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SYNOPSIS ON

(A STUDY OF CURRENCY DERIVATIVE IN INDIA)

CHOOSE TO KNOW
SUBMITTED FOR MBA PROGRAM UNDER THE SUPERVISION OF
(DR. VIQAR ALI BAIG)

SUBMITTED TO: SUBMITTED BY:

LINGAYAS UNIVERSITY KUMUD R.MISHRA


09MBA035
(BETCH-:2009-2011)

TABLE OF CONTENT
(1) INTRODUCTIN OF CURRENCY DERIVATIVES

(2) LITERATURE REVIEW

(3) RESERCH METHODOLOGY

(a) Type of research

(b) Sources of data collection

(c) purpose of study

(d) Objective of the study

(e) Limitation

(4) Introduction to the topic

(a) Introduction of financial derivatives


(b) Type of financial derivatives
(c) Derivatives introduction in India
(d) Introduction to currency derivatives
(e) Utility of currency derivatives

(5) Brief overview of the foreign exchange market in India

(a)overview of foreign exchange market in india


(b) Currency derivatives product
(c) Foreign exchange spot market
(d) Foreign exchange quotation
(e) Trding and process settlement process
(f) Regulatory framework for currency future

(6) Conclusion

(7) Refrence

INTRODUCTION
Each country has its own currency through which both
national and international transaction are
performed.All the international business transaction involve
an exchange of one currency for another.
For example
If any Indian firm borrow funds from international
financial market in USdollars for short or long term then at
maturity The would be refunded in particular agreed
currency along with accrued interest on borrowed money , it
means that the borrowed foreign currency brought in the
country will be converted into Indian currency , and when
borrowed fund are paid to the lender then the home
currency will be converted into foreign lenders currency.
Thus the currency units of a country involve an exchange
of one currency for another. The price of one currency in
terms of other currency is knows as exchange rate. The
foreign market of a country provide the mechanism of
exchanging different currencies with one and another., and
thus , facilitating transfer of purchasing power from one
country to another . with the multiple growths of
international trade and finance all over the world , trading in
foreign currencies has grown tremendously over the several
past decade .

Since the exchange rate are continuously changing , so the


firms are exposed to the risk rate movement . As a reasult
the assets or liability or cash flows of a firm which are
denominated in foreign currencies undergo a chabge in
value over a period of time due to variation in exchange
rate. This variability in the value of asset or liability or cash
flows is referred to exchange rate risk has become
substantial for many business firms. As a result these firm
increasingly turning to various risk hedging prduct.
LITERATURE REVIEW
This paper defines derivatives as financil instrument such as
option, future, forward and
swap that are derived from their underlying currencies. The
retrun on
derivatives are tied to yield of these underlying securities
and currencies. This paper detail the essential role the
derivatives market plays in the global economy in countries
such as Asia, Germany and Switzerland, in which these
economies reap substantial growth rate due to these
financial practices. The writer contend that with the
presence of this market the financial condition of business
entities are stabilized and secure from the possibility of
hedge currency risk. The derivatives market also decrease
the amplitude in the fluctuation of spot prices and promote
optimal funds placing. The research stress the importance in
the implimention and development of the currency
derivatives market as a necessary prerequisite for the groth
of international trade volume , expansion of foreign
investment and for the genral development economy.

RESERCH METHODOLOGY
TYPE OF RESEARCH

Descriptive research methodology were use.

The research methodology adopted carrying out the study


was at the first stage theoretical study is attempted and at
the second stage observed online trading on NSE\ BSE.

SOURCES OF DATA COLLECTION

Secondary data were used such as various book , report


submitted by RBI\ SEBI Committee and NCFM\ BCFM
module

Purpose of the study

Currency base derivatives are used by exporters invoicing


receivables in foreign currency willing to protect their
earning from the foreign currency depreciation by locking
the currency conversion rate at a high level . their use by
importers hedging forogn currency paybles is effectives
when the payment currency expacted to appreciated and the
importer would like to guarantee . a lower conversion rate .
investor in foreign currency denominated securities would
like to secure strong foreign earning by obtaing the right to
foreign currency at a conversion rate , thus defending their
revenue from the foreign currency depreciation.

OBJECTIVES OF THE STUDY


To differentiate risk and allocate it to those investor most
able and willing to take it.

To provide the right platform for the trading in currency


future .

To show how currency future cover ground in comparision


with other available derivatives instrument and provide
awarness in market and attract the investors.

The basic idea behind undertaking currency derivatives


product to gain knowledge about currency future market.

TO study the basic concept of currency future.

TO study the exchange traded currency future.

TO understand the practical consideration and wars of


consideration currency future price.

TO analze different currency derivatives product.

LIMITATION

The analysis is purely base on the secondary data, so any


error in the secondary data might also affect the study

INTRODUCTION TO THE TOPIC


INTRODUCTION OF FINANCIAL DERIVATIVES

A word formed by derivation. It means, thus word has been


arisen by derivation

Something derived , it means that something have to be


derived or arisen out of the underlying variables . A
financial derivatives is an indeed derived from the financial
market.

A very simple example of derivatives is curd, which is


derivative of milk . The price of curd depends upon the
price of milk , which in trun depends upon the demand and
supply of mlk.

TYPE OF FINANCIAL DERIVATIVE

Financial derivatives are those assets whose values are


determined by the value of some other asset, called as the
underlying , presently these are cmplex varieties of
derivatives already in existence and the market are
innovating newer and new ones continuously. In the simple
form the derivatives can be classified into different
categories , which are shown below.

Financial (basic) Comodities


(complex)
Forwards swaps

Future exotics(non std)

Options

Warrants and convertibles

Derivatives introduction in india

The first step forward introduction of derivatives trading in


India was the promulgation of the security law
(amendment) ordinance ,1995 ,which withdraw the
prohibition on option in security. SEBI set-up a 24 –
member
Committee under the chairmanship of DR. L.C.GUPTA on
November 18, 1996 to develop appropriate regulatory
framework for derivting in India , submmited its reports on
march 17,1988. The committee recominded that the
derivatives should be declared as securities , so that
regulatory framework applicable to trading of , security,
could also govern trding of derivatives .
To begin with, SEBI approved trding in index future
contract based on S&P CNX NIFTY and BSE 30
(SENSEX) INDEX.
The trading in index option commenced in june 2001 and
the trading in option on individual security securities
commenced in july 2001.Future contracts on individual
stocks were launched in November 2001.

Introduction to currency future


Future as contrcts is a standardized contracts, traded on
exchange, to buy or sell a underlying asset or an
instrument data certain date in the future at a specified price
.When the underlying assets is commodities,e.g oil or
wheat ,the contract is termed a currency at a specified date
and specified rate in the future .
Therefore the buyer and seller lock themselves into an
exchange rate for a specific value or delivery date . Both
parties of the future contracts must fall their obligation on
the settlement date . Currency can be cash settled or s
ettled by delivery the respective obligation of seller and
buyer, all settlement however , unlike in the case of OTC
markets go through the exchange

UTILITY OF CURRENCY DERIVATIVES

Currency –based derivatives are used by exporter


invoiceing receivables in foreign currency , willing to
protect their earning from the foreign currency depreciation
by looking the currency conversion rate at the high leval.
Their use by importer hedging foreign currency paybles is
effectives , when the payment currency is expacted to
appreciate and the importers would like to secure strong
foreign earning by obtaining the right to sell foreign
currency depreciation . Multinational companies use
currency derivatives being engaged in direct investment.
A high degree of volatility of exchange rate creates a
fertiles ground for foreign exchange , speculator objectives
is to guarantee a high selling rate of a foreign currency by
obtaining a derivatives markets contracts while hoping to
buy the currency at low rate in future.
BRIEF OVERVIEW OF THE FOREIGN EXCHANGE
MARKET IN
INDIA

OVERVIEW OF THE FOREIGN EXCHANGE MARKET


IN INDIA

During the early 1990s , India embarked on a series of


structura in reform in the foreign exchange 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 instrument in
developing a market determined exchange rate of the rupee
and was an important step in the process toward total
current account convertibility, which was achived in august
1994. although liberlalization helped the Indian forex
market in various ways , it led to extensive fluctuation of
exchange rate . this issue has attracted a great deal of
concern from policy- makers and investor. While some
flexibility in foreign exchange markets and exchange rate
determination is desirable , excessive volatility can have an
adverse impact on price discovery , export performance ,
sustainability of current account balance , and balance sheet
. in the context of upgrading Indian foreign market to
international standard , well-developed foreign derivatives
markets(both OTC aswell as exchange traded ) is
imperative .RBI on april 20, 2007 issued comprehensive
guidelines on the usage of foreign currency forwards ,
swaps and option in the OTC market.

CURRENCY DERIVATIVES PRODUCT


Derivative contracts have several variants. The most
common variants are forward , future, option and swap. We
take a brief look at various derivatives contracts that have
come to be used.

FORWARD

The basic objective of a forward market in any underlying


assets is to a fix a PAprice for a contract to be carried
through on the future agreed date and is intended to free
both the purchaser and the seller from any risk of which
might incur due to fluctuation in the price of underlying
asset.

FUTURE

A currency future contracts provides a simultaneous right


and obligation to buy and sell a particular curreny at a
specified future date , a specified price and a standard
quantity . in another word, a future contracts is an
agreement between two parties to buy or sell an asset at a
certain time in the future at acertain price . future
contractsbare special type of forward contracts in the sence
that they are standardized exchange traded contract.
SWAP

Swap is a private agreement between two parties to


exchange cashflow in the future according to prearranged
formula . they can be regarded as portfolio of forward
contracts . the currency swap entail swapping both principal
and interest between parties , with the cashflow in one
direction being in a different currency than those in the
opposite direction . there are various type of currency swap
like as fixed to fixed acurrency swap , floating to floating
swap, and fixed to floating swap.

OPTION

Currency option is a financial instrument that gives the


option holder a right and not the obligation to buy or sell a
given amount of foreign exchange at a fixed price per unit
for specified time period (until the expiration date) .in the
other word , a foreign currency option is a contracts for
future delivery of a specified currency in exchange for
another in which buyer of the option has to right to
buy(call) or sell(put) a particular currency at an agreed price
for or within specified period.

FOREIGN EXCHANGE SPOT (CASH ) MARKET

The foreign exchange spot market trades indifferent


currencies for both spot and forward delivery .generally
they do not have specific location , and mostly take place
primarly by means of telecommunication both within and
between countries . it consist of a network of foreign dealer
which are oftenly banks , financial institiuation , large
concern etc. the large banks usually make market in
different currencies . in the spot exchange market, the
business is transacted throughout the world on a continual
basis . so it is possible to transaction in foreign exchange
market 24 hours a day . the standard settlement period in
this market is 48 hours . i.e. 2 days after the execution of
transaction . the spot foreign exchange market is similar to
the OTC market for securities . there is no fixed opening
and closing time . since most of the business in this market
done by bank, hence transaction usually do not involve a
physical transfer of currency , rather simply book keeping
transfer entry among bank.

FOREIGN EXCHANGE QUOTATION

Foreign exchange quotation can be confusing because


currencies are quoted in terms of other currencies . it means
exchange rate is relative price.

For example
If one US doller is worth of RS 45 indian rupees than it
implies that 45 indian rupees will by one doller of USA
doller , or that one rupee is worth of 0.022 USA doller.
Which is simply reciprocal of the former doller exchange
rate.
Exchange rate
Direct
Indirect
The number of unit of domestic
The number of unit of foreign
Currency stated against one unit

There are two ways of quatating exchange rate , the direct


and indirect . most country use the direct method . in
global foreign exchange market , two rate are quoted by
dealer , one rate for buying (bid rate ) and another rate for
selling (ask or offered rate) for a currency.

TRADING PROCESS AND SETTLEMENT PROCESS

Like other future trading , the future currencies are also


traded at organized exchange .
It has been observed that in most future markets actual ,
physical delivery of underlying asset is very rare and hardly
it ranges from 1percent to 5 percent. Most often buyers and
sellers offset orginal position prior to delivery date by
taking on opposite position. This is becoz most of future
contracts in different products are predominantly
speculative instrument. For example , x purchage American
doller future and y sell it. It lead to two contracts , first, x
party and clearing house and second y party and clearing
house. Assume next day x sell same contracts to z, then x is
out of the picture and the clearing house is seller to z, and
buyer from y , hence , this process is goes on.

REGULATORY FRAMEWORK FOR CURRENCY


FUTURE

With a view to enables entities to manage volatility in the


currency market .RBI on april 20, 2007 issued
comprehensive guideline on the usage of foreign currency
forward, swap and option in the OTC market . At same time
RBI also setup an intended working group to explore the
advantage of introducing currency futures.

The terms of refrence to the committee was as under-

-To coordinate the regulatory roles of RBI and SEBI in


regard to trading of currency and interest rate future on
exchange.
-To suggest eligibility criteria for the member of such
exchange.
-To suggest the eligibility norms for currency and interest
rate future trading.
CONCLUSION

By far the most significant event in finance during the past


decade has been the extraordinary development expansion
of financial derivatives. These instrument enhance the
ability to differentiate risk and allocate it to those investors
most able and willing to take it- a process that has
undoubtly improved national productivity , groth and
standard of living.

The currency future gives the safe standardized contracts to


its investors and individual are aware about the forex
market or predict the movement of exchange rate so they
will get the right plateform forh the trading in currency
future .

Initially NSE had the permission but now BSE and MCX
has also started currecy future , it is show that how currency
future cover ground in the compare of other derivatives
instrument . not only big businessmen and exporter importer
use this but individual who are interested and having
knowledge forex market they can also invest in currency
future.
REFERENCE

Books and journals

Financial derivatives (theory , concept and problem) by S L


GUPTA

NCFM : Currency future module

BCFM : Currency future module

Report of the RBI- SEBI standing committee on exchange


traded currency future , 2008

Report of the internal working group on currency future


(Reserve bank of India ,april 2008)

Website
www.sebi.gov.in
www.rbi.org.in
www.bseindia.com
www.nseindia.com
www.economywatch.com