CURRENCY MARKETS

1.1 BASIC FOREIGN EXCHANGE

DEFINITIONS

Spot: Foreign exchange spot trading is buying one currency with

a different currency for immediate delivery. The standard

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settlement convention for Foreign Exchange Spot trades is T+2
days, i.e., two business days from the date of trade. An exception is
the USD/CAD (USD–Canadian Dollars) currency pair which settles
T+1. Rates for days other than spot are always calculated with
reference to spot rate.

Forward Outright: A foreign exchange forward is a contract

between two counterparties to exchange one currency for another
on any day after spot. In this transaction, money does not actually
change hands until some agreed upon future date. The duration of
the trade can be a few days, months or years. For most major
currencies, three business days or more after deal date would
constitute a forward transaction.

Settlement date / Definition

Value Cash Trade Date Same day as deal date
Value Tom Trade Date + 1 1 business day after deal
Spot Trade Date + 2 2 business days after
Forward Trade Date + 3 or any 3 business days or more
Outright laterdate after deal date, always
* USD/CAD is the
exception

Base Currency / Terms Currency: In foreign exchange markets,

the base currency is the first currency in a currency pair. The
second currency is called as the terms currency. Exchange rates
are quoted in per unit of the base currency. Eg. The expression US
Dollar–Rupee, tells you that the US Dollar is being quoted in terms
of the Rupee. The US Dollar is the base currency and the Rupee is
the terms currency.

Exchange rates are constantly changing, which means that the

value of one currency in terms of the other is constantly in flux.
Changes in rates are expressed as strengthening or weakening of
one currency vis-à-vis the other currency. Changes are also
expressed as appreciation or depreciation of one currency in terms
of the other currency. Whenever the base currency buys more
of the terms currency, the base currency has strengthened /
appreciated and the terms currency has weakened / depreciated.
Eg. If US Dollar–Rupee moved from 43.00 to 43.25, the US Dollar
has appreciated and the Rupee has depreciated.

Swaps: A foreign exchange swap is a simultaneous purchase and

sale, or sale and purchase, of identical amounts of one currency
for another with two different value dates. Foreign Exchange
Swaps are commonly used as a way to facilitate funding in the

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cases where funds are available in a different currency than the one
needed. Effectively, each party to the deal is given the use of an
amount of foreign currency for a specific time.

The Forward Rate is derived by adjusting the Spot rate for the
interest rate differential of the two currencies for the period
between the Spot and the Forward date. Liquidity in one currency is
converted into another currency for a period of time.

1.2 EXCHANGE RATE

MECHANISM

“Foreign Exchange” refers to money denominated in the currency of

another nation or a group of nations. Any person who exchanges
money denominated in his own nation’s currency for money
denominated in another nation’s currency acquires foreign
exchange.
This holds true whether the amount of the transaction is equal to a
few rupees or to billions of rupees; whether the person involved is a
tourist cashing a travellers’ cheque or an investor exchanging
hundreds of millions of rupees for the acquisition of a foreign
company; and whether the form of money being acquired is
foreign currency notes, foreign currency-denominated bank
deposits, or other short-term claims denominated in foreign
currency.

A foreign exchange transaction is still a shift of funds or short-

term financial claims from one country and currency to another.
Thus, within India, any money denominated in any currency other
than the Indian Rupees (INR) is, broadly speaking, “foreign
exchange.” Foreign Exchange can be cash, funds available on credit
cards and debit cards, travellers’ cheques, bank deposits, or other
short-term claims. It is still “foreign exchange” if it is a short-term
negotiable financial claim denominated in a currency other than
INR.

Almost every nation has its own national currency or monetary

unit - Rupee, US Dollar, Peso etc.- used for making and receiving
payments within its own borders. But foreign currencies are usually
needed for payments across national borders. Thus, in any nation
whose residents conduct business abroad or engage in financial
transactions with persons in other countries, there must be a
mechanism for providing access to foreign currencies, so that
payments can be made in a form acceptable to foreigners. In other
words, there is need for “foreign exchange” transactions—exchange

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of one currency for another.

The exchange rate is a price - the number of units of one nation’s

currency that must be surrendered in order to acquire one unit of
another nation’s currency. There are scores of “exchange rates”
for INR and other currencies, say US Dollar. In the spot market,
there is an exchange rate for every other national currency traded
in that market, as well as for various composite currencies or
constructed monetary units such as the Euro or the International
Monetary Fund’s “SDR”. There are also various “trade-weighted” or
“effective” rates designed to show a currency’s movements against
an average of various other currencies (for eg US Dollar index,
which is a weighted index against world major currencies like Euro,
Pound Sterling, Yen, and Canadian Dollar). Apart from the spot
rates, there are additional exchange rates for other delivery dates in
the forward markets.

The market price is determined by the interaction of buyers and

sellers in that market, and a market exchange rate between two
currencies is determined by the interaction of the official and
private participants in the foreign exchange rate market. For a
currency with an exchange rate that is fixed, or set by the
monetary authorities, the central bank or another official body is a
participant in the market, standing ready to buy or sell the
currency as necessary to maintain the authorized pegged rate or
range. But in countries like the United States, which follows a
complete free floating regime, the authorities are not known to
intervene in the foreign exchange market on a continuous basis to
influence the exchange rate. The market participation is made up of
individuals, non-financial firms, banks, official bodies, and other
private institutions from all over the world that are buying and
selling US Dollars at that particular time.
The participants in the foreign
exchange market are thus a heterogeneous group. The various
investors, hedgers, and speculators may be focused on any time
period, from a few minutes to several years. But, whatever is the
constitution of participants, and whether their motive is
investing, hedging, speculating, arbitraging, paying for imports, or
seeking to influence the rate, they are all part of the aggregate
demand for and supply of the currencies involved, and they all play
a role in determining the market price at that instant. Given the
diverse views, interests, and time frames of the participants,
predicting the future course of exchange rates is a particularly
complex and uncertain exercise. At the same time, since the
exchange rate influences such a vast array of participants and
business decisions, it is a pervasive and singularly important price

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in an open economy, influencing consumer prices, investment
decisions, interest rates, economic growth, the location of industry,
and much more. The role of the foreign exchange market in the
determination of that price is critically important.

1.3 MAJOR CURRENCIES OF THE

WORLD

The US Dollar is by far the most widely traded currency. In part,

the widespread use of the US Dollar reflects its substantial
international role as “investment” currency in many capital
markets, “reserve” currency held by many central banks,
“transaction” currency in many international commodity markets,
“invoice” currency in many contracts, and “intervention”
currency employed by monetary authorities in market
operations to influence their own exchange rates.

In addition, the widespread trading of the US Dollar reflects its use

as a “vehicle” currency in foreign exchange transactions, a use that
reinforces its international role in trade and finance. For most pairs
of currencies, the market practice is to trade each of the two
currencies against a common third currency as a vehicle, rather
than to trade the two currencies directly against each other. The
vehicle currency used most often is the US Dollar, although very
recently euro also has become an important vehicle currency.

Thus, a trader who wants to shift funds from one currency to

another, say from Indian Rupees to Philippine Pesos, will probably
sell INR for US Dollars and then sell the US Dollars for Pesos.
Although this approach results in two transactions rather than one,
it may be the preferred way, since the US Dollar/INR market and
the US Dollar/Philippine Peso market are much more active and
liquid and have much better information than a bilateral market for
the two currencies directly against each other. By using the US
Dollar or some other currency as a vehicle, banks and other foreign
exchange market participants can limit more of their working
balances to the vehicle currency, rather than holding and
managing many currencies, and can concentrate their research
and information sources on the vehicle currency.

Use of a vehicle currency greatly reduces the number of

exchange rates that must be dealt with in a multilateral
system. In a system of 10 currencies, if one currency is selected as
the vehicle currency and used for all transactions, there would be a
total of nine currency pairs or exchange rates to be dealt with (i.e.
one exchange rate for the vehicle currency against each of the

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others), whereas if no vehicle currency were used, there would be
45 exchange rates to be dealt with. In a system of 100 currencies
with no vehicle currencies, potentially there would be 4,950
currency pairs or exchange rates [the formula is: n(n-1)/2]. Thus,
using a vehicle currency can yield the advantages of fewer,
larger, and more liquid markets with fewer currency balances,
reduced informational needs, and simpler operations.
The US Dollar took on a major vehicle currency role with the
introduction of the Bretton Woods par value system, in which
most nations met their IMF exchange rate obligations by buying
and selling US Dollars to maintain a par value relationship for their
own currency against the US Dollar. The US Dollar was a convenient
vehicle because of its central role in the exchange rate system and
its widespread use as a reserve currency. The US Dollar’s vehicle
currency role was also due to the presence of large and liquid US
Dollar money and other financial markets, and, in time, the Euro-
US Dollar markets, where the US Dollars needed for (or
resulting from) foreign exchange transactions could conveniently be
borrowed (or placed).

Other Major

Currencies include:

The Euro

Like the US Dollar, the Euro has a strong international presence and
over the years has emerged as a premier currency, second only to
the US Dollar.

The
Japanese
Yen

The Japanese Yen is the third most traded currency in the world. It
has a much smaller international presence than the US Dollar or the
Euro. The Yen is very liquid around the world, practically around the
clock.

The British
Pound

Until the end of World War II, the Pound was the currency of
reference. The nickname Cable is derived from the telegrams used
to update the GBP/USD rates across the Atlantic. The currency is
heavily traded against the Euro and the US Dollar, but it has a
spotty presence against other currencies. The two-year bout with
the Exchange Rate Mechanism, between 1990 and 1992, had a

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soothing effect on the British Pound, as it generally had to
follow the Deutsche Mark's fluctuations, but the crisis conditions that
precipitated the pound's withdrawal from the Exchange Rate
Mechanism had a psychological effect on the currency.

The Swiss
Franc

The Swiss Franc is the only currency of a major European country

that belongs neither to the European Monetary Union nor to the
G-7 countries. Although the Swiss economy is relatively small, the
Swiss Franc is one of the major currencies, closely resembling the
strength and quality of the Swiss economy and finance. Switzerland
has a very close economic relationship with Germany, and thus to
the Euro zone.

Typically, it is believed that the Swiss Franc is a stable currency.

Actually, from a foreign exchange point of view, the Swiss Franc
closely resembles the patterns of the Euro, but lacks its liquidity.

Currency
Table

The Currency Table is a a user-friendly table that provides

information on currency movements.

USD EUR GBP JPY

US 1 0.7468 0.6627
D 1.33 1 0.8869
EU 9
1.509 1 149.
R
0.0101 0.0075 1
GB

1.4 OVERVIEW OF INTERNATIONAL

CURRENCY MARKETS

During the past quarter century, the concept of a 24-hour market

has become a reality. Somewhere on the planet, financial centers
are open for business; banks and other institutions are trading the
US Dollar and other currencies every hour of the day and night,
except on weekends. In financial centers around the world,
business hours overlap; as some centers close, others open and
begin to trade. The foreign exchange market follows the sun around
the earth.

Business is heavy when both the US markets and the major

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European markets are open -that is, when it is morning in New
York and afternoon in London. In the New York market, nearly two-
thirds of the day’s activity typically takes place in the morning
hours. Activity normally becomes very slow in New York in the mid-
to late afternoon, after European markets have closed and before
the Tokyo, Hong Kong, and Singapore markets have opened.

Given this uneven flow of business around the clock, market

participants often will respond less aggressively to an exchange rate
development that occurs at a relatively inactive time of day, and will
wait to see whether the development is confirmed when the major
markets open. Some institutions pay little attention to
developments in less active markets. Nonetheless, the 24-hour
market does provide a continuous “real-time” market
assessment of the ebb and flow of influences and attitudes with
respect to the traded currencies, and an opportunity for a quick
judgment of unexpected events. With many traders carrying
pocket monitors, it has become relatively easy to stay in touch with
market developments at all times.

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The market consists of a limited number of major dealer
institutions that are particularly active in foreign exchange, trading
with customers and (more often) with each other. Most of these
institutions, but not all, are commercial banks and investment
banks. These institutions are geographically dispersed, located in
numerous financial centers around the world. Wherever they are
located, these institutions are in close communication with each
other; linked to each other through telephones, computers, and
other electronic means.

Each nation’s market has its own infrastructure. For foreign

exchange market operations as well as for other connected matters,
each country enforces its own laws, banking regulations, accounting
rules, taxation and operates its own payment and settlement
systems. Thus, even in a global foreign exchange market with
currencies traded on essentially the same terms simultaneously in
many financial centers, there are different national financial
systems and infrastructures through which transactions are
executed, and within which currencies are held.

With access to all of the foreign exchange markets generally open

to participants from all countries, and with vast amounts of market
information transmitted simultaneously and almost instantly to
dealers throughout the world, there is an enormous amount of
cross-border foreign exchange trading among dealers as well as
between dealers and their customers.

At any moment, the exchange rates of major currencies tend to be

virtually identical in all the financial centers where there is active
trading. Rarely are there such substantial price differences among
major centers as to provide major opportunities for arbitrage. In
pricing, the various financial centers that are open for business and
active at any one time are effectively integrated into a single
market.

1.5 ECONOMIC VARIABLES IMPACTING EXCHANGE

RATE MOVEMENTS

Various economic variables impact the movement in exchange

rates. Interest rates, inflation figures, GDP are the main variables;
however other economic indicators that provide direction
regarding the state of the economy also have a significant
impact on the movement of a currency. These would include
employment reports, balance of payment figures, manufacturing
indices, consumer prices and retail sales amongst others. Indicators

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 which suggest that the economy is strengthening are positively
correlated with a strong currency and would result in the currency
strengthening and vice versa.

Currency trader should be aware of government policies and the

central bank stance as indicated by them from time to time, either
by policy action or market intervention. Government structures its
policies in a manner such that its long term objectives on
employment and growth are met. In trying to achieve these
objectives, it sometimes has to work around the economic variables
and hence policy directives and the economic variables are
entwined and have an impact on exchange rate movements.

For instance, if the government wants to stimulate growth, one of the

measures it could take would be cutting interest rates and if such a
measure is seen to bear expected results then the market would react
positively and its impact would also be seen in the strengthening of the
home currency. Inflation and interest rates are opposites. In order to
reduce inflation, which reduces the purchasing power of money, often
the policy of high interest rate is followed but such a policy hinders
growth therefore a policy to balance inflation and interest rates is
considered ideal and the perception of the success of such a policy by
the participants in the foreign exchange market will impact the
movement and direction of the currency.

1.6 History of currency derivative:-

Currency derivative are created in the Chicago Mercantile Exchange
(CME) in the year of 1972. the contracts are created under the guidance
& leadership of leo me lamed, CME chairman Emeritus. The FX contract
capitalized on the U.S. abandonment of the bretton woods agreement,
which had fixed world exchange rates to a gold standard after World
War II. The abandonment of the Bretton woods agreement resulted in
currency values being allowed to float increases the risk of doing a
business, by creating another market in which futures could be treaded,
CME currency futures extended the reach of risk management beyond
commodities which were main derivative contracts traded at CME unit
then. The concept of currency futures at CME was revolutionary, &
gained credibility through endorsement of Nobel-prize-winning
economist Milton Friedman.

Today, CME offers 41 individual FX futures & 31, options contracts on 19

currencies, all of which trade electronically on the exchanges CME
Globex platform. It is a largest regulated marketplace for FX trading.

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Traders of CME FX futures are a diverse group that includes
multinational corporations, hedge funds, commercial banks, investment
banks, financial managers, commodity trading advisors, proprietary
trading firms. Currency overlay managers & individual investors. They
trade in order to transact business hedge against unfavorable changes
in currency rates or to speculate on rate fluctuations.

1.7 Brief history or overview of foreign exchange

market
During early 1990’s.india embarked on a series of structural reforms
in the foreign market. The exchange rate regime, that was earlier
pegged, was partially floated in March,1992 and fully floated in
March,1993. The unification of the exchange rate was instrumental
developing a market determined exchange rate of the rupee and was
important steps in the progress towards total current account
convertibility, which was achieved in 1994.

Although liberalization helped the Indian forex market in various

ways ,it led to extensive fluctuations of exchange rate .this issue has
attracted a great deal of concern from policy makers and investors.
While some flexibility in foreign exchange markets and exchange rate
determination is desirable, excessive volatility can have an adverse
effect on price discovery, export performance , sustainability of current
account balance & balance sheet. In the content of upgrading Indian
foreign market exchange to international standards a well developed
foreign exchange market (both PTC as well as exchange traded ) is
imperative. With a view to entities to manage volatilities in the currency
market, RBI on April 207, issued comprehensive guidelines on the wage
of foreign currency forwards, swaps ,& options in the OTC market. At
the same time, RBI also set up an internal working group to explore the
advantage of introducing currency futures.The report of the internal
working group of RBI submitted in April 2008, recommended the
introduction of exchange traded currency derivative.

Subsequently, RBI & SEBI jointly constituted the standing

technical committee to analyse the currency forward and future market
around the world and lay down the guidelines to introduce traded
currency futures in the Indian market. The committee submitted it’s
report on may 29, 2008, further RBI& SEBI also issued circular on this
regard, on August 06,2008. Currently, India is a US D 34 billion OTC
market, where all the major currencies like USD, EURO, YEN, Pound,

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Swiss and France are trade. With the help of electronic trading and
efficient risk management systems .exchange traded currency futures
will bring in more transparency and efficiency in price discovery,
eliminate counter party credit risk, provide access to all types of market
participants, offer standard products and provide transparent trading
platform, marks are allowed to become of this segment on the exchange
, thereby providing them with a new opportunity.

1.8 Product definition of currency futures on NSE / BSE

UDERLYING:

Initially, currency futures contracts on USD- INDIAN RUPEE (US$-INR)

would be permitted.

TRADING HOURS:

The trading on currency futures would be available from 9a.m to 5p.m

SIZE OF THE CONTRACT:

The minimum contract size of the currency futures contract

at the time of introduction would be US$100.The contract size would be
periodically aligned to ensure that the size of the contract remains close
to minimum size.

QUATATION:

The currency futures contract would be quoted in rupee terms.

However the outstanding position would be in dollar terms.

TENOR OF CONTRACT:

The currency contract shall have maximum maturity of 12 months.

AVAILABLE CONTRACT:

All monthly maturities from 1to 12months would be made available.

SETTLEMENT MECHANISM:

The currency futures contract shall be settled in cash in Indian rupee.

SETTLEMENT PRICE:

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 The settlement price would the reserve bank reference rate on the date
of expiry. The methodology of computation and dissemination of
reference rate may be publicly disclosed by RBI.

FINAL SETTLEMENT DAY:

The currency futures date would expire on the last working day
(excluding Saturdays) of the month. the last working day would be taken
to be the same as that of interbank settlement in Mumbai. The rules for
interbank settlement, including those for known holidays and
subsequently declared holiday would be those as laid down by FEDAI.

1.9 Utility of Currency Derivatives

Exporter: - CDs are used by exporters invoicing the receivables in
foreign currency, willing to protect the earnings foreign currency
depreciation by locating the currency conversion rate at a high level.

Importers: - Importers use CDs for hedging the payables in foreign

currency when the foreign currency is expected to appreciate and they
would always like to guarantee a low conversion rate.

Investors: - Investors in foreign currency denominated securities would

like to secure strong foreign earnings by obtaining the right to sell the
foreign currency at a high conversion rate, thus defending their revenue
from foreign currency derivatives.

MNCs: - MNCs use CDs being engaged in direct investment

oversease.They want to guarantee the rate of purchasing foreign
currency for various payments related to installation of a foreign branch
or subsidiary, or to joint venture payment with foreign partners.

A high degree of volatility creates a fertile ground for foreign exchange

speculators. Their objective is to guarantee a high selling rate of foreign
currency by obtaining a derivative contract while hoping to bye the
currency at a low rate in the future.

The most commonly used instrument among the CDs is currency

forward contracts. These are large national value selling or buying
contracts obtained by Exporters, Importers, Investors and speculators
from bank with the denomination normally.

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1.9.1 Foreign exchange quotation
Foreign exchange quotations may be confusing because currencies are
quoted in terms of another currency.

Mainly there are two methods of quoting:

1. Direct method and

2. Indirect method

Direct method is followed by most of the countries in which the numbers

of domestic currency is stated against one unit of foreign currency. For
example: in we have to spent Rs.45 to purchase one unit dollar than
quotation can be written as:

Rs. /$ = 45 or $1 = Rs. 45

In case of indirect method of quoting value of one unit of domestic

currency is stated against foreign currency. If we continue with the
previous example then it can be quoted as:

Rs. 1 = 1/45 or 0.02222

In the global foreign exchange market two rates are quoted by dealers –
one rate is buying rate which is also called the BID RATE and another is
selling rate which is also known as ASK RATE. To separate the buying
and selling rate a small desh or oblique line is drawn. For example:

Rs. = 45.6600/6650

Here the bid price is Rs.45.6600 and ask price is Rs. 45.6650 and the
difference between these two rates is known as SPREAD.

SPREAD = 45.6650 – 45. 6600 = .0050

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1.9.2 Trading process of currency derivative

Like other future trading the future currency is also traded in organized
exchange. Above flow diagram of trading is shown. When the market
opens transaction takes place at the floor of the exchange when the
trader wants to sell or purchase he/she has to place the sale or purchase
order to the broker who are issued an unique identification number by
the exchange. Traders directly cannot make any transaction directly in
the exchange, they have to trade through brokers after placing the sales
or purchase order all the transactions are done by broker in exchange
and exchange informs it to the clearing house. In any transaction seller
and buyer does not know each other.Also beyond the trading hours
transactions may take place through an electronic system, called
GLOBEX. It connects the market of Chicago, Paris, London and others
from 2.30 pm to 7.05 am the following morning. GLOBEX system also
matches the purchase and selling order for each type of currency future
contracts.

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 Chapter 2

OBJECTIVES AND SCOPE

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Objec t ive of the P proje ct:
The b a s i c i d e a b e h i n d u n d e r t a k i n g C u r r e n c y D e r i v a t i v e s
market is t o g a i n knowledge about currency future market to study
the basic concept of Currency future.

To understand the investors for currency future with other

currency derivatives.

To study the hedging, speculation and arbitrage in Currency

Future.

To understand the practical considerations and ways of

considering currency future price.

Scope Of the
Study:

It explains how the currency derivatives market has

successfully developed under an effective regulatory regime in
India. All three prerequisites for a well-functioning market – safety,
efficiency and innovation – are fulfilled. While there is no need for
structural changes in the framework under which OTC Players and
exchanges operate today, improvements are possible. Particularly
in the OTC segment, increasing operating efficiency, market
transparency and enhancing counterparty risk mitigation would help
the global derivatives market to function even more effectively.

L i m i ta t i o n o f t h e
Study:
The analysis will be purely based on the secondary data.
The currency future is a new concept; the study is based on
information from different artic les. The analysis was purely based on the
secondary data. So, any error in the secondary data might also affect the study
undertaken.

The currency future is newly introduced in Indian exchanges. USD introduced on

October 2008 and YEN, EURO &GBP introduced on Jan 2009.So our study
restricted to USD and small data updates on other currencies.

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 Chapter 3

RESEARCH AND METHODOLOGY

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. RESEARCH METHODOLOGY

 TYPE OF RESEARCH

The research is basically a descriptive research. In this

project Descriptive research methodologies i s u s e d . The
research methodology will be used for gathering details of
different aspects of currency future derivative in India.

 SOURCE OF DATA COLLECTION

Secondary data will be collected from articles in journals and

magazines. The database of SEBI, RBI, NSE and BSE will be
taken. As this topic is very new, article from other w e b s i t e
l i n k s is required. Report submitted b y RBI/SEBI committee
is used.

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 Chapter 4

REVIEW OF

LITERATURE

CHAPTER 4 FOREIGN EXCHANGE

DERIVATIVES

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4.1 DERIVATIVES -
DEFINITION
Derivative is a product whose value is derived from the value of one
or more basic variables, called bases (underlying asset, index, or
reference rate), in a contractual manner. The underlying asset
can be equity, foreign exchange, commodity or any other asset.
For example, wheat farmers may wish to sell their harvest at a
future date to eliminate the risk of a change in prices by that date.
Such a transaction is an example of a derivative. The price of this
derivative is driven by the spot price of wheat which is the
"underlying".
In the Indian context the Securities Contracts (Regulation) Act,
1956 [SC(R) A] defines "derivative" to include-
1. A security derived from a debt instrument, share, loan
whether secured or unsecured, risk instrument or contract for
differences or any other form of security.
2. A contract which derives its value from the prices, or index of
prices, of underlying securities. Derivatives are securities under the
SC(R) A and hence the trading of derivatives is governed by the
regulatory framework under the SC(R) A.
The term derivative has also been defined in section
45U(a) of the RBI act as follows:
An instrument, to be settled at a future date, whose value is
derived from change in interest rate, foreign exchange rate, credit
rating or credit index, price of securities (also called “underlying”),
or a combination of more than one of them and includes interest
rate swaps, forward rate agreements, foreign currency swaps,
foreign currency-rupee swaps, foreign currency options, foreign
currency-rupee options or such other instruments as may be
specified by the Bank from time to time.
Derivative products initially emerged as hedging devices against fluctuations
in commodity prices, and commodity-linked derivatives remained the sole
form of such products for almost three hundred years. Financial derivatives
came into spotlight in the post-1970 period due to growing instability in the
financial markets. However, since their emergence, these products have
become very popular and by 1990s, they accounted for about two-thirds of
total transactions in derivative products. In recent years, the market for
financial derivatives has grown tremendously in terms of variety of instruments
available, their complexity and also turnover.
Box 2.1: Emergence of financial derivative
products

1
4.2 DERIVATIVE
PRODUCTS
Derivative contracts have several variants. The most common
variants are forwards, futures, options and swaps. We take a brief
look at various derivatives contracts that have come to be used.
Forwards: A forward contract is a customized contract between
two parties, where settlement takes place on a specific date in the
future at today's pre-agreed price.
Futures: 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.
Futures contracts are special types of forward contracts in the sense
that they are standardized and are generally traded on an
exchange.

Options: Options are of two types - calls and puts. Calls give the
buyer the right but not the obligation to buy a given quantity of the
underlying asset, at a given price on or before a given future date.
Puts give the buyer the right, but not the obligation to sell a given
quantity of the underlying asset at a given price on or before a
given date.

Warrants: Options generally have tenors of upto one year;

the majority of options traded on options exchanges have a
maximum maturity of nine months. Longer-dated options are
called warrants and are generally traded over-the-counter (OTC).

LEAPS: The acronym LEAPS means Long Term Equity Anticipation

Securities. These are options having a maturity of upto three years.

Baskets: Basket options are options on portfolios of underlying

assets. The underlying asset is usually a moving average of a
basket of assets. Equity index option is a form of basket option.

Swaps: Swaps are agreements between two parties to exchange

cash flows in the future according to a prearranged formula. They

1
can be regarded as portfolios of forward contracts. The two
commonly used swaps are:

Interest rate swaps: These entail swapping only the interest

related cash flows between the parties in the same currency.

Currency swaps: These entail swapping both principal and

interest between the parties, with the cash flows in one
direction being in a different currency than those in the
opposite direction.

Swaptions: Swaptions are options to buy or sell a swap that

will become operative at the expiry of the options. Thus a
swaption is an option on a forward swap. Rather than have calls
and puts, the swaptions market has receiver swaptions and payer
swaptions. A receiver swaption is an option to receive fixed and pay
floating. A payer swaption is an option to pay fixed and receive
floating.

4.3 GROWTH DRIVERS OF

DERIVATIVES
Over the last three decades, the derivatives market has seen
a phenomenal growth. A large variety of derivative contracts
have been launched at exchanges across the world. Some of the
factors driving the growth of financial derivatives are:
1. Increased volatility in asset prices in financial markets,
2. Increased integration of national financial markets with the
international financial markets,
3. Marked improvement in communication facilities and sharp
decline in their costs,
4. Development of more sophisticated risk management
tools, providing a wider choice of risk management
strategies, and
5. Innovations in the derivatives markets, which optimally
combine the risks and returns over a large number of
financial assets, leading to higher returns, reduced risk and
lower transactions costs as compared to individual financial
assets.

1
4.4 MARKET
PLAYERS

The following three broad categories of participants - hedgers,

speculators, and arbitrageurs - trade in the derivatives market.
Hedgers face risk associated with the price of an asset and they
use futures or options markets to reduce or eliminate this risk.
Speculators wish to bet on future movements in the price of an
asset. Futures and options contracts can give them an extra
leverage; that is, they can increase both the potential gains and
potential losses in a speculative venture. Arbitrageurs are in
business to take advantage of a discrepancy between prices in
two different markets. If, for example, they see the futures price
of an asset getting out of line with the cash price, they will take
offsetting positions in the two markets to lock in a profit.

4.5 KEY ECONOMIC FUNCTION OF DERIVATIVES

Despite the fear and criticism with which the derivative markets
are commonly looked at, these markets perform a number of
economic functions.
1. Prices in an organized derivatives market reflect the perception
of market participants about the future and lead the prices of
underlying to the perceived future level. The prices of
derivatives converge with the prices of the underlying at the
expiration of the derivative contract. Thus derivatives help in
discovery of future prices.
2. The derivatives market helps to transfer risks from those who
have them but may not like them to those who have an appetite
for risks.
3. Derivatives, due to their inherent nature, are linked to the
underlying cash markets. With the introduction of derivatives, the
underlying market witnesses higher trading volumes because of
participation by more players who would not otherwise
participate for lack of an arrangement to transfer risk.
4. Speculative trades shift to a more controlled environment of
derivatives market. In the absence of an organized derivatives
market, speculators trade in the underlying cash markets.
Margining, monitoring and surveillance of the activities of
various participants become extremely difficult in these types of
mixed markets.

Early forward contracts in the US addressed merchants' concerns about ensuring

that there were buyers and sellers for commodities. However 'credit risk"

1
remained a serious problem. To deal with this problem, a group of Chicago
businessmen formed the Chicago Board of Trade (CBOT) in 1848. The primary
intention of the CBOT was to provide a centralized location known in advance
for buyers and sellers to negotiate forward contracts. In 1865, the CBOT went
one step further and listed the first 'exchange traded" derivatives contract in the
US, these contracts were called 'futures contracts". In 1919, Chicago Butter and
Egg Board, a spin-off of CBOT, was reorganized to allow futures trading. Its
name was changed to Chicago Mercantile Exchange (CME). The CBOT and the
CME were, until recently the two largest organized futures exchanges, which have
merged to become the “CME Group”.

The first stock index futures contract was traded at Kansas City Board of Trade.
Currently the most popular stock index futures contract in the world is based on
S&P 500 index, traded on Chicago Mercantile Exchange. During the mid eighties,
financial futures became the most active derivative instruments generating
volumes many times more than the commodity futures. Index futures, futures on
T-bills and Euro-Dollar futures are the three most popular futures contracts
traded today. Other popular international exchanges that trade derivatives are
LIFFE in England, DTB in Germany, SGX in Singapore, TIFFE in Japan, MATIF in
France, Eurex etc.

Box 2.2: History of derivatives markets

5. An important incidental benefit that flows from derivatives
trading is that it acts as a catalyst for new entrepreneurial
activity. The derivatives have a history of attracting many
bright, creative, well-educated people with an entrepreneurial
attitude. They often energize others to create new
businesses, new products and new employment opportunities,
the benefits of which are immense.
In a nut shell, derivatives markets help increase savings and
investment in the long run. Transfer of risk enables market
participants to expand their volume of activity.

4.6 EXCHANGE-TRADED VS. OVER –THE- COUNTER

DERIVATIVES

Derivatives have probably been around for as long as people have

been trading with one another. Forward contracting dates back at
least to the 12th century, and may well have been around before
then. Merchants entered into contracts with one another for future
delivery of specified amount of commodities at specified price. A
primary motivation for pre-arranging a buyer or seller for a stock
of commodities in early forward contracts was to lessen the
possibility that large swings would inhibit marketing the commodity
after a harvest.

As the name suggests, derivatives that trade on an exchange are

called exchange traded derivatives, whereas privately negotiated

1
derivative contracts are called OTC derivatives.

The OTC derivatives markets have witnessed rather sharp

growth over the last few years which have accompanied the
modernization of commercial and investment banking and
globalization of financial activities. The recent developments in
information technology have contributed to a great extent to these
developments. While both exchange-traded and OTC derivative
contracts offer many benefits, the former have rigid structures
compared to the latter.
The OTC derivatives markets have the following features
compared to exchange-traded derivatives:
1) The management of counter-party (credit) risk is
decentralized and located within individual institutions,
2) There are no formal centralized limits on individual positions,
leverage, or margining; limits are determined as credit lines by
each of the counterparties entering into these contracts
3) There are no formal rules for
risk and burden-sharing,
4) There are no formal rules or mechanisms for ensuring market
stability and integrity, and for safeguarding the collective
interests of market participants, and
5) Although OTC contracts are affected indirectly by national legal
systems, banking supervision and market surveillance, they are
generally not regulated by a regulatory authority.

Some of the features of OTC derivatives markets embody risks to

financial market stability. The following features of OTC
derivatives markets can give rise to instability in institutions,
markets, and the international financial system:

(i)the dynamic nature of gross

credit exposures;

(ii) information

asymmetries;

the effects of OTC derivative activities on

(iii)
available aggregate credit;

(iv) the high concentration of OTC derivative

activities in major institutions; and

1
(v)the central role of OTC derivatives markets in
the global financial system.

Instability arises when shocks, such as counter-party credit events

and sharp movements in asset prices that underlie derivative
contracts occur, which significantly alter the perceptions of
current and potential future credit exposures. When asset prices
change rapidly, the size and configuration of counter-party
exposures can become unsustainably large and provoke a rapid
unwinding of positions.

There has been some progress in addressing these risks and

perceptions. However, the progress has been limited in
implementing reforms in risk management, including counter-
party, liquidity and operational risks, and OTC derivatives markets
continue to pose a threat to international financial stability. The
problem is more acute as heavy reliance on OTC derivatives creates
the possibility of systemic financial events, which fall outside the
more formal clearing corporation structures.

1
CHAPTER 4.I EXCHANGE TRADED
CURRENCY FUTURES

4.I.1 CURRENCY FUTURES

-DEFINITION

A futures contract is a standardized contract, traded on an

exchange, to buy or sell a certain underlying asset or an instrument
at a certain date in the future, at a specified price. When the
underlying asset is a commodity, e.g. Oil or Wheat, the contract is
termed a “commodity futures contract”.

When the underlying is an exchange rate, the contract is termed a

“currency futures contract”. In other words, it is a contract to
exchange one currency for another currency at a specified date
and a specified rate in the future. Therefore, the buyer and the
seller lock themselves into an exchange rate for a specific value
and delivery date. Both parties of the futures contract must fulfill
their obligations on the settlement date.

Internationally, currency futures can be cash settled or settled by

delivering the respective obligation of the seller and buyer. All
settlements, however, unlike in the case of OTC markets, go through
the exchange.

Currency futures are a linear product, and calculating profits or

losses on Currency Futures will be similar to calculating profits or
losses on Index futures. In determining profits and losses in futures
trading, it is essential to know both the contract size (the number of
currency units being traded) and also what the “tick” value is.

A tick is the minimum trading increment or price differential at

which traders are able to enter bids and offers. Tick values differ
for different currency pairs and different underlyings. For e.g. in
the case of the USD-INR currency futures contract the tick size
shall be 0.25 paise or 0.0025 Rupee. To demonstrate how a move
of one tick affects the price, imagine a trader buys a contract (USD
1000 being the value of each contract) at Rs.
42.2500. One tick move on this contract will translate to
Rs.42.2475 or Rs.42.2525 depending on the direction of market
movement.

Purchase price:

Rs.42.2500
Price increases by one tick:

1
+Rs.00.0025
New price:

Rs.42.2525

Purchase price:

Rs.42.2500
Price decreases by one tick: –
Rs.00.0025
New price:

Rs.42.2475

The value of one tick on each contract is Rupees 2.50 (1000X

0.0025). So if a trader buys 5 contracts and the price moves up by
4 ticks, he makes Rupees 50.00
Step 1: 42.2600 –
42.2500
Step 2: 4 ticks * 5 contracts
= 20 points
Step 3: 20 points * Rupees 2.5 per tick
= Rupees 50.00
(Note: The above examples
do not i nclude transaction
fees and any other fees,
which are essential for
calculating final profit and
loss)

4.I.2 FUTURES
TERMINOLOGY

Spot price: The price at which an asset trades in the spot

market. In the case of USD/INR, spot value is T + 2.

Futures price: The price at which the futures

contract trades in the futures market.

Contract cycle: The period over which a contract trades. The

currency futures contracts on the SEBI recognized exchanges
have one-month, two-month, and three-month up to
twelve-month expiry cycles. Hence, these exchanges will
have 12 contracts outstanding at any given point in time.

Value Date/Final Settlement Date: The last business day

of the month will be termed the Value date / Final Set tlement
date of each contract. The last business day would be taken
to the same as that for Inter-bank Settlements in Mumbai. The

1
 rules for Inter-bank Settlements, including those for ‘known
holidays’ and ‘subsequently declared holiday’ would be those
as laid down by Foreign Exchange Dealers’ Association of
India (FEDAI).

Expiry date: It is the date specified in the futures contract. All

contracts expire on the last working day (excluding Saturdays)
of the contract months. The last day for the trading of the
contract shall be two working days prior to the final settlement
date or value date.

Contract size: The amount of asset that has to be delivered

under one contract. Also called as lot size. In the case of
USD/INR it is USD 1000.

Basis: In the context of financial futures, basis can be

defined as the futures price minus the spot price. There will
be a different basis for each delivery month for each
contract. In a normal market, basis will be positive. This
reflects that futures prices normally exceed spot prices.

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. This measures (in commodity markets) the
storage cost plus the interest that is paid to finance or ‘carry’
the asset till delivery less the income earned on the asset. For
equity derivatives carry cost is the rate of interest.

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.

Marking-to-market: In the futures market, at the end of

each trading day, the margin account is adjusted to reflect
the investor's gain or loss depending upon the futures closing
price. This is called marking-to-market.

4.I.3 RATIONALE BEHIND CURRENCY

FUTURES
Futures markets were designed to address certain problems that
exist in forward markets. 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. But unlike forward contracts, the futures
contracts are standardized and exchange traded. To facilitate
liquidity in the futures contracts, the exchange specifies certain
standard features of the contract. A futures contract is standardized

1
contract with standard underlying instrument, a standard quantity
of the underlying instrument that can be delivered, (or which can
be used for reference purposes in settlement) and a standard
timing of such settlement. A futures contract may be offset prior to
maturity by entering into an equal and opposite transaction.

The standardized items in a futures

contract are: Quantity 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, April 2008) as
follows;
“The rationale for establishing the currency futures market is
manifold. 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, no gains and losses
are made out of currency exposures. But if domestic currency
depreciates (appreciates) against the foreign currency, the exposure
would result in gain (loss) for residents purchasing foreign assets
and loss (gain) for non residents purchasing domestic assets. In
this backdrop, unpredicted movements in exchange rates expose
investors to currency risks. Currency futures enable them to
hedge these risks. Nominal exchange rates are often random
walks with or without drift, while real exchange rates over long
run are mean reverting. As such, it is possible that over a long –
run, the incentive to hedge currency risk may not be large.
However, financial planning horizon is much smaller than the long-
run, which is typically inter-generational in the context of exchange
rates. Per se, 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, and applies equally to trade
in goods and services, which results in income flows with leads
and lags and get converted into different currencies at the
market rates. Empirically, changes in exchange rate are found to
have very low correlations with foreign equity and bond returns.
This in theory should lower portfolio risk. Therefore, 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, there are strong arguments to

1
use instruments to hedge currency risks.
Currency risks could be hedged mainly through forwards,
futures, swaps and options. Each of these instruments has its
role in managing the currency risk. The main advantage of currency
futures over its closest substitute product, viz. forwards which are
traded over the counter lies in price transparency, elimination of
counterparty credit risk and greater reach in
terms of easy accessibility to all. Currency futures are expected to
bring about better price discovery and also possibly lower
transaction costs. Apart from pure hedgers, currency futures also
invite arbitrageurs, speculators and those traders who may take a
bet on exchange rate movements without an underlying or an
economic exposure as a motivation for trading.
From an economy-wide perspective, currency futures contribute to
hedging of risks and help traders and investors in undertaking
their economic activity. There is a large body of empirical
evidence which suggests that exchange rate volatility has an
adverse impact on foreign trade. Since there are first order gains
from trade which contribute to output growth and consumer
welfare, currency futures can potentially have an important
impact on real economy. Gains from international risk sharing
through trade in assets could be of relatively smaller magnitude
than gains from trade. However, in a dynamic setting these
investments could still significantly impact capital formation in an
economy and as such currency futures could be seen as a facilitator
in promoting investment and aggregate demand in the economy,
thus promoting growth”.
The Chicago Mercantile Exchange (CME) created FX futures, the first ever
financial futures contracts, in 1972. The contracts were created under the
guidance and leadership of Leo Melamed, CME Chairman Emeritus. The FX
contract capitalized on the U.S. abandonment of the Bretton Woods
agreement, which had fixed world exchange rates to a gold standard after
World War II. The abandonment of the Bretton Woods agreement resulted in
currency values being allowed to float, increasing the risk of doing business. By
creating another type of market in which futures could be traded, CME currency
futures extended the reach of risk management beyond commodities, which
were the main derivative contracts traded at CME until then. The concept of
currency futures at CME was revolutionary, and gained credibility through
endorsement of Nobel-prize-winning economist Milton Friedman.

Today, CME offers 41 individual FX futures and 31 options contracts on 19

currencies, all of which trade electronically on the exchange’s CME Globex
platform. It is the largest regulated marketplace for FX trading.

Traders of CME FX futures are a diverse group that includes multinational

corporations, hedge funds, commercial banks, investment banks, financial

1
managers, commodity trading advisors (CTAs), proprietary trading firms,
currency overlay managers and individual investors. They trade in order to
transact business, hedge against unfavourable changes in currency rates, or to
speculate on rate fluctuations.

Box 3.1: Emergence and growth of FX futures

4.I.4 DISTINCTION BETWEEN FUTURES AND

FORWARD CONTRACTS

Forward contracts are often confused with futures contracts. The

confusion is primarily because both serve essentially the same
economic functions of allocating risk in the probability of future price
uncertainty. However futures have some distinct advantages over
forward contracts as they eliminate counterparty risk and offer
more liquidity and price transparency. However, it should be noted
that forwards enjoy the benefit of being customized to meet
specific client requirements. The advantages and limitations of
futures contracts are as follows;

Advantages of
Futures:

- Transparency and efficient price discovery. The market brings

together divergent categories of buyers and sellers.
- Elimination of Counterparty credit risk.
- Access to all types of market participants. (Currently, in the Foreign
Exchange OTC markets one side of the transaction has to
compulsorily be an Authorized Dealer – i.e. Bank).
- Standardized products.
- Transparent trading platform.

Limitations of
Futures:

- The benefit of standardization which often leads to improving

liquidity in futures, works against this product when a client
needs to hedge a specific amount to a date for which there
is no standard contract

- While margining and daily settlement is a

prudent risk management policy, some clients may
prefer not to incur this cost in favor of OTC forwards,
where collateral is usually not demanded

4.I.5 INTEREST RATE PARITY AND PRICING OF

CURRENCY FUTURES

1
For currencies which are fully convertible, the rate of exchange for
any date other than spot, is a function of spot and the relative
interest rates in each currency. The assumption is that, any funds
held will be invested in a time deposit of that currency. Hence, the
forward rate is the rate which neutralizes the effect of differences in
the interest rates in both the currencies.
In the context of currencies, like USD/INR which are not fully
convertible, forwards and futures prices can be influenced by
several factors including regulations that are in place at any given
point in time. The forward rate is a function of the spot rate and the
interest rate differential between the two currencies, adjusted for
time. A futures contract is a standardized forward contract traded
through an exchange to eliminate counterparty risk.

In order to derive the forward rate from the spot rate, there are
three commonly used formulae which give similar results, viz.

a. Term : Base
Formula
b. Spot-Forward r& p
Formula
c. Continuous
Compounding Formula

a. Term : Base
Formula
Forward Rate = Spot
+ Points

Points = Spot 1 + terms i * days

basis _ 1
1 + base i * days
basis

Wher
e:
i = rate of
interest
basis = day count basis (Most currencies use a 360-day basis, except the
pound sterling and a few others, which use a 365-day year.)

b. Spot-Forward r& p

1
Formula

The spot exchange rate is S0. This quote is in USD per INR. The US
risk-free interest rate is p, and the holding period is T. You take
S0(1+ p)-T INR and buy (1+ p)-T dollars. Simultaneously, you
sell one future contract expiring at time T. The future exchange
rate is F0, which is also in INR per dollar. You take your (1+ p)-T
dollars and invest them in US T-bills that have a return of p.

When the forward contract expires, you will have 1 dollar. This is
because your (1+ ρ)-T dollars will have grown by the factor (1+ p)T
therefore (1+ p)-T (1+ p)T = 1. Your forward contract obligates
you to deliver the dollar, for which you receive F(0,T) INR. In
effect, you have invested S0(1+ p)-T and received F(0,T) INR.
Since the transaction is riskless, your return should be the INR rate,
r; therefore:

F(0,T) = S0(1+ r)
T
/ (1+p) T

C. Continuous
Compounding Formula

F(0,T) =
S0e(r-p)T

Illustrat
ion:

Consider the following example from an Indian perspective. On

January 31 of a particular year, the spot USD/INR rate was 43.50.
The US interest rate was 3 percent, while the Indian interest rate
was 6 percent. The time to expiration was 90/360 = 0.25.
This can be solved using three different formulae
as illustrated below:

1
(a) Terms:Base Formula (b) Spot Forward (c)
r& p
Formula Continuous
Compounding
Forward Rate = Spot + Points F(0,T) = S0(1+ F(0,T) = S0e(r-p)T
r) T/ (1+p) T
Points = Spot 1 + terms i * days
basis _1
1 + base i * days
basis

Points = 43.5 {[(1+.06*.25)/ F = 43.5 * F = 43.5 * e

(1+.03*.25)]-1} [(1+.06)^.25] [(.06-.03) *
/ [(1+.03)^.25] .25]
= 0.3238
Forward Rate = 43.5 + (.3238) =
43.8238

Ans: 43.8238 Ans: 43.8133 Ans: 43.8275

The term ‘e’ is a well-known mathematical expression to simplify a larger

expression:
(1+r/∞)∞ which signifies continuous compounding on a given interest rate. The
best approximation of e is
2.71828183.

As can be noticed from the above table, the three formulae give
results which are similar but not identical. Any of these formulae
can be used for decision making. However, from a trading
perspective, greater levels of accuracy may be desired. Hence,
traders prefer the Continuous Compounding formula.

1
CHAPTER 4.II STRATEGIES USING
CURRENCY FUTURES

4.II.1 SPECULATION IN
FUTURES MARKETS

Speculators play a vital role in the futures markets. Futures are

designed primarily to assist hedgers in managing their exposure
to price risk; however, this would not be possible without the
participation of speculators. Speculators, or traders, assume the
price risk that hedgers attempt to lay off in the markets. In other
words, hedgers often depend on speculators to take the other side
of their trades (i.e. act as counter party) and to add depth and
liquidity to the markets that are vital for the functioning of a futures
market. The speculators therefore have a big hand in making the
market.
Speculation is not similar to manipulation. A manipulator tries to
push prices in the reverse direction of the market equilibrium while
the speculator forecasts the movement in prices and this effort
eventually brings the prices closer to the market equilibrium. If the
speculators do not adhere to the relevant fundamental factors of the
spot market, they would not survive since their correlation with
the underlying spot market would be nonexistent.

4.II.2 LONG POSITION

IN FUTURES

Long position in a currency futures contract without any exposure

in the cash market is called a speculative position. Long position
in futures for speculative purpose means buying futures contract
in anticipation of strengthening of the exchange rate (which
actually means buy the base currency (USD) and sell the terms
currency (INR) and you want the base currency to rise in value
and then you would sell it back at a higher price). If the exchange
rate strengthens before the expiry of the contract then the trader
makes a profit on squaring off the position, and if the exchange
rate weakens then the trader makes a loss.

1
 Payoff – Long Position in Futures

Profit

Profit

0 Time

L
O
S
o
s

The graph above depicts the pay-off of a long position in a future

contract, which does demonstrate that the pay-off of a trader is a
linear derivative, that is, he makes unlimited profit if the market
moves as per his directional view, and if the market goes against,
he has equal risk of making unlimited losses if he doesn’t choose
to exit out his position.

Hypothetical Example – Long

positions in futures

1
On May 1, 2008, an active trader in the currency futures market
expects INR will depreciate against USD caused by India’s sharply
rising import bill and poor FII equity flows. On the basis of his
view about the USD/INR movement, he buys 1 USD/INR August
contract at the prevailing rate of Rs. 40.5800.

He decides to hold the contract till expiry and during the holding
period USD/INR futures actually moves as per his anticipation and
the RBI Reference rate increases to USD/INR 42.46 on May 30, 2008.
He squares off his position and books a profit of Rs. 1880
(42.4600x1000 - 40.5800x1000) on 1 contract of USD/INR futures
contract.

USDINR (May 1 - May 30, 2008)

Position Squaredoff
43 USDINR@4 2.46

42
USDINR

Long
Position
Initiate USD Strengthen by 1.88.
d
41
USDINR@4 0.58

40
May 1, ‘08 May 30, ’08
Time

1
Observation: The trader has effectively analysed the market
conditions and has taken a right call by going long on futures and
thus has made a gain of Rs. 1,880.

4.II.3 SHORT POSITION

IN FUTURES

Short position in a currency futures contract without any exposure in

the cash market is called a speculative transaction. Short position in
futures for speculative purposes means selling a futures contract in
anticipation of decline in the exchange rate (which actually means
sell the base currency (USD) and buy the terms currency (INR) and
you want the base currency to fall in value and then you would buy
it back at a lower price). If the exchange rate weakens before the
expiry of the contract, then the trader makes a profit on squaring
off the position, and if the exchange rate strengthens then the
trader makes loss.

The graph above depicts the pay-off of a short position in a future

contract which does exhibit that the pay-off of a short trader is a
linear derivative, that is, he makes unlimited profit if the market
moves as per his directional view and if the market goes against
his view he has equal risk of making unlimited loss if he doesn’t
choose to exit out his position.
Example – Short positions
in futures

On December 1, 2009, an active trader in the currency futures

market expects INR will appreciate against USD, caused by
softening of crude oil prices in the international market and hence
improving India’s trade balance. On the basis of his view about the
USD/INR movement, he sells 1 USD/INR August contract at the
prevailing rate of Rs. 49.3600.

On August 6, 2008, USD/INR August futures contract actually

moves as per his anticipation and declines to 48.9975. He
decides to square off his position and earns a profit of Rs.
362.50 ( 49.3600x1000 – 48.9975x1000) on squaring off the short
position of 1 USD/INR August futures contract.

Observation: The trader has effectively analysed the market

conditions and has taken a right call by going short on futures and
thus has made a gain of Rs. 362.50 per contract with small
investment (a margin of 3%, which comes to Rs. 1270.80) in a span
of 6 days.

46
4.II.4 HEDGING USING
CURRENCY FUTURES

Hedging: Hedging means taking a position in the future market

that is opposite to a position in the physical market with a view to
reduce or limit risk associated with unpredictable changes in
exchange rate.

A hedger has an Overall Portfolio (OP) composed of

(at least) 2 positions:
1. Underlying
position
2. Hedging position with negative correlation with
underlying position

Value of OP = Underlying position + Hedging position; and in case of a Perfect

hedge, the Value of the OP is insensitive to exchange rate (FX) changes.

Types of FX Hedgers
using Futures

Long
hedge:
Underlying position: short in the foreign currency
Hedging position: long in currency futures

Short
hedge:
Underlying position: long in the foreign currency
Hedging position: short in currency futures

The proper size of the

Hedging position

Basic Approach: Equal

hedge
Modern Approach: Optimal hedge

Equal hedge: In an Equal Hedge, the total value of the futures

contracts involved is the same as the value of the spot market
position. As an example, a US importer who has an exposure of £ 1
million will go long on 16 contracts assuming a face value of
£62,500 per contract. Therefore in an equal hedge: Size of
Underlying position = Size of Hedging position.
Optimal Hedge: An optimal hedge is one where the changes in the
spot prices are negatively correlated with the changes in the futures
prices and perfectly offset each other. This can generally be
described as an equal hedge, except when the spot-future basis
relationship changes. An Optimal Hedge is a hedging strategy which

46
yields the highest level of utility to the hedger.
Corporate Hedging

Before the introduction of currency futures, a corporate hedger

had only Over-the-Counter (OTC) market as a platform to hedge
his currency exposure; however now he has an additional platform
where he can compare between the two platforms and accordingly
decide whether he will hedge his exposure in the OTC market or
on an exchange or he will like to hedge his exposures partially on
both the platforms.

Example 1: Long Futures Hedge Exposed to the

Risk of Strengthening USD

Unhedged Exposure: Let’s say on January 1, 2008, an Indian

importer enters into a contract to import 1,000 barrels of oil with
payment to be made in US Dollar (USD) on July 1, 2008. The price
of each barrel of oil has been fixed at USD 110/barrel at the
prevailing exchange rate of 1 USD = INR 39.41; the cost of one
barrel of oil in INR works out to be Rs. 4335.10 (110 x 39.41). The
importer has a risk that the USD may strengthen over the next six
months causing the oil to cost more in INR; however, he decides
not to hedge his position.

On July 1, 2008, the INR actually depreciates and now the

exchange rate stands at 1 USD = INR 43.23. In dollar terms he
has fixed his price, that is USD 110/barrel, however, to make
payment in USD he has to convert the INR into USD on the
given date and now the exchange rate stands at 1USD =
INR43.23. Therefore, to make payment for one dollar, he has to
shell out Rs. 43.23. Hence the same barrel of oil which was
costing Rs. 4335.10 on January 1, 2008 will now cost him Rs.
4755.30, which means 1 barrel of oil ended up costing Rs.
4755.30 - Rs. 4335.10 = Rs. 420.20 more and hence the 1000
barrels of oil has become dearer by INR 4,20,200.

46
When INR weakens, he makes a loss, and when INR strengthens,
he makes a profit. As the importer cannot be sure of future
exchange rate developments, he has an entirely speculative
position in the cash market, which can affect the value of his
operating cash flows, income statement, and competitive
position, hence market share and stock price.

Hedged: Let’s presume the same Indian Importer pre-empted

that there is good probability that INR will weaken against the
USD given the current macroeconomic fundamentals of increasing
Current Account deficit and FII outflows and decides to hedge his
exposure on an exchange platform using currency futures.

Since he is concerned that the value of USD will rise he decides

go long on currency futures, it means he purchases a USD/INR
futures contract. This protects the importer because strengthening
of USD would lead to profit in the long futures position, which would
effectively ensure that his loss in the physical market would be
mitigated. The following figure and Exhibit explain the mechanics of
hedging using currency futures.

Is short on

46
USD 110000 in the spotmkt
Is long (buys) 110
USD/INR
futures contracts

OIL IMPORTER

Buys back (sells) USD/INR

futures contracts to square
off transaction Buys USD
to meet
import requirement in
the spot market

Observation: Following a 9.7% rise in the spot price for USD, the US
dollars are purchased at the new, higher spot price, but profits on
the hedge foster an effective exchange rate equal to the original
hedge price.

4.II.5 TRADING SPREADS USING

46
CURRENCY FUTURES
.
Spread refers to difference in prices of two futures contracts. A
good understanding of spread relation in terms of pair spread is
essential to earn profit. Considerable knowledge of a particular
currency pair is also necessary to enable the trader to use spread
trading strategy.

Spread movement is based on

following factors:

o Interest Rate
Differentials
o Liquidity in Banking
System
o Monetary Policy Decisions (Repo, Reverse
Repo and CRR)
o

Inflation

Intra-Currency Pair Spread: An intra-currency pair spread consists of

one long futures and one short futures contract. Both have the
same underlying but different maturities.

Inter-Currency Pair Spread: An inter–currency pair spread is a

long-short position in futures on different underlying currency
pairs. Both typically have the same maturity.

Example: A person is an active trader in the currency futures

market. In September 2008, he gets an opportunity for spread
trading in currency futures. He is of the view that in the current
environment of high inflation and high interest rate the premium
will move higher and hence USD will appreciate far more than the
indication in the current quotes, i.e. spread will widen. On the basis
of his views, he decides to buy December currency futures at 47.00
and at the same time sell October futures contract at 46.80; the
spread between the two contracts is 0.20.

Let’s say after 30 days the spread widens as per his expectation
and now the October futures contract is trading at 46.90 and
December futures contract is trading at 47.25, the spread now
stands at 0.35. He decides to square off his position making a gain
of Rs. 150 (0.35 – 0.20 = 0.15 x $1000) per contract.

4.II.6

ARBITRAGE

46
 Arbitrage means locking in a profit by simultaneously entering into
transactions in two or more markets. If the relation between forward
prices and futures prices differs, it gives rise to arbitrage
opportunities. Difference in the equilibrium prices determined by
the demand and supply at two different markets also gives
opportunities to arbitrage.

Example – Let’s say the spot rate for USD/INR is quoted @ Rs.
44.325 and one month forward is quoted at 3 paisa premium
to spot @ 44.3550 while at the same time one month
currency futures is trading @ Rs.44.4625. An active
arbitrager realizes that there is an arbitrage opportunity as
the one month futures price is more than the one month
forward price. He implements the arbitrage trade where he;
o Buys in forward @ 44.3250 + 3 paisa premium = 44.3550 (1
month) with the same term period

o On the date of future expiry he buys in forward and delivers the

same on exchange platform

o In a process, he makes a Net Gain of 44.4625-

44.3550 = 0.1075

o i.e. Approx 11 Paisa

arbitrage

o Profit per contract = 107.50

(0.1075x1000)

Observation – The discrepancies in the prices between the

two markets have given an opportunity to implement a lower
risk arbitrage. As more and more market players will realize this
opportunity, they may also implement the arbitrage strategy and in
the process will enable market to come to a level of equilibrium.
CHAPTER 4.III TRADING

In this chapter we shall take a brief look at the trading system for
the Currency Derivatives segment. However, the best way to get a
feel of the trading system is to actually watch the screen and
observe trading.

2.III.1 CURRENCY FUTURES CONTRACT SPECIFICATION

Contract specification: USD INR Currency Derivatives

Underlying Rate of exchange between one USD and INR
Contract Size USD 1000

46
 Tick Size Re. 0.0025
Price Bands Not applicable
Trading Cycle The futures contracts will have a maximum of
twelve months trading cycle. New contract will be
introduced following the Expiry of
Expiry Day current
Last month
working contract.
day of the month (subject to holiday
calendars)
Last Trading Day Two working days prior to the last business day of the
expiry month at 12 noon.
Settlement Basis Daily mark to market settlement will be on a T
+1 basis and final settlement will be cash settled on
Settlement Price T+2 basis.
Daily mark to market settlement price will be the
closing price of the futures contracts for the trading
day and the final settlement price shall be the RBI
reference rate for last trading date of the contract.
Settlement Cash settled

Final Settlement Price The reference rate fixed by RBI two working days
prior to the final settlement date.

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.

Market Timing is from 9

am to 5 pm.

TRADING PROCESS AND SETTLEMENT PROCESS

Like other future trading, the future currencies are also traded at
organized exchanges. The following diagram shows how operation
take place on currency future market:

46
 TRADER TRADER

( BUYER ) ( SELLER )

Purchase
Sales order
order

Transaction on the floor

MEMBER (Exchange) MEMBER

( BROKER ) ( BROKER )

Inform
s
CLEARING

HOUSE

It has been observed that in most futures markets, actual physical

delivery of the underlying assets is very rare and hardly it ranges
from 1 percent to 5 percent. Most often buyers and sellers offset
their original position prior to delivery date by taking an opposite
positions. This is because most of futures contracts in different
products are predominantly speculative instruments. For example, X
purchases American Dollar futures and Y sells it. It leads to two
contracts, first, X party and clearing house and second Y party and
clearing house. Assume next day X sells same contract to Z, then X
is out of the picture and the clearing house is seller to Z and buyer
from Y, and hence, this process is goes on.

4.III.2 TRADING
PARAMETERS

i) Base
Price

Base price of the USD/INR Futures Contracts on the first day shall
be the theoretical futures price. The base price of the Contracts on
subsequent trading days will be the daily settlement price of the
USD/INR futures contracts.

46
ii) Closing
Price

The closing price for a futures contract is currently calculated as the

last half an hour weighted average price of the contract. In case a
futures contract is not traded on a day, or not traded during the
last half hour, a 'theoretical settlement price' is computed as may
be decided by the relevant authority from time to time.

Dissemination of Open, High, Low, and

Last-Traded Prices

During a trading session, the Exchange continuously disseminates

open, high, low, and last-traded prices through its trading system
on real time basis.

2.III.3 TENORS OF FUTURES

CONTRACT

The tenor of a contract means the period when the contract will be
available for futures trading, i.e. the period between the start of
trading and the day it expires. This period is also known as the
“trading cycle” of the contract. The currency future contract will be
available for trading with a maximum maturity of 12 months.

Expiry
Date

All contracts expire on the last working day (excluding Saturdays)

of the contract months. The last day for the trading of the contract
shall be two working days prior to the final settlement.

Final
Settlement
Rate

Final Settlement rate would be the Reserve Bank (RBI)

Reference rate for the date of expiry.

4.III.4 TRADER WORKSTATION

SCREEN (TWS)

Each Exchange has its own unique format of the Trader

Workstation Screen and the best way to familiarize oneself with

46
the screen and its various segments would be to actually spend
time studying a live screen. Information regarding the TWS can
also be obtained from exchange websites.

46
46
46
4.III.6 TYPES OF ORDERS

The system allows the trading members to enter orders with

various conditions attached to them as per their requirements.
These conditions are broadly divided into the following categories:

46
 Time conditions

Price conditions

Other conditions
Several combinations of the above are allowed thereby providing
enormous flexibility to the users. The order types and conditions
are summarized below.

• Time conditions

- Day order: A day order, as the name suggests is an

order which is valid for the day on which it is entered. If
the order is not executed during the day, the system
cancels the order automatically at the end of the day.

- Immediate or Cancel (IOC): An IOC order allows the

user to buy or sell a contract as soon as the order is
released into the system, failing which the order is
cancelled from the system. Partial match is possible for
the order, and the unmatched portion of the order is
cancelled immediately.

• Price condition

- Market price: Market orders are orders for which no

price is specified at the time the order is entered (i.e.
price is market price). For such orders, the trading
system determines the price.

- Limit price: An order to a broker to buy a specified

quantity of a security at or below a specified price, or
to sell it at or above a specified price (called the limit
price). This ensures that a person will never pay more
for the futures contract than whatever price is set as
his/her limit. It is also the price of orders after triggering
from stop-loss book.

Stop-loss: This facility allows the user to release an

order into the system, after the market price of the
security reaches or crosses a threshold price e.g. if for
stop-loss buy order, the trigger is Rs. 42.0025, the limit
price is Rs. 42.2575 , then this order is released into
the system once the market price reaches or exceeds
Rs. 42.0025. This order is added to the regular lot book
with time of triggering as the time stamp, as a limit
order of Rs. 42.2575.

46
 Thus, for the stop loss buy order, the trigger price has to
be less than the limit price and for the stop-loss sell
order, the trigger price has to be greater than the limit
price.

• Other
conditions

- Pro: Pro means that the orders are entered on the trading member's
own account.

- Cli: Cli means that the trading member enters the orders on behalf of
a client.

In exchange traded derivative contracts, the Clearing Corporation

acts as a central counterparty to all trades and performs full
novation. The risk to the clearing corporation can only be taken care
of through a stringent margining framework. Also, since
derivatives are leveraged instruments, margins also act as a
cost and discourage excessive speculation. A robust risk
management system should therefore, not only impose margins
on the members of the clearing corporation but also enforce
collection of margins from the clients.

Price Limit
Circuit Filter

There shall be no daily price bands applicable for Currency Futures

contracts. However in order to prevent erroneous order entry by
members, operating ranges will be kept at +/-3% of the base price
for contracts with tenure upto 6 months and +/-5% for contracts
with tenure greater than 6 months. In respect of orders which
have come under price freeze, the members would be required to
confirm to the Exchange that there is no inadvertent error in the
order entry and that the order is genuine. On such confirmation,
the Exchange may take appropriate action.

2.III.7 MARK-to-
MARKET

During the trading session, the system keeps track of losses, both
notional and booked, incurred by every member up to the last
executed trade. This is calculated by the system on a real-time
basis by way of computing the difference between the actual
trade price of a member and the daily settlement price of the
market. Daily settlement price on a trading day is also the closing

46
price of the respective futures contracts on such day. Such
calculation happens for every member after execution of each and
every trade. The maximum loss limit, which the system allows a
member to sustain on a real-time basis, is 75% of the total deposit.
Every time such loss amount goes beyond the levels of 60%, 75%,
or 90% of the prior mentioned maximum loss limit, the member
gets a warning signal. Thereafter, when the loss crosses the 75%
of the total deposit limit, the member is suspended by the system.
In such calculations, there is no allowance given in respect of
profits made by such members in a different contract. This is
monitored by the system to curb any default in the process of day
trading.

4.III.8
POSITION
LIMITS

In order to avoid building up of huge open positions, the regulator

has specified the maximum allowable open position limit across all
members of the Exchange.

Rules with respect to monitoring and enforcement of position limits in

the currency futures market:
Positions during the day are monitored based on the total open
interest at the end of the previous day’s trade.
The above monitoring is for both client level positions (based on
the unique client code) and for trading member level positions.

The Exchange treats violation of position limits as an input for

further surveillance action. Upon detecting large open positions,
the Exchange conducts detailed analysis based on the overall
nature of positions, the trading strategy, positions in the
underlying market, positions of related entities (concept of
persons acting in concert would be applied), etc.

The violators of position limits are accountable for their large

positions and are asked to submit detailed information pertaining
to their trading activities whenever the information is sought by
the Exchange. The clearing member is accountable for
positions of all trading members and clients of trading
members clearing through him. Similarly, the trading member is
accountable for the positions of his clients. The Exchange also
calls for information directly from the client itself.

46
 The following position limits would be applicable in the
currency future market: Client Level: The gross open position of
the client across all contracts should not exceed 6% of the total
open interest or USD 10 million whichever is higher. The
Exchange will disseminate alerts whenever the gross open
position of the client exceeds 3% of the total open interest at
the end of the previous day’s trade.

Non Bank Trading Member Level: The gross open positions of

the trading member across all contracts should not exceed 15%
of the total open interest or USD 50 million whichever is higher.
However, the gross open position of a Trading Member, which is
a bank, across all contracts, shall not exceed 15% of the total
open interest or USD 100 million, whichever is higher.

Clearing Member Level: No separate position limit is prescribed

at the level of clearing member. However, the clearing member
shall ensure that his own trading position and the positions of
each trading member clearing through him are within the limits
specified above.

Surveillance
System

The surveillance systems of the exchanges are designed keeping in

view all the relevant aspects, including the following:
i. The alerts in the online surveillance system automatically generate
material aberrations from normal activity.
ii. The surveillance systems and
processes are able to:
• Monitor open interest, cost of carry,
and volatility.
• Monitor closing
prices.
• Capture and process client
level details.
• Develop databases of trading activity by brokers
as well as clients.
• Generate trading pattern by a broker over a period of time
or by a client / group of clients over a period of time.
iii. The information and feedback received from member
inspections are vital inputs for effective surveillance. For this,
member inspections are taken up in a rational manner keeping in
view the level of trading activity, client profile, number and nature
of complaints received against the member, history of risk

46
 management related defaults and regulatory violations, etc.
Information obtained through member inspections is made available
to the monitoring/ surveillance departments of Exchanges.
iv. The Exchange calls for information from members in a standard
form, and preferably in electronic form, to facilitate faster analysis
as well as building up of databases.
Rules, regulations and bye laws of Exchange

Rules, regulation and bye-laws of the Exchange govern the

functions and processes of the Exchange. They guide broader
aspects, like constitution and composition of the Board, the
Executive committee, types of membership, criteria and eligibility
of membership, to operational issues, like, how transaction is
entered into and how it is settled. It also explains process of
arbitration, investors’ protection and compensation, and penalty
for violation of any of the rules, regulations and bye-laws of the
Exchange.

REGULATORY FRAMEWORK FOR CURRENCY FUTURES

With a view to enable entities to manage volatility in the currency

market, RBI on April 20, 2007 issued comprehensive guidelines on the
usage of foreign currency forwards, swaps and options in the OTC
market. At the same time, RBI also set up an Internal Working Group
to explore the advantages of introducing currency futures. The Report
of the Internal Working Group of RBI submitted in April 2008,
recommended the introduction of exchange traded currency futures.
With the expected benefits of exchange traded currency futures, it
was decided in a joint meeting of RBI and SEBI on February 28, 2008,
that an RBI-SEBI Standing Technical Committee on Exchange Traded
Currency and Interest Rate Derivatives would be constituted. To begin
with, the Committee would evolve norms and oversee the
implementation of Exchange traded currency futures. The Terms of
Reference to the Committee was as under:

46
1. To coordinate the regulatory roles of RBI and SEBI in regard to
trading of Currency and Interest Rate Futures on the Exchanges.

2. To suggest the eligibility norms for existing and new Exchanges

for Currency and Interest Rate Futures trading.

3. To suggest eligibility criteria for the members of such exchanges.

4. To review product design, margin requirements and other risk

mitigation measures on an ongoing basis.

5. To suggest surveillance mechanism and dissemination of market

information.

6. To consider microstructure issues, in the overall interest of

financial stability.

46
 Chapter 5

COMPANY PROFILE

46
 Company profile

Today JRG is one of the foremost brokerage houses,

being a member of various exchanges in the capital and commodity markets

and the insurance sector. JRG is a member of the National Stock Exchange of

India (NSE), the Bombay Stock Exchange, the National Multi Commodity

Exchange of India Ltd (NMCEIL), the National Commodities Derivatives

Exchange Ltd (NCDEX), the Multi Commodity Exchange of India Ltd

(MCX) and the Indian Pepper and Spices Trades Association (IPSTA). JRG is

a full-fledged depository participant of the National Securities Depository Ltd

and Central Depository Services (India) Limited.

JRG is also one of southern India's leading Insurance Brokers. No wonder, we

call ourselves, the Financial Supermarket. JRG constantly infuses quality into
service. We provide our clients full expertise to play in the market with
confidence. They avail full-fledged trading facilities and services through our
nation-wide offices in securities and in commodities.

To help our clients better, we have located our offices in major towns and
placed highly qualified and experienced financial experts to man them. A
team of dynamic finance professionals with decades of experience leads them.
These professionals share a common vision not only to transform the
company into a highly professional organization, but also make their clients
earn the maximum from their hard-earned money.

46
What has made this remarkable growth possible at JRG?

Trust. Commitment. Integrity.

Our transparency, commitment and integrity in all dealings have earned us

trust, which in turn has enabled us to build long term relationships.

JRG Securities Limited was born out of a vision to explore the immense
investment opportunities in the Indian financial market, to benefit the
investors. The company is built on the pillars of financial expertise,
professionalism, exemplary ethics and a commitment to provide ultimate
customer satisfaction.

JRG constantly strives to meet the changing market needs and trends.

We take pride to tell the world that we had a modest beginning. We began as
a sub-brokerage house in the year 1992. Our financial expertise and
professionalism coupled with ethics and a commitment has made JRG one of
the major players in Indian financial market.

We cater efficiently to the diverse and complex needs of over 200,000

customers, most of whom are individual traders, institutions and money
managers.

The vision of the JRG Group is to be a Financial Super Market. It aims to

provide all types of financial services to its clients at one place to save them
from going from place to place to meet their investment needs.

With the opening up of the Indian economy and the advent of IT enabled
trading, the Indian capital market has become a whole new ball game. From
floor trading, the custom is fast shifting to Internet trading. Equally fast is the
role of the financial service provider, which is being redefined. Earlier, a

46
financial service provider's responsibility was limited to executing customer's
instructions to buy and sell. Now, the whole operational paradigm has
progressively shifted with the opening of more and more avenues to offer
strategic customer supports.

The guiding principles that lead us:

Serve the clients with the highest level of responsiveness and integrity.

Place the client's interests and protection of their investments as the top
priorities.

Operate on predefined and constantly updated service standards. Is customer

driven, rather than deal driven?

Adopt futuristic technology to gather vital information on real time basis to

optimize investor protection and investor returns.

Set up most modern trading facilities for its clients at par with global
standards.

Group of companies:

Your search ends with us, the JRG Group, a leading financial and investment
Service Company in India. From a modest beginning a decade back, JRG is
today a power to reckon with in the financial services industry through the
following JRG Group of Companies:

JRG Securities Ltd

JRG Wealth Management Ltd

JRG Insurance Broking Pvt Ltd

JRG Metal & Commodities DMCC, Dubai

JRG Fincorp Limited

46
JRG Business Investment Consultants Limited

Board of Directors:

JRG’s Directorial Board is comprised of a team, who are veterans in the field
of Stock broking. Their experience and expertise have helped the Company
attain the status of a premier Broking House in the Country. The executive
team is also made up of a group of individuals who are the propelling strength
of the Company.

1) Mr. Rahul Bhasin – Chairman

Mr. Rahul Bhasin, Chairman was appointed in the Board on 30.10.2007. He is

an MBA graduate from IIM Ahmedabad and has vast experience as Fund
Manager, Portfolio Manager for over 18 yrs. He is the Head of Baring Private
Equity Partners (India) Limited since 1998. He has previously worked with
Citicorp, Global Asset Management in London where he was involved in
asset allocation on a sectoral and regional basis for all their global portfolios.
Aside from his experience in the developed markets, he has actively invested
in the emerging markets in Latin America, East Europe, Russia, Asia and
India.

2) Mr. T M Venkataraman - Director

Mr. T M Venkataraman, Director, is a Commerce graduate and CAIIB and

has over 43 years of banking experience in various capacities with a
creditable service record – 37 years in a public sector bank and 5 years as the
Chairman and Chief Executive Officer of The Dhanalakshmi Bank Ltd . The
knowledge he gained being in the managerial cadre in his professional life has
been imparted to the Company. Besides, being the Director of our Company,
he is also on Board of the subsidiary companies, JRG Wealth Management
Ltd and JRG Fincorp Ltd

3) Mr. Munish Dayal - Director

Mr. Munish Dayal, Director, was appointed in the Board on 30.10.2007. He is

an MBA graduate from Delhi University and Faculty of Management Studies,

46
New Delhi. Has 16 years of experience in City Bank was in establishing and
building businesses in the Financial Services industry in functions ranging
from retail banking, cash management, asset based finance to custody,
culminating as the Head of Small Business and Mass Markets group for Asia
Pacific. He was also one of the early members of the senior management team
at Yes Bank – a recently established bank - and was instrumental in scaling up
the SME and Mid Market product portfolio of the bank as a key profit center.

4) Mr. Pradeep Mallick - Director

Mr. Pradeep Mallick, Director, was appointed in the Board on 29.04.2009. He

is a Graduate in Electrical Engineering from IIT, Madras and received a
Diploma in Business Management from UK. He is a ‘Chartered Engineer’,
Fellow of the Institution of Engineering & Technology (FIET), London. He
was honoured by IIT Madras with the Distinguished Alumnus Award. He
worked almost 22 years with Companies in the field of Power Distribution &
Power Transmission, primarily in managing large turnkey projects in India,
Gulf, West Asia and North Africa. He is a Past Chairman of Confederation of
Indian Industry (CII), Western Region and a Past President of Bombay
Chamber of Commerce & Industry. He has also served the Institution of
Engineering & Technology (IET), London, in various capacities on
International Board, Members Board, International Strategy Working Party
and Council.

5) Mr. B R Menon - Director

Mr. B R Menon, Director, was appointed as a Director on 27.05.2008. He is a

graduate in Commerce from Delhi University and holds Law degree from the
Government Law College, Bombay. He has almost 25 years experience at the
Bar and has appeared in several important cases before the Supreme Court of
India and various High Courts. Also appeared in matters before the Courts in
the United Kingdom and Australia besides the ICC Tribunal for arbitration.

6) Mr. Regi Jacob- Director

Mr. Regi Jacob, Director, is chief promoter and co-founder of the company.
He has several years of professional experience in the securities market. He is
the unfeigned inspiration of the group. He is a Post Graduate in Literature as
well as in Journalism and Mass Communication. He has been in this field for
a period of Seventeen years and his knowledge is the driving force in the

46
progression of the Company. Under his leader ship JRG started its operations
in the financial market in 1992, as a brokerage house to offer service to the
investing public of the country, especially to the people in south India. He
served as Managing Director till 29.04.2009.

7) Mr. Gaurav Vivek Soni – Managing Director

Mr. Gaurav Vivek Soni, Managing Director, was appointed on 29.04.2009.

He is a Commerce graduate and ACA with over 17 years experience both in
India & overseas in the areas of Finance, Accounts, Auditing and Commercial
Operations. He has 2 years of experience in the capital market. He joined the
organization in June 2008 as chief Financial Officer and was promoted as
ManagingDirector.

Code of conduct:

The Board of Directors / senior management personnel (the “Board”) of the

Company has adopted the following Code of Business Conduct and Ethics
(the “Code”) for Directors / senior management personnel of the Company.
This Code is intended to focus the Board and each directors / senior
management personnel on areas of ethical risk; provide guidance to directors /
senior management personnel to help them recognize and deal with ethical
issues; provide mechanisms to report unethical conduct; and help foster a
culture of honesty and accountability.

Interpretation of Code: Any question or interpretation under this Code of

Ethics and Business Conduct will be handled by the Board or any person
/committee authorized by the Board of the Company. The Board of Directors /
senior management personnel or any designated person/committee has the
authority to waive compliance with this Code of business conduct for any
director, officer or employee of the Company. The person-seeking waiver of
this Code shall make full disclosure of the particular circumstances to the
Board or the designated person/ committee. Each directors / senior
management personnel must comply with the letter and spirit of this Code.

Conflict of Interest: Directors / senior management personnel must avoid

any conflicts of interest between the director / senior management personnel
and the Company. Any situation that involves, or may reasonably be expected
to involve, a conflict of interest with the Company, should be disclosed

46
promptly to the Board. A “conflict of interest” can occur when:

. A director's / senior management personnel’s personal interest is adverse

to or may appear to be adverse to the interests of the Company as a
whole.
. A director, or his / her relative, as defined by the Companies Act, 1956,
receives improper personal benefits as a result of his/her position as a
director of the Company.

Some of the more common conflicts, which directors / senior management

personnel should avoid, are listed below:

A Relationship of Company with third parties:

Directors / senior management personnel may not receive a personal
benefit from a person or firm, which is seeking to do business or to retain
business with the Company. A director shall keep away him/herself from
any Company Board decision involving another firm or company with
which the director is affiliated.

b Compensation from non-Company sources:

Directors / senior management personnel may not accept compensation
(in any form) for services performed for the Company from any source
other than the Company.
c Gifts:
Directors / senior management personnel may not offer, give or receive
gifts from persons or entities that deal with the company in those cases
where any such gift is being made in order to influence the directors'
actions as members of the Board, or where acceptance of the gifts could
create the appearance of a conflict of interest.

Corporate Opportunities: Directors / senior management personnel are

prohibited from:

a Taking for themselves or their companies opportunities that are

discovered through the use of Company property, Company information
or position as a director;
b Using the Company's property or information for personal gain; or

46
 c Competing with the Company for business opportunities. However, if the
Company's disinterested directors / senior management personnel
determine that the Company will not pursue an opportunity that relates to
the Company's business, a director / senior management personnel may
then do so.

Confidentiality: Directors / senior management personnel must maintain the

confidentiality of information entrusted to them by the Company and any
other confidential information about the Company that comes to them, from
whatever source, in their capacity as a director / senior management
personnel, except when disclosure is authorized or legally mandated.
For purposes of this Code, “confidential information” includes all non-public
information relating to the Company.

Political Non-Alignment: The Board shall be committed to and support a

functioning democratic constitution and system with a transparent and fair
electoral system in India. The Board shall not support, directly or indirectly,
any specific political party or candidate for political office. The Company
shall not offer or give any company funds or property as donations, directly or
indirectly, to any specific political party, candidate or campaign if it is
violating any law.

Compliance with Laws, Rules and Regulations; Fair Dealing :Directors /

senior management personnel must comply, and oversee compliance by
employees, officers and other directors, with laws, rules and regulations
applicable to the Company, including insider trading laws.
Directors / senior management personnel must deal fairly, and must oversee
fair dealing by employees and officers, with the Company's customers,
suppliers, competitors and employees.

Financial Reporting & Records: The Directors / senior management

personnel must ensure that: The Company and its Officers shall prepare and
maintain accounts of the Company’s business affairs fairly and accurately in
accordance with the accounting and financial reporting standards which

46
represent the generally accepted guidelines, principles, standards, laws and
regulations of the country in which the Company conducts its business affairs.

Internal accounting and audit procedures shall fairly and accurately reflect all
of the Company's business transactions and disposition of assets. All required
information shall be accessible to Company Auditors and other authorized
parties and government agencies. There shall be no willful omissions of any
Company transactions from the books and records, no advance income
recognition, and no hidden bank account and funds.

Any willful material misrepresentation of and/or misinformation on the

financial accounts and reports shall be regarded as a violation of this code,
apart from inviting appropriate civil or criminal action under the relevant law.

Integrity of Data Furnished: Every Board Member / Senior Management

personnel shall ensure, at all times, the integrity of data or information
furnished by him to the Board.

Encouraging the Reporting of any Illegal or Unethical Behavior :Directors /

senior management personnel should promote ethical behavior and take steps
to ensure that the Company:-

a Encourages employees to talk to supervisors, managers and other

appropriate personnel when in doubt about the best course of action in a
particular situation;
b Encourages employees to report violations of laws, rules, regulations or
the Company's Code of Conduct to appropriate personnel;
c Informs employees that the Company will not allow retaliation for
reports made in good faith.

Compliance Standards: Directors / senior management personnel should

communicate any suspected violations of this Code promptly to the Board.
Violations will be investigated by the board or by persons designated by the
board, and appropriate action will be taken in the event of any violations of
the Code.

Waiver of Code of Business Conduct and Ethics: Any waiver of this Code
that may be made by the Board of Directors / senior management personnel
must be promptly disclosed to the Company’s shareholders.

46
 Chapter 6

DATAANALYSIS

&

46
 INTERPRETATIO

USD Prices are trading in the range of 50.055 Rupees to

49.05 rupees which is moderate volatility during this
period (01/01/09 to 30/01/09)

46
Open interest of the trading contract of USDINR 2912009 is constantly
increases from the period of 1st Jan 2009 to 30th Jan 2009.

Data of USD vs. INR with Open interest and closing prices for the month
of January 2009.

USDINR 291209

46
 Trade Date Close Price Open Interest
30-Jan-09 50.055 258
29-Jan-09 50.055 258
28-Jan-09 50.055 258
27-Jan-09 50.055 258
23-Jan-09 50.055 258
22-Jan-09 50.055 258
21-Jan-09 50.055 258
20-Jan-09 49.05 193
19-Jan-09 49.95 133
16-Jan-09 49.95 133
15-Jan-09 49.95 133
14-Jan-09 49.7 115
13-Jan-09 49.75 112
12-Jan-09 49.7 110
9-Jan-09 49.8 85
7-Jan-09 49.8 85
6-Jan-09 49.8 85
5-Jan-09 49.8 85
2-Jan-09 49.8 85
1-Jan-09 49.76 75

USD Prices are trading in the range of 51.46 Rupees to

49.5 rupees which is high volatility during this period
(01/02/09 to 28/02/09)

46
Open interest of the trading contract of USDINR 2912009 is more than
doubles from 258 to 684 during the period 1st Feb 2009 to 28th Jan
2009.

Data of USD vs. INR with Open interest and closing prices for the month
of February 2009.

46
USDINR29120
9
Close Open
Trade Date Price Interest
27-Feb-09 51.46 684
26-Feb-09 50.99 520
25-Feb-09 51 525
24-Feb-09 50.4 375
20-Feb-09 50.6 302
19-Feb-09 50.6 302
18-Feb-09 50.535 294
17-Feb-09 49.96 267
16-Feb-09 49.5 262
13-Feb-09 49.5 262
12-Feb-09 49.5 262
11-Feb-09 49.5 262
10-Feb-09 49.5 262
9-Feb-09 49.5 262
6-Feb-09 49.6 258
5-Feb-09 49.6 258
4-Feb-09 50.055 258
3-Feb-09 50.055 258
2-Feb-09 50.055 258

USD Prices are trading in the range of 52.4 Rupees to 50.4 rupees
which is high volatility during this period (01/03/09 to 31/03/09) and

46
 a price touches historical high.

Open interest of the trading contract of USDINR 2912009 is moderately

increases from 694 to 731 during the period 1st Mar 2009 to 31st Mar
2009.

46
Data of USD vs. INR with Open interest and closing prices for the month
of March 2009.

USDINR
291209
Open
Trade Date Close Price Interest
31-Mar-09 52 731
30-Mar-09 51.5 711
26-Mar-09 51.5 711
25-Mar-09 51.7 711
24-Mar-09 51.51 703
23-Mar-09 50.4 694
20-Mar-09 50.4 694
19-Mar-09 50.4 694
18-Mar-09 50.4 694
17-Mar-09 50.4 694
16-Mar-09 52.4 694
13-Mar-09 52.4 694
12-Mar-09 52.4 694
9-Mar-09 52.4 694
6-Mar-09 52.4 694
5-Mar-09 52.4 694
4-Mar-09 52.4 694
3-Mar-09 52.4 694
2-Mar-09 52.4 694

46
USD Prices are trading in the range of 51.6 Rupees to 50.4 Rupees
which is moderate volatility during this period (01/04/09 to 30/04/09).

Open interest of the trading contract of USDINR 2912009 is almost all

flat from 721 to 728 during the period of 1st Apr 2009 to 31st Apr 2009.

46
Data of USD vs. INR with Open interest and closing prices for
the month of April 2009.

USDINR
291209
Close Open
Trade Date Price Interest
29-Apr-09 51.36 728
28-Apr-09 51.36 728
27-Apr-09 51 728
24-Apr-09 51 727
23-Apr-09 51 727
22-Apr-09 51 727
21-Apr-09 51 727
20-Apr-09 51 727
17-Apr-09 50.8975 727
16-Apr-09 50.4 721
15-Apr-09 50.9 721
13-Apr-09 50.9 721
9-Apr-09 51.1 721
8-Apr-09 51.1 721
6-Apr-09 51.1 721
2-Apr-09 51.6 721

46
USD Prices are trading in the range of 51.125 Rupees to 48 Rupees
which is heavy volatility during this period (01/05/09 to 31/05/09).

Open interest of the trading contract of USDINR 2912009 is slightly

increases from 728 to 843 during the period of 1st May 2009 to 31st
May 2009.

46
Data of USD vs. INR with Open interest and closing prices for the month
of May 2009

USDINR
291209
Close Open
Trade Date Price Interest
29-May-09 48 843
28-May-09 48 843
27-May-09 48 843
26-May-09 48 843
25-May-09 48 843
22-May-09 47.8 748
21-May-09 47.96 748
20-May-09 48.25 738
19-May-09 48.25 738
18-May-09 48.8 738
15-May-09 51.125 735
14-May-09 51.125 735
13-May-09 50.4025 735
12-May-09 50.4 735
11-May-09 50.37 730
8-May-09 50.55 730
7-May-09 50.55 730
6-May-09 50.55 730
5-May-09 50.6 731
4-May-09 51.36 728

46
USD Prices are trading in the range of 47.75 Rupees to 49.15 Rupees
which is low volatility during this period (01/06/09 to 30/06/09).

Open interest of the trading contract of USDINR 2912009 is

moderately increases from 843 to 1052 during the period of 1st June
2009 to 30th June 2009.

46
Data of USD vs. INR with Open interest and closing prices for the month
of JUNE 2009

USDINR
291209
Close Open
Trade Date Price Interest
30-Jun-09 48.9925 1052
29-Jun-09 48.9925 1052
26-Jun-09 48.9925 1052
25-Jun-09 49.3 1052
24-Jun-09 49.15 1017
23-Jun-09 49.15 1017
22-Jun-09 49.15 1017
19-Jun-09 48.85 917
18-Jun-09 48.8 910
17-Jun-09 48.6975 890
16-Jun-09 48.2 885
15-Jun-09 48.2 885
12-Jun-09 48.2 885
11-Jun-09 48.2 885
10-Jun-09 48 885
9-Jun-09 48 885
8-Jun-09 47.75 883
5-Jun-09 47.75 883
4-Jun-09 48 843
3-Jun-09 48 843
2-Jun-09 48 843
1-Jun-09 48 843

46
USD Prices are trading in the range of 48.50 Rupees to 49.20 Rupees
which is flat during this period (01/07/09 to 31/07/09).

Open interest of the trading contract of USDINR 2912009 is almost all

doubled by 1052 to 2086 during the period of 1st July 2009 to 31st July
2009.

46
Data of USD vs. INR with Open interest and closing prices for the month
of JULY 2009

USDINR
291209
Close Open
Trade Date Price Interest
31-Jul-09 48.5025 2086
30-Jul-09 48.8425 2068
29-Jul-09 48.8425 2068
28-Jul-09 48.67 2018
27-Jul-09 48.67 2018
24-Jul-09 48.7 2008
23-Jul-09 49.05 1992
22-Jul-09 49.05 1992
21-Jul-09 48.85 1983
20-Jul-09 48.7 1953
17-Jul-09 49.15 1989
16-Jul-09 49.29 1991
15-Jul-09 49.15 1981
14-Jul-09 49.4575 1941
13-Jul-09 49.4575 1941
10-Jul-09 49.45 1858
9-Jul-09 49.2025 1623
8-Jul-09 49.41 1607
7-Jul-09 48.98 1679
6-Jul-09 49.05 1753
3-Jul-09 48.52 1492
2-Jul-09 48.66 1442
1-Jul-09 48.9925 1052

46
USD Prices are trading in the range of 48.1 Rupees to 49.24 Rupees
which is very low volatility during this period (01/08/09 to 31/08/09).

Open interest of the trading contract of USDINR 2912009 is almost all

doubled by 2152 to 4369 during the period of 1st August 2009 to 31st
August 2009.

46
Data of USD vs. INR with Open interest and closing prices for the month
of AUGUST 2009

USDINR
291209
Close Open
Trade Date Price Interest
31-Aug-09 49.2 4369
28-Aug-09 49.075 3764
27-Aug-09 49.03 3764
26-Aug-09 49.24 3752
25-Aug-09 49.1 3693
24-Aug-09 48.93 3691
21-Aug-09 49.1 3686
20-Aug-09 49 3685
18-Aug-09 49.1125 3685
17-Aug-09 49.32 3490
14-Aug-09 48.7 2727
13-Aug-09 48.42 2675
12-Aug-09 48.9 2675
11-Aug-09 48.4 2597
10-Aug-09 48.35 2597
7-Aug-09 48.35 2597
6-Aug-09 48.15 2587
5-Aug-09 48.05 2475
4-Aug-09 48.12 2421
3-Aug-09 48.1 2152

46
USD Prices are trading in the range of 48.29 Rupees to 49.4 Rupees
which is very low volatility during this period (01/09/09 to 30/08/09).

Open interest of the trading contract of USDINR 2912009 is constantly

increases from 4587 to 7576 during the period of 1st September 2009
to 31st September 2009.

46
Data of USD vs. INR with Open interest and closing prices for the month
of September 2009.

USDINR
291209
Close Open
Trade Date Price Interest
29-Sep-09 48.35 7576
25-Sep-09 48.29 7313
24-Sep-09 48.2875 6515
23-Sep-09 48.35 6435
22-Sep-09 48.2875 5800
18-Sep-09 48.45 5348
17-Sep-09 48.3375 5482
16-Sep-09 48.55 5466
15-Sep-09 48.94 5304
14-Sep-09 49.04 4727
11-Sep-09 48.89 4668
10-Sep-09 48.86 4816
9-Sep-09 48.76 4735
8-Sep-09 48.8225 4730
7-Sep-09 49.03 4721
4-Sep-09 49.17 4722
3-Sep-09 49.25 4765

46
 2-Sep-09 49.4 4761
1-Sep-09 49.34 4587

USD Prices are trading in the range of 46.33 Rupees to 48.015 Rupees
which is moderately volatile during this period (01/10/09 to 30/10/09).

Open interest of the trading contract of USDINR 2912009 is increases

tremendously from 8248 to 78239 during the period of 1st October
2009 to 30th October 2009.

46
Data of USD vs. INR with Open interest and closing prices for the month
of October 2009.

USDINR
291209
Close Open
Trade Date Price Interest
30-Oct-09 47.15 78239
29-Oct-09 47.42 79287
28-Oct-09 47.5425 77205
27-Oct-09 47.11 59318
26-Oct-09 46.8425 53887
23-Oct-09 46.74 52191
22-Oct-09 46.96 50468
21-Oct-09 46.7 49413
20-Oct-09 46.33 49033
17-Oct-09 46.5375 48951
16-Oct-09 46.515 48621
15-Oct-09 46.3925 46257
14-Oct-09 46.3325 40906
12-Oct-09 46.7175 34691
9-Oct-09 46.675 30959

46
 8-Oct-09 46.6025 18938
7-Oct-09 46.9075 9532
6-Oct-09 47.205 8868
5-Oct-09 47.8325 9109
1-Oct-09 48.015 8248

USD Prices are trading in the range of 46.3 Rupees to 47.56 Rupees
which is slightly volatile during this period (01/11/09 to 30/11/09).

Open interest of the trading contract of USDINR 2912009 is increases

tremendously from 92704 to 408439 during the period of 1st
November 2009 to 30th November 2009.

46
Data of USD vs. INR with Open interest and closing prices for the month
of November 2009.

USDINR29120
9
Close Open
Trade Date Price Interest
30-Nov-09 46.56 408439
27-Nov-09 46.6875 419431
26-Nov-09 46.565 401859
25-Nov-09 46.3325 320497
24-Nov-09 46.475 274613
23-Nov-09 46.6 241050
20-Nov-09 46.7475 190253
19-Nov-09 46.7475 154666
18-Nov-09 46.3 122491
17-Nov-09 46.38 108954
16-Nov-09 46.3425 107008
13-Nov-09 46.4525 108489
12-Nov-09 46.72 103341
11-Nov-09 46.425 100317

46
 10-Nov-09 46.6075 99368
9-Nov-09 46.515 97578
6-Nov-09 46.945 90161
5-Nov-09 47.1525 85589
4-Nov-09 47.1775 89975
3-Nov-09 47.56 92704

USD Prices are trading in the range of 46.18 Rupees to 47.56 Rupees
which is flat during this period (01/12/09 to 31/12/09).

Open interest of the trading contract of USDINR 2912009 is decreases

46
 half of the OI from 427125 to 219913 during the period of 1st
December 2009 to 31st December 2009.

Data of USD vs. INR with Open interest and closing prices for the month
of December 2009.

USDINR
291209
Close Open
Trade Date Price Interest
29-Dec-09 46.6825 219913
24-Dec-09 46.705 250217
23-Dec-09 46.895 277168
22-Dec-09 46.8325 287243
21-Dec-09 46.8625 303435
18-Dec-09 46.7975 310165
17-Dec-09 46.9375 312238
16-Dec-09 46.7025 332582
15-Dec-09 46.755 315068
14-Dec-09 46.7625 351988
11-Dec-09 46.6125 360895
10-Dec-09 46.7225 379848
9-Dec-09 46.645 356171

46
 8-Dec-09 46.71 386479
7-Dec-09 46.6475 382352
4-Dec-09 46.3375 415734
3-Dec-09 46.18 457913
2-Dec-09 46.38 439902
1-Dec-09 46.375 427125

USD Prices are trading in the range of 45.38 Rupees to 46.71 Rupees
which is high volatile during this period (01/01/10 to 31/01/10).

Open interest of the trading contract of USDINR 2912009 is sideways

in the range of from 297839 to 494197 during the period of 1st

46
 January 2010 to 31st January 2010.

Data of USD vs. INR with Open interest and closing prices for the month
of January 2010.

USDINR
270110
Close Open
Trade Date Price Interest
27-Jan-10 46.2875 359372
25-Jan-10 46.1225 471442
22-Jan-10 46.155 494197
21-Jan-10 46.085 465225
20-Jan-10 45.9625 393244
19-Jan-10 45.8175 367986
18-Jan-10 45.6975 434293
15-Jan-10 45.8325 456694
14-Jan-10 45.65 457160
13-Jan-10 45.695 467509
12-Jan-10 45.71 464751

46
 11-Jan-10 45.3825 406918
8-Jan-10 45.8575 394451
7-Jan-10 45.7375 398270
6-Jan-10 45.9475 360315
5-Jan-10 46.305 351914
4-Jan-10 46.3525 333130
1-Jan-10 46.7125 297839

Euro Prices trading in the range of 63.8 to 64.6

which is less volatile.

46
 Open interest increases almost double during the February month 2010.

Trading of Euro vs. Rupee with trading contract on Feb 29 2010 from
Jan 29th 2010 to Feb 11 2010.

Open
Trade Date Close Price Interest
11-Feb-10 63.8825 17561

46
10-Feb-10 64.2175 11664
9-Feb-10 64.035 13563
8-Feb-10 64.145 11332
5-Feb-10 64.0625 12794
4-Feb-10 64.0675 12822
3-Feb-10 64.4725 6886
2-Feb-10 64.54 8276
1-Feb-10 64.555 7042

GBP Prices trading in the range of 73.8 to 72.6

which is less volatile.

46
Open Interest Of GBP during the month of February is sideways.

Close
Trade Date Price Open Interest
11-Feb-10 72.5425 3648
10-Feb-10 72.95 3333
9-Feb-10 72.7225 2914
8-Feb-10 73.02 5310
5-Feb-10 73.405 5196
4-Feb-10 73.3 2510
3-Feb-10 73.65 2759
2-Feb-10 73.73 2357
1-Feb-10 73.705 1311

46
 Japan yen Prices trading in the range of 51.0 to
52.5 which is less volatile.

Open Interest is sideways during the month of February

Yen

46
 Close Open
Trade Date Price Interest
51.85
11-Feb-10 75 1236
10-Feb-10 52 1283
52.19
9-Feb-10 5 1525
52.41
8-Feb-10 25 1492
5-Feb-10 52.28 1271
4-Feb-10 51 1065
50.96
3-Feb-10 75 1120
51.07
2-Feb-10 25 1207
51.46
1-Feb-10 5 1058

46
RBI Reference Rate Vs. USD INR (Series 1: RBI Rate, Series 2 :USD INR)
th th
from 29 August 2008 to 26 March 2009

52

50

48

46
Series1
44 Series2
42

40

38
1 2 3 4 5 6 7 8

Fundamental Analysis of Rupee

Till now we had discussed about what is FOREX market, what we

46
understand by Derivative market, and many other uses and ways of
investment. As we proceed further I want to see some other
dimensions of rupee. As we trade in the global environment so we
cannot ignore the facts that there are many different factors that
affect our value of rupee and show a behavioral trend with rupee.

Positives for rupee in longer duration

1. Stable government in India

2. Falling dollar index

3. Rising equity and commodity markets

4. China’s diversification into gold, other commodities

5. Heavy foreign flow into India

Negatives for rupee in short term

1. Rising crude oil prices

2. Fiscal deficit in India

3. RBI likely intervention around 46.8-47 to protect exporters.

4. SMO (Special market Operation) window shutdown

5. Overbought equity and commodity market, any significant fall means potential
dollar outflow

6. Crucial technical multiple support around 47

Some of the factors that should be taken in account which directly or indirectly
affect the movement of rupee are as below:-

 Dollar

 EURO

INR and US Dollar:-

Indian rupee is quoted in dollar terms this relation of rupee and dollar
makes it more dependent on each other. There is a relationship seen

46
in dollar and major currencies of world, if dollar is falling against Euro
or against Euro or Yen then it will fall against another major
currencies. On the basis of dollars value with other currencies there is
a dollar index which is prepared. And this predicts the dollar value
worldwide that how it is performing and also how it is fluctuating. This
index is calculated by factoring in the exchange rates of six major
world currencies: The euro, Japanese yen, Canadian dollar, British
pound, Swedish kroner and Swiss franc.

In the graph below we can see the trend of dollar index and rupee
th
value from 26 June, 2008 to
th
26 June 29, 2009. This graph shows the dollar trend among the
other currencies in the world which is being denoted by the black line
and the red line shows the ups and downs seen by the rupee.

We can directly figure out the relationship between dollar index and
rupee over here when the dollar index get stronger the rupee is
getting weak and when the rupee get stronger the dollar index is
falling so the relation is dollar and rupee is inversely proportionate to
each another. In other words, when the dollar index goes up rupee
falls and when the rupees value in terms of dollar appreciates the
dollar index comes down.

By this relationship it is clear that because the rupee is quoted in the

dollar terms they become inversely correlated to each other.

46
INR and EURO:-

Euro is one of the major currencies in the global Forex market and it
is quoted in the terms of dollar. On the other hand rupee is not
directly related to euro but is somehow because of being quoted
against common currency euro moment effect rupee also. If dollar
is getting weak in relation to euro most of the times it will also fall in
relation with rupee and this type of indirect relation make rupee dollar
pair predictable by the move in the euro dollar currency pair.

In the graph below we can see the trend of Euro and rupee value
th
from 26 June, 2008 to 26th June 29, 2009.

From this graph we can easily figure out that how the both currency
pairs are related. When we see euro at stronger position we can also
see that rupee is showing recovery sign against its base currency
which is dollar. Dollar being the common in both currency pair makes
them interrelated to each another.

There is also one more factor which makes these pairs so closely
related to each other. Euro and rupee both are high yielding
currency so if there is a flow in market towards high yielding
currency from low yielding currency like dollar the demand of that
currency increase and we see and the similar kind of moment in both
currency pairs.

46
HEDGING WITH CURENCY FUTURES

Exchange rates are quite volatile and unpredictable, it is possible that

anticipated profit in foreign investment may be eliminated, rather even
may incur loss. Thus, in order to hedge this foreign currency risk, the
traders’ oftenly use the currency futures. For example, a long hedge
(I.e.., buying currency futures contracts) will protect against a rise in a
foreign currency value whereas a short hedge (i.e., selling currency
futures contracts) will protect against a decline in a foreign currency’s
value.

It is noted that corporate profits are exposed to exchange rate risk in

many situation. For example, if a trader is exporting or importing any
particular product from other countries then he is exposed to foreign
exchange risk. Similarly, if the firm is borrowing or lending or investing
for short or long period from foreign countries, in all these situations,

46
the firm’s profit will be affected by change in foreign exchange rates. In
all these situations, the firm can take long or short position in futures
currency market as per requirement.

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

The choice of underlying currency

The first important decision in this respect is deciding the currency in

which futures contracts are to be initiated. For example, 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). Assume that
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. Which contract should he choose? Probably he has
only one option rupee with dollar. This is called cross hedge.

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. For example, suppose Indian importer import raw material of
100000 USD on 1st November 2008. And he will have to pay 100000
USD on 1st February 2009. And he predicts that the value of USD will
increase against Indian rupees nearest to due date of that payment.
Importer predicts that the value of USD will increase more than 51.0000.

So what he will do to protect against depreciating in Indian rupee?

Suppose spots value of 1 USD is 49.8500. Future Value of the 1USD on
NSE as below:

46
 Price Watch

Order Book

Best Best Best Best Open

Contract LTP Volume
Buy Qty Buy Price Sell Price Sell Qty Interest

USDINR 261108 464 49.8550 49.8575 712 49.8550 58506 43785

USDINR 291208 189 49.6925 49.7000 612 49.7300 176453 111830

USDINR 280109 1 49.8850 49.9250 2 49.9450 5598 16809

USDINR 250209 100 50.1000 50.2275 1 50.1925 3771 6367

USDINR 270309 100 49.9225 50.5000 5 49.9125 311 892

USDINR 280409 1 50.0000 51.0000 5 50.5000 - 278

USDINR 270509 - - 51.0000 5 47.1000 - 506

USDINR 260609 25 49.0000 - - 50.0000 - 116

USDINR 290709 1 48.0875 - - 49.1500 - 44

USDINR 270809 2 48.1625 50.5000 1 50.3000 6 2215

USDINR 280909 1 48.2375 - - 51.2000 - 79

USDINR 281009 1 48.3100 53.1900 2 50.9900 - 2

USDINR 261109 1 48.3825 - - 50.9275 - -

Volume As On 26-NOV-2008 17:00:00 Hours IST

Rules, Byelaws & Regulations

No. of Contracts

244645 Membership

46
 Archives Circulars

As On 26-Nov-2008 12:00:00 Hours IST List of Holidays

Underlying RBI reference rate

USDINR 49.8500

Solution:

He should buy ten contract of USDINR 28012009 at the rate of 49.8850.

Value of the contract is (49.8850*1000*100) =4988500. (Value of
currency future per USD*contract size*No of contract).

For that he has to pay 5% margin on 5988500. Means he will have to

pay Rs.299425 at present.

And suppose on settlement day the spot price of USD is 51.0000. On

settlement date payoff of importer will be (51.0000-59.8850) =1.115
per USD. And (1.115*100000) =111500.Rs.

Choice of the number of contracts (hedging ratio)

Another important decision in this respect is to decide hedging ratio HR.

The value of the futures position should be taken to match as closely as
possible the value of the cash market position. As we know that in the
futures markets due to their standardization, exact match will generally
not be possible but hedge ratio should be as close to unity as possible.
We may define the hedge ratio HR as follows:

HR= VF / Vc

Where, VF is the value of the futures position and Vc is the value of the cash position.

Suppose value of contract dated 28th January 2009 is 49.8850.

And spot value is 49.8500.

HR=49.8850/49.8500=1.001.

46
 Chapter 7

FINDINGS AND
SUGGESTIONS

46
FINDINGS

 New concept of Exchange traded currency future trading is

regulated by higher authority and regulatory. The whole function
of Exchange traded currency future is regulated by SEBI/RBI, and
they established rules and regulation so there is very safe
trading is emerged and counter party risk is minimized in
currency Future trading. And also time reduced in Clearing and
Settlement process up to T+1 day’s basis.
 Larger exporter and importer has continued to deal in the OTC
counter even exchange traded currency future is available in
markets because,
 There is a limit of USD 100 million on open interest applicable to
trading member who are banks. 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.
In India RBI and SEBI has restricted other currency derivatives
except Currency future, at this time if any person wants to use
other instrument of currency derivatives in this case he has to
use OTC.

SUGGESTIONS
 Currency Future need to change some restriction it imposed
such as cut off limit of 5 million USD, Ban on NRI’s and FII’s and
Mutual Funds from Participating.
 Now in exchange traded currency future segment only one pair
USD-INR is available to trade so there is also one more demand

46
 by the exporters and importers to introduce another pair in
currency trading. Like POUND-INR, CAD-INR etc.
 In OTC there is no limit for trader to buy or short Currency
futures so there demand arises that in Exchange traded
currency future should have increase limit for Trading Members
and also at client level, in result OTC users will divert to
Exchange traded currency Futures.
 In India the regulatory of Financial and Securities market (SEBI)
has Ban on other Currency Derivatives except Currency
Futures, so this restriction seem unreasonable to exporters and
importers. And according to Indian financial growth now it’s
become necessary to introducing other currency derivatives in
Exchange traded currency derivative segment.

Chapter 8

46
 CONCLU
SIONS

CONCLUSIONS
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- a process that has undoubtedly improved national productivity growth
and standards of livings.

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

46
exchange traded future contract and its standardized nature gives counter party risk
minimized.

Initially only NSE had the permission but now BSE and MCX-SX has also started
currency future. It is shows that how currency future covers ground in the compare of
other available derivatives instruments. 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.

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.

46
Chapter 9
 Bibliography
Websites:-

 www.informedtrades.com

 www.wikipedia.com

 www.bloomberg.com

 www.marketwatch.com

 www.nism.ac.in

 www.way2wealth.com

 www.useindia.com

 www.netdania.com

 www.dailyfx.com

Reference Books:-

 Options, Futures and other derivatives

Author -- Jhon C. Hull

 Derivatives Simplified - An Introduction To Risk Management

Author -- P Vijaya Bhaskar and B Mahapatra

 Day trading the currency market

Author--- Kathy lien

 Currency futures

Author -- Glenlake and Fitzroy Dearnborn

 Currency Trading for Dummies

Author—Mark Galant and Brian Dolan