This action might not be possible to undo. Are you sure you want to continue?
(A STUDY OF CURRENCY DERIVATIVE IN INDIA)
CHOOSE TO KNOW SUBMITTED FOR MBA PROGRAM UNDER THE SUPERVISION OF
(DR. VIQAR ALI BAIG)
SUBMITTED TO: LINGAYAS UNIVERSITY
SUBMITTED BY: KUMUD R.MISHRA
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 .
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. so the firms are exposed to the risk rate movement . Since the exchange rate are continuously changing . 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 . LITERATURE REVIEW .Each country has its own currency through which both national and international transaction are performed. As a result these firm increasingly turning to various risk hedging prduct. and thus .All the international business transaction involve an exchange of one currency for another. 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. Thus the currency units of a country involve an exchange of one currency for another. The foreign market of a country provide the mechanism of exchanging different currencies with one and another.. and when borrowed fund are paid to the lender then the home currency will be converted into foreign lenders currency. The price of one currency in terms of other currency is knows as exchange rate. with the multiple growths of international trade and finance all over the world . it means that the borrowed foreign currency brought in the country will be converted into Indian currency . trading in foreign currencies has grown tremendously over the several past decade . facilitating transfer of purchasing power from one country to another .
expansion of foreign investment and for the genral development economy. The derivatives market also decrease the amplitude in the fluctuation of spot prices and promote optimal funds placing. 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 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 . The retrun on derivatives are tied to yield of these underlying securities and currencies. in which these economies reap substantial growth rate due to these financial practices. RESERCH METHODOLOGY .This paper defines derivatives as financil instrument such as option. future. forward and swap that are derived from their underlying currencies. This paper detail the essential role the derivatives market plays in the global economy in countries such as Asia. Germany and Switzerland.
TYPE OF RESEARCH Descriptive research methodology were use. 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 . thus defending their revenue from the foreign currency depreciation. 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 . their use by importers hedging forogn currency paybles is effectives when the payment currency expacted to appreciated and the importer would like to guarantee . OBJECTIVES OF THE STUDY . SOURCES OF DATA COLLECTION Secondary data were used such as various book . 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.
The basic idea behind undertaking currency derivatives product to gain knowledge about currency future market. TO study the basic concept of currency future. LIMITATION The analysis is purely base on the secondary data. To provide the right platform for the trading in currency future .To differentiate risk and allocate it to those investor most able and willing to take it. TO analze different currency derivatives product. TO understand the practical consideration and wars of consideration currency future price. To show how currency future cover ground in comparision with other available derivatives instrument and provide awarness in market and attract the investors. TO study the exchange traded currency future. so any error in the secondary data might also affect the study INTRODUCTION TO THE TOPIC .
A financial derivatives is an indeed derived from the financial market. called as the underlying . The price of curd depends upon the price of milk . which are shown below. thus word has been arisen by derivation Something derived . In the simple form the derivatives can be classified into different categories . presently these are cmplex varieties of derivatives already in existence and the market are innovating newer and new ones continuously. It means. 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. Financial (basic) (complex) Comodities . which is derivative of milk .INTRODUCTION OF FINANCIAL DERIVATIVES A word formed by derivation. A very simple example of derivatives is curd. it means that something have to be derived or arisen out of the underlying variables .
could also govern trding of derivatives .which withdraw the prohibition on option in security.1988.Forwards Future Options Warrants and convertibles Derivatives introduction in india swaps exotics(non std) The first step forward introduction of derivatives trading in India was the promulgation of the security law (amendment) ordinance .GUPTA on November 18. security. The trading in index option commenced in june 2001 and the trading in option on individual security securities commenced in july 2001. SEBI set-up a 24 – member Committee under the chairmanship of DR. so that regulatory framework applicable to trading of .Future contracts on individual stocks were launched in November 2001. SEBI approved trding in index future contract based on S&P CNX NIFTY and BSE 30 (SENSEX) INDEX. 1996 to develop appropriate regulatory framework for derivting in India . Introduction to currency future . L. The committee recominded that the derivatives should be declared as securities .1995 . To begin with. submmited its reports on march 17.C.
g oil or wheat . Both parties of the future contracts must fall their obligation on the settlement date .e. 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. 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 .When the underlying assets is commodities. . Therefore the buyer and seller lock themselves into an exchange rate for a specific value or delivery date . to buy or sell a underlying asset or an instrument data certain date in the future at a specified price . 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. traded on exchange. all settlement however . Currency can be cash settled or s ettled by delivery the respective obligation of seller and buyer.the contract is termed a currency at a specified date and specified rate in the future . A high degree of volatility of exchange rate creates a fertiles ground for foreign exchange .Future as contrcts is a standardized contracts. willing to protect their earning from the foreign currency depreciation by looking the currency conversion rate at the high leval.
The exchange rate regime . which was achived in august 1994. sustainability of current account balance . swaps and option in the OTC market. that was earlier pegged . it led to extensive fluctuation of exchange rate . well-developed foreign derivatives markets(both OTC aswell as exchange traded ) is imperative .BRIEF OVERVIEW OF THE FOREIGN EXCHANGE MARKET IN INDIA OVERVIEW OF THE FOREIGN EXCHANGE MARKET IN INDIA During the early 1990s . While some flexibility in foreign exchange markets and exchange rate determination is desirable . and balance sheet . although liberlalization helped the Indian forex market in various ways . this issue has attracted a great deal of concern from policy. 2007 issued comprehensive guidelines on the usage of foreign currency forwards . in the context of upgrading Indian foreign market to international standard . India embarked on a series of structura in reform in the foreign exchange market. excessive volatility can have an adverse impact on price discovery .RBI on april 20.makers and investor. export performance . CURRENCY DERIVATIVES PRODUCT . 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. was partially floated in march 1992 and fully floated in march 1993.
there are various type of currency swap . with the cashflow in one direction being in a different currency than those in the opposite direction . 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. SWAP Swap is a private agreement between two parties to exchange cashflow in the future according to prearranged formula . a specified price and a standard quantity . future. 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 . they can be regarded as portfolio of forward contracts . The most common variants are forward . We take a brief look at various derivatives contracts that have come to be used. FUTURE A currency future contracts provides a simultaneous right and obligation to buy and sell a particular curreny at a specified future date . future contractsbare special type of forward contracts in the sence that they are standardized exchange traded contract. the currency swap entail swapping both principal and interest between parties .Derivative contracts have several variants. option and swap.
like as fixed to fixed acurrency swap . FOREIGN EXCHANGE SPOT (CASH ) MARKET The foreign exchange spot market trades indifferent currencies for both spot and forward delivery . since most of the business in this market done by bank. and mostly take place primarly by means of telecommunication both within and between countries . the spot foreign exchange market is similar to the OTC market for securities . 2 days after the execution of transaction . 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) . it consist of a network of foreign dealer which are oftenly banks .e.generally they do not have specific location . hence transaction usually do not involve a . floating to floating swap. there is no fixed opening and closing time . the large banks usually make market in different currencies . the standard settlement period in this market is 48 hours . 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 . 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. large concern etc. i.in the other word . financial institiuation . in the spot exchange market. and fixed to floating swap.
it means exchange rate is relative price. TRADING PROCESS AND SETTLEMENT PROCESS Like other future trading .physical transfer of currency . two rate are quoted by dealer . 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 . most country use the direct method . the future currencies are also traded at organized exchange . Which is simply reciprocal of the former doller exchange rate. . 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. one rate for buying (bid rate ) and another rate for selling (ask or offered rate) for a currency. in global foreign exchange market . rather simply book keeping transfer entry among bank.022 USA doller. FOREIGN EXCHANGE QUOTATION Foreign exchange quotation can be confusing because currencies are quoted in terms of other currencies . the direct and indirect .
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. swap and option in the OTC market . physical delivery of underlying asset is very rare and hardly it ranges from 1percent to 5 percent. x purchage American doller future and y sell it. . This is becoz most of future contracts in different products are predominantly speculative instrument.RBI on april 20. REGULATORY FRAMEWORK FOR CURRENCY FUTURE With a view to enables entities to manage volatility in the currency market . It lead to two contracts . At same time RBI also setup an intended working group to explore the advantage of introducing currency futures. Most often buyers and sellers offset orginal position prior to delivery date by taking on opposite position. then x is out of the picture and the clearing house is seller to z. Assume next day x sell same contracts to z. For example . 2007 issued comprehensive guideline on the usage of foreign currency forward. first. x party and clearing house and second y party and clearing house. and buyer from y . hence . -To suggest the eligibility norms for currency and interest rate future trading.It has been observed that in most future markets actual . -To suggest eligibility criteria for the member of such exchange. this process is goes on.
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 . 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. 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 . 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 .CONCLUSION By far the most significant event in finance during the past decade has been the extraordinary development expansion of financial derivatives.
economywatch.rbi.in www.com www.nseindia.bseindia.in www.com www.com .org.gov.sebi.april 2008) Website www. concept and problem) by S L GUPTA NCFM : Currency future module BCFM : Currency future module Report of the RBI.REFERENCE Books and journals Financial derivatives (theory . 2008 Report of the internal working group on currency future (Reserve bank of India .SEBI standing committee on exchange traded currency future .
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.