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NPTEL

International Finance
Vinod Gupta School of Management, IIT.Kharagpur.

Module - 9
Foreign Exchange Contracts:
Spot and Forward Contracts

Developed by: Dr. Prabina Rajib
Associate Professor (Finance & Accounts)
Vinod Gupta School of Management
IIT Kharagpur, 721 302
Email: prabina@vgsom.iitkgp.ernet.in

Joint Initiative IITs and IISc – Funded by MHRD -1-

NPTEL
International Finance
Vinod Gupta School of Management, IIT.Kharagpur.

Lesson - 9
Foreign Exchange Contracts:
Spot and Forward Contracts

Highlight & Motivation:

Forex market players can trade foreign exchange in differing maturities and using
different types of instruments i.e, cash, tom, spot, forward, futures, swaps and options
market. In this session, different aspects spot, forward and futures contracts are
discussed. The difference between forward contract and futures contracts is also part of
this session. Different dimensions of contract specification of futures contract traded at
National stock exchange have also been elaborated.

Hence the objective of this module is to understand:
• Cash, Tom, Spot trading

o Trade date, settlement date

o Spot trading rollover mechanism.

• Foreign Exchange Forward contracts

o Fixed maturity contract

o Partially optional contract

o Fully optional contract

o Non-delivery forward contracts.

• Foreign Exchange Futures Contract

o Different dimensions of foreign exchange future contract specification

trading at National Stock Exchange of India.

Joint Initiative IITs and IISc – Funded by MHRD -2-

On settlement/value date. It can “ at that instance” can go upto maximum of two days. When buyers and sellers agree to trade at the current exchange rate for immediate delivery. 9. Section 9. Similarly in the interbank market. Normally the hotel/antique shops will have a display board mentioning different INR rates for different currency. the delivery under a spot transaction can be settled as ready/cash. Tom or Spot as given in Table 9.2: Spot forex transactions: When a person goes to money changer/bank and buys one currency by paying another currency is an example of spot transaction (or spot delivery) and the rate quoted by the money changer/bank is the spot rate. spot forex trading can either be categorized as cash. the buying or selling actions will be realized by settlement of payment and receipt.Kharagpur. However. banks & financial institutions buy and sell currencies at a rate prevailed on the trade date.2 the spot transactions details are elaborated. For example. In forex market parlance. Depending upon the gap between trade and value date. In the next section. some hotels buy or sell foreign currency over the counter. IIT. The settlement date/value date is the day on which funds are actually transferred between the buyer and seller. forward contracts. settlement date is narrowing down to trade date. Joint Initiative IITs and IISc – Funded by MHRD -3- . In India. This is an example of cash transaction where the trade date and settlement date coincide. The word “immediate” has different meaning in this case.1: Introduction: Forex rates can be quoted as spot or. Any guest visiting the hotel can buy or sell foreign currency at the rate displayed on the board. With the advance in communication technology and electronic fund transfer mechanism. the actual settlement for the agreed amount may take place on T+1 or latest by T+2 days.NPTEL International Finance Vinod Gupta School of Management.1. in India. the trade date is the day on which both parties agree to buy and sell. 9. tom or spot transaction. it is known as spot transaction or cash transaction.

even for weekends. For example.e. Hence. but gets rolled over. Hence. 9. By providing rollover facilities. it can be understood that the trader has given a loan of INR 47680 to the broker. A trader receives interest on the currency that has been bought and pays interest for the currency that has been sold. the trader pays USD 1000 and receives INR 47680. Interest is calculated every day i. For deferring the settlement. a trader has entered into a spot transaction to sell USD 1000 to a forex broker and receive INR 47680. Depending on the prevailing interest rate in the respective currencies. the broker has given a loan of USD 1000 to the trader. net interest is either added or subtracted from traders account. Table 9. (on Day 3). settlement for spot/tom transactions may not happen on the T+1 or T+2. Spot Delivery of foreign exchange would take place on the 2nd working day from the trade date. By deferring the settlement. actual delivery of one currency and receipt of other currency happens between two parties.3: Roll over of Spot/Tom contract: Many-a-times. forex brokers pay or receive interest from the trader. Hence both owe each other interest for 2-days. the trader should deliver USD 1000 and take INR 47680. In a typical spot/tom transaction. forex brokers allow these speculators to rollover the contracts. They do not trade with the intention of delivering (the currency they have sold) or receiving currency (the currency they have bought).Kharagpur. This goes on until the trader squares up his open position. the trader sells USD and buys INR. Joint Initiative IITs and IISc – Funded by MHRD -4- . In other words. IIT. on Day 5. However.1: Different types of delivery/settlement under spot transaction. Ready or cash The transaction to be settled on the same day Tom The delivery of foreign exchange to be made on the day next (tomorrow) to the date of transaction. but wants to make profit from speculation. On the settlement day. most forex traders are speculators. Rollover delays the actual settlement of the trade and it goes on until the trader closes its position. However. both the trader and the broker agree not to settle but defer the settlement by another two days. forex brokers also earn significant brokerage fee. Simultaneously.NPTEL International Finance Vinod Gupta School of Management. on Day 1.

a short USD/JPY position will incur an interest charge as one is effectively "short" US Dollars and "long" Japanese Yen. a negative 3% difference. the seller must deliver 10. Hence the trader’s receipt would be (INR 20. either the trader or the broker pays interest rate differential.NPTEL International Finance Vinod Gupta School of Management.com/2policy_rollover_interest. if they are long then their account will be credited. For example. Rollover & Interest Policy In the spot forex market trades settle in two business days.5%. As a service to our traders. Box 9. Hence. if a trader is "short" the currency bearing the higher interest rate then their account will be debited. For providing this roll over facilities.9) and payment Joint Initiative IITs and IISc – Funded by MHRD -5- .Kharagpur.000 Euros on Tuesday. Forex brokers and traders enter into an agreement that forms the basis for the rollover facility provided by brokers.000 Euros on Thursday unless the position is held open and "rolled" over to the next value date.1: Rollover & Interest Policy for spot forex trades. the brokers charge different types of margins. The trader should receive INR interest for two days and pay USD interest for 2 days. The Box 9.5% while Yen rates are around 0. the broker pays interest rate on INR 47680 for two days. In the majority of cases. Source: http://www.html iFinix Forex policy statements provide our clients with the utmost in transparency and client service in order to maximize their Forex trading experience. Rollover or "cost-of-carry" involves the applying of a daily debit or credit to a trading account based on positions held open at 17:00 Eastern Time and on the interest differential between the two currencies in the pair(s) being traded. iFinix Forex automatically rolls over all open positions to the next settlement date at 17:00 Eastern Time. Let us go back to our example of forex trader and forex broker. After two days. Similarly. The interest payment and receipt is netted off. Dollar short-term interest rates are currently at 3. If a trader sells 10.ifinixforex. Monday through Friday each week. This interest differential forms the basis of the daily premium debit/credit which is applied to all open trades at 17:00 Eastern Time. the trader pays interest rate on USD 1000 for two days. Suppose interest per annum in INR is 8% while that of USD is 4%. IIT.1 highlights the policy statements regarding rollover and interest rate for rollover spot transaction of iFinixforex brokers. The trader has given a loan of INR 47680 and taken a loan of USD 1000.

The word “immediate” has different meaning in this case. More details about forward premium and discount aspects are discussed in Session 14. Trader’s payment in INR terms is INR 10.1 month rate. In a Fixed Maturity Contract.465. Such types of forward contracts are known as outright forward contracts (OFTs). The settlement date is the day on which funds are actually transferred between the buyer and seller.Kharagpur. The rate is fixed on the trade date and the rate is be known as Fwd. may enter into a contract today ( trade execution date) to sell Euro and receive Indian Rupees after 1 month ( maturity date). With netting off the trader receives INR10. On the maturity date. IIT. As forward contracts are OTC contracts. both parties exchange the pre- negotiated rate.e. Euro on account of an export order after one month. the trade date is the day on which both parties agree to buy and sell. the maturity date is fixed. the Indian exporter agrees to sell EURO 1000 and receive INR 72450. the terms of the purchase (buy or sell) are agreed up front (trade execution date) but actual exchange take place on a date in the future (maturity date). It can “ at that instance” can go upto maximum of two days. For example. In such type of contract. Partially Optional Contracts provide some flexibility. The payment and receipt happens on the maturity date. trade execution date. option start date and maturity Joint Initiative IITs and IISc – Funded by MHRD -6- . there are three dates. would be (USD 0. On the maturity date. an Indian company which is likely to earn foreign currency i.2191). forward contracts. The OFT exchange rate are quoted as differentials that is at a premium or discount from the spot rate. Forex rates can be quoted as spot or. he delivers EURO 1000 and receives INR 72450. Suppose the INR/US$ rate is INR 47. In forex market parlance.435.NPTEL International Finance Vinod Gupta School of Management.75 on day 2. Forward contracts can be many types depending on the rigidness associated with the maturity date. Suppose on trade date. then the base currency will trade at a forward premium or above the spot rate. For example. it is known as spot transaction or cash transaction. When buyers and sellers agree to trade at the current exchange rate for immediate delivery. if the base currency earns a lower interest rate than the term currency.4: Forward forex transactions In a forward contract both parties enter into a contract on a given day and lock in a fixed rate on specific future date. In such types of contract. 9. there are many variants to it.

Figs. date. In other words. Joint Initiative IITs and IISc – Funded by MHRD -7- . the parties can settle the transaction any time during the option start date and on before maturity date. the maturity date spans across days rather than a single day.Kharagpur. the contract may end anytime during the life of the contract i. Like the spot contracts. In Fully Optional Contract. Execution Maturity Date Date Fig 9(a) Fixed Maturity Contract Execution Option start On or Before Date Date Maturity Date Fig 9(b) Partially Option Contract Execution Option start On or Before Date Date Maturity Date Fig 9(c) Fully Optional Contract Almost all banks provide the forward contracts to their clients. as long as both parties agree. the actual settlement happens within two-business day from the maturity date. As these are OTC contracts.e.9(a). In addition. IIT. On the trade execution date.NPTEL International Finance Vinod Gupta School of Management. There is no standard clause regarding the duration of the forward contract. in this contract. anytime during trade execution date and maturity date. in forward contracts. partially optional contracts and fully optional contract respectively. The forward contract duration can go as long as 2 years into future. forward contract maturity can be of any duration. 9(b) and 9(c) graphically represents fixed maturity contract. two parties agree to exchange and the rate of exchange is fixed.

Joint Initiative IITs and IISc – Funded by MHRD -8- .Kharagpur. the contract can be cancelled by settling the difference in exchange between the forward contract rate and current day’s spot rate. On Day 1. Banks charge an extension margin to the original rate negotiated. an Indian importer had entered into a forward contract with a bank to buy USD after 3 months.75 with XYZ bank. Forward contracts can be closed early. Similarly forward contract maturity date can be extended. the Indian exporter delivers 1000 and receives INR 46750. after 15 days of entering the forward contract. For example. these flexibilities in forward contracts (closing early. If an importer wants to extend the maturity date. he has to buy the foreign currency from the spot market and delivers it to the bank on the maturity date. the bank still fulfills the commitment and delivers the USD to the importer and receives INR for the extended date. (who has entered into a contract to sell USD forward) cannot abide by the contract. one party gains at the cost of other. However. Forward contracts can also be cancelled. the Indian exporter agrees to sell USD 1000 and receive INR 46750. The following example highlights this aspect. extended or cancelled altogether. parties in a foreign currency forward contract cannot unwind their position. These options are exceptions rather than norms. If the exporter agrees with the new rate. suppose an Indian exporter expecting to receive USD1 mn after a year. Normally. If the importer/exporter can not use the forward contract. the importer wants to shorten the contract duration as it has to prepay USD to the US company for some reason. The importer asks the bank to predeliver the contract. However. extension and cancellation) may vary form bank to bank and from client to client in a bank. In case. The bank may quote an amended forward rate. On the contract maturity date.75. IIT. Suppose on trade date. enters into 1-yaer forward contract at INR 46. The exporter is expecting that without the contract he may have to sell USD at rate lesser than INR 46. Both exporter and bank enter into another fresh forward contract for the extended maturity period. then the old contract is cancelled and some fee charged.NPTEL International Finance Vinod Gupta School of Management. On the maturity date. But it comes with some cost. an exporter.

The exporter has taken a long forward position and the bank has takes the short forward position. Figure 9(d) and Figure 9(e) explains the zero sum game.2 explains the difficulties faced by Indian exporters who had entered into the forward contract.Kharagpur. the exporter is benefiting compared to an unhedged position. IIT. The following Economic Times article. These two figures should be mirror image of each other. the exporter looses and the bank gains. On the expiry date. 9.NPTEL International Finance Vinod Gupta School of Management. An exporter and a bank enter into the forward contract where the exporter agrees to buy INR (of course sale USD) at a price of INR 46. if the spot rate is greater than INR 46. In a similar token.75/ USD INR 46. given in Box 9. the exporter gains.75.(d) Exporter’s Payoff Fig 9.75/USD Fig.(e) Bank’s Payoff Forward contracts are zero-sum game. With a forward contract.75. an Indian importer benefits if INR depreciates after the forward contract rate has been decided.75. If the spot rate were higher than INR 46. then the exporter would have been better off without the contract. INR 46. on the expiry date. Similarly. but ended up incurring significant loss as their expectation regarding future exchange rate was quite off the mark!. Joint Initiative IITs and IISc – Funded by MHRD -9- . if the spot rate would be lesser than INR 46.75.

” Leading technology companies have already begun switching over to options. Now. say a quarter or two. which tie exporters to a preset deal. wherein the company has a fair idea of how much its expenses would be. the options function as insurance cover. “Over the past two-three quarters. with the rupee weakening. But for many. But unlike stock options. we have witnessed a shift in our hedging structure. Box 9. Forward contracts to sell the rupee at a fixed rate is leaving little opportunity for exporters to make money even though the exchange rate has swung the other way. the latest trend is for exporters in IT and pharma sectors to unwind these forward agreements and to go in for currency options instead. IIT.Kharagpur.” Joint Initiative IITs and IISc – Funded by MHRD . there have been no gains.indiatimes.prtpage-1. as in for payments expected over two-three years. companies have to pay a premium to acquire a currency option. These are somewhat similar to employee stock options. Companies need to exercise their option to sell dollars in the future only if the deal rate is favourable compared with the prevailing market rate. “Entering into a forward contract limits the company’s ability to protect its revenues. http://economictimes. Majority of our hedges now are in the form of option instruments. Says Patni Computer Systems chief financial officer Surjeet Singh. these contracts are now tying corporates to unprofitable exchange rates. This is a good strategy in times of high exchange rate volatility. 23rd July 2008.com/articleshow/msid-3266587. Leading exporters unwinding forward contracts The Economic Times.10 - . Such contracts are good only for a short period.cms A 10% dip in the value of the rupee against the dollar in three months should have resulted in windfall profits for exporters. Unlike forward contracts. moving away from forwards.NPTEL International Finance Vinod Gupta School of Management. which allow employees to buy equity shares at a fixed price.2. In 2007. However. Says TCS chief financial officer S Mahalingam. hit by a 13% rise in the value of the rupee. many exporters entered into forward contracts even for long-term receivables.

75/USD.1: Non-Delivery Forward Contract: A special type of forward contract is known as Non-Deliverable Forward (NDF) contract. fixing date etc. Suppose the spot rate on the fixing date is INR 47. For example. If. Suppose the fixing date is 1 week before the maturity date of six months. In an NDF. the bank would pay the netted amount to the importer. In an NDF. settlement amount is always in the convertible currency.35/USD. the importer bought USD1 mn at an INR 48. highlights the impact of NDF contracts traded outside India and its impact on INR/USD exchange rate.20/USD. one week before the maturity date.e. no exchange of foreign currency takes place. In the above example. On the fixing date i.11 - . USD1 mn is the notional principal amount.NPTEL International Finance Vinod Gupta School of Management. though USD leg of the contract is “not delivered” but actually.4: Non delivery Forward Contract: 9.3. IIT. are agreed by both parties on the trade execution date. the forward exchange rate. These two rates will govern the NDF settlement on the maturity date. Joint Initiative IITs and IISc – Funded by MHRD .35/USD and selling back to the bank USD 1 mn of INR 47. NDFs are cash-settled and the settlement is done by calculating the difference between agreed upon forward rate and spot rate on the settlement date for an agreed upon notional amount of funds. an importer and a bank enter into an agreement where the importer would buy USD 1mn.Kharagpur. Hence the importer pays INR 600. the prevailing spot exchange rate is compared with the agreed forward exchange rate. the principal amount.000 to the bank. six months from today by paying a negotiated rate of INR48. the amount settled is always in a “convertible currency” like USD. As most of the trading in NDF happens in offshore centers. the exchange rate would have been INR 49. 5.75/USD.000 (the netted off amount). on fixing date. the importer pays INR 600.Both payment and receipt are netted off and on the maturity date. In effect.4. Details given in Box 9.

Rupee hit by an invisible force. at forex consultant Mecklai & Mecklai. Contracts can range from one week to a year and Indian deals are mostly done in markets such as Hong Kong.NPTEL International Finance Vinod Gupta School of Management.or "arbitrage" –– the difference in the domestic forward rate and the NDF rate. a fall of nearly 8%. "NDF arbitrage has without doubt played a crucial part in the rupee weakness. But it's a peculiar situation because the rupee is not fully convertible here. sell equivalent dollars abroad. For example.65 a month back.Dipti Deodhar. but countries where these trades are settled have fully convertible currencies. such deals are done in currencies that are not fully convertible to take advantage of –. Forex watchers said such deals have primarily pulled the rupee down to 46.05 from 42.70/$1 (46. because such trades are not sanctioned by the Reserve Bank of India. which is the difference between both the rates. the same forward is quoting at INR 47. Joint Initiative IITs and IISc – Funded by MHRD ." said a senior official of the Foreign Exchange Dealers Association of India. manager risk advisory. so that on the delivery date they make a profit or loss. Indian diamond companies with offices in markets like Hong Kong are also trading in NDF. Illegal." she said. Blame the "illegal" overseas non- deliverable forward (NDF) market. on foreign shores.68/$1 –. in which banks buy forward dollars (book dollars today for delivery at a specified future date) in the local market for their clients and.com/finance/fullstory. A NDF. Also.Kharagpur. simultaneously. DNA MONEY 16th June 2008. as the name suggests. IIT.3. but in Hong Kong. Globally.12 - . or vice-versa. the one-year forward rate in the domestic market is INR46. the RBI can't just go ahead and legalise these trades because it would mean that they are jumping the regulation just because there are some players using this route. Foreign institutional investors pulling out of India have also used this route to hedge bets.a clear arbitrage of 98 paise. http://sify. Box 9. "It's illegal so we can't even talk about it. is a non-deliverable forward contract. Singapore and London (because their time zones match with the dealing room time here).php?id=14759072 An invisible force is stalking the dollar/rupee market and the Reserve Bank of India could do little to stanch the local currency's fast plunge.05 is the rupee rate plus a 65 paise forward premium). said hedge funds and foreign investors have made merry. The RBI can't do anything to stop the trades since they are executed outside its jurisdiction.

maturity period etc.13 - . 9. For any currency.25/INR 45. INR/Euro. Minimum initial Joint Initiative IITs and IISc – Funded by MHRD .1.1 shows the contracts specifications for the INR/USD trading at National Stock Exchange. Annexure 9. IIT. it indicates that the trader has agreed to buy 1000 USD and pay INR 45.5. 12 monthly contracts are available. forex futures contracts on INR/US$. the NDF evolves. For example.25. However being exchange traded. 50/INR45. Base price indicates the theoretical price based on spot rate and interest rate prevailing in both countries (explained later). Tick size of INR0.5. In other words. a trader can enter into a contract to buy/sell futures for August 2011. price quotations can very in multiple of INR 0. Traders also have to pay margins – initial and daily margin as exchanges require all traders to pay margin. Being exchange traded. at a given point of time. Contract cycle of 12 months indicate that a trader can take position maximum upto 12 months. Position limit indicates the maximum open position a trader can take depending on whether a trader is a retail client or a trading member or a bank.250 in future. INR/Pound Sterling and INR/Japanese Yen are traded at some Indian exchanges like National Stock Exchange and United Stock Exchange.25 indicates that.23. In other words.5: Forex futures contract: A exchange traded forward contract is known as futures contract. For example. there is some form of convertibility restrictions. futures contract can be squared off easily which may not be possible in case of forward contract.Kharagpur. Different aspects of the futures contract are given in Section 9. In case of futures contract. the trader is taking position to buy/sell 1000 USD.1: Understanding forex futures contract specification: Unit of trading of USD 1000 indicates that whenever a trader is taking position in 1 futures contract.75 etc. NDF market can also evolve is there is no forward market exists for the currency in the domestic market.25 per USD. Forward contracts are tailor made depending on the requirement of the contract buyers or sellers. but the trader can not quote INR 45. Does NDF market peculiar to INR? Definitely not. futures contracts are standardized – contract size. in the month of August 2011. In India. September 2011 upto July 2012. Price operating range indicates the maximum price variation which can happen on a given day – akin to circuit filter in stock trading. 9. a trader can quote a price of INR45.NPTEL International Finance Vinod Gupta School of Management. if a trader is taking 1 long futures contract at say INR 45. the clearing house associated with exchange takes the counterparty risk – risk that the loss making party does not deliver during the maturity period.

The contract is going to mature after 3 months. Everyday the open positions are also settled based on the settlement price. theoretical price is INR 43. the trader pays.14 - .1) (1+ rUS *T ) Where rIndia and rUS indicates the interest rate in India and Us respectively.. This indicates that the trader is buying 1 USD by paying INR 43. 4 (1 + .Kharagpur. the initial margin. Theoretical price or base price is calculated by taking into consideration the spot price and interest rates associated with a currency pair. On day T+1 day. suppose Indian rupee has appreciated and is quoting at INR 43.08 * ) Forware Rate( FINR / USD ) = INR 43.. a trader takes a long futures position to buy 1000 USD at INR 43.50 whose value is INR 43. margin is the amount a trader pays the moment he/she takes a futures position. Joint Initiative IITs and IISc – Funded by MHRD . Suppose the contract is for 4 months. then the trader would not have to pay the margin but the counterparty to the trader (short futures position holder) would pay the margin. For example spot rate on Day T is INR43.NPTEL International Finance Vinod Gupta School of Management. To summarize. Settlement price on the expiry date is different than the settlement price on the contract maturity date.6. On the expiry date. Interest rate in India is 8% per annum while in USA is 5% per annum. Based on M-T-M loss the trader pays additional margin – known as extreme loss margin. (1+ rIndia *T ) Forware Rate(FINR /USD ) = Spot Rate(SINR /USD ) . On any non-expiry day.92 / USD 4 (1 + . Hence on Day T. Everyday the open positions are M-T-M and daily margin is calculated.05 * ) 12 As the interest rate in India is higher than the interest rate in USA.50/USD. The trader has to pay M-T-M margin based on the loss..50 * 12 = INR 43.( Eq. The open position is also marked-to-market (M-T-M) on daily basis. IIT. the settlement price is given by RBI –known as RBI reference rate.92/USD. Indian rupee is expected to depreciate in future. T indicates the maturity period of the contract. M-T-M margin works like this: Suppose on day T. the settlement price is calculated as last half an hour weighted average price. on Day T.15. If the spot exchange rate would have been appreciated.50.15 today. Hence the trader is making loss.

Kharagpur. Order matching happens when best buy order matches with the best ask price. IIT.2 : Snapshot of the electronic order book for “USDINR 290709” Source http://www. Table 9.15 - .com Joint Initiative IITs and IISc – Funded by MHRD .NPTEL International Finance Vinod Gupta School of Management. “Best bid” and “best ask” prices are quotations respectively from the buyers and sellers side. The electronic order book for “USDINR 290709” is given in Table 9.2 taken from National stock Exchange website.nseindia.

Cash b. 1. Gap between ___________ and ____________ dates makes a forex trade as cash/tom/spot trade.” Multiple Choice Questions and Fill in the blanks. His expectation is a. futures on around 40 different currency pairs available for trading. A trader intending to rollover its contract will never take a position in a. d) variable rate. OTC stands for Joint Initiative IITs and IISc – Funded by MHRD . http://www. including major world currencies and currencies of emerging markets. None of the above. at the CME.NPTEL International Finance Vinod Gupta School of Management. Trade date and T+1 c. Outright forward contract. Trade Date and T+2 d.Kharagpur. b) stock rate. Indian Rupee to Appreciate c. For example. All most all major exchanges offer foreign currency futures for different currency pairs. and the second largest electronic FX market.com/trading/fx/ lists the currency pairs. The exchange website mentions the following details regarding futures and options on currency pairs: “CME Group offers the largest regulated foreign exchange marketplace in the world.16 - . An Indian importer with foreign currency payables enters into a forward contract.cmegroup. Value Date and Settlement date b. they will be making use of a: a) forward rate. 3. trading and settlement details. 4. 5. Tom c. Trade Date and value date 2. IIT. We provide trading of 49 futures contracts and 32 options contracts based on 20 global currencies. a. Indian Rupee to Depreciate b. Spot d. c) futures rate. If a company contracts today for some future date of actual currency exchange. duration of futures contract.

000 in 120 days. Dell is typically invoiced for these goods in Korean Won and is concerned that the Korean Won will appreciate in the near future. d. 6. is a U. purchase Korean Won put options. company is expected to receive £100. Over the customer c. 8.Kharagpur. c. Futures contracts are typically _______. and are standardized. Which of the following is not an appropriate hedging technique under these circumstances? a. Exchange traded. contain a commitment by the owner. sold on an exchange b) offered by commercial banks. contain a commitment by the owner. OTC. IIT. purchase Korean Won forward.-based MNC that frequently imports raw materials from Korea. c. a) sold on an exchange. OTC b. Over the counter d. Forward contracts are _________ while futures contracts are ___________ products. and can be tailored to the desire of the owner. exchange traded c. offered by commercial banks d) offered by commercial banks. and can be tailored to the desire of the owner. purchase Korean Won call options.NPTEL International Finance Vinod Gupta School of Management. A U. None of these. Forward contracts: a. then it would . If the company wants to minimize the risk of foreign exchange. b.S. sold on an exchange c) sold on an exchange. d. a. a. a) buy British pounds forward b) sell British pounds forward c) buy British pounds 120 days from now d) sell British pounds 120 days from now e) sell British pounds in the current spot market Short Joint Questions: Initiative IITs and IISc – Funded by MHRD . and are standardized. contain a right but not a commitment by the owner. Non-Deliverable 7. Inc.17 - . deliverable d. Over the client b. Non deliverable. 10.S. offered by commercial banks 9. Dell. b. contain a right but not a commitment by the owner. Deliverable. forward contracts are typically _______. purchase Korean Won futures contracts.

c 6. 1.b 7.c 9.NPTEL International Finance Vinod Gupta School of Management. Explain why forward/futures/option contracts are zero-sum game? 5.a 5. What is the difference among Ready/Tom/Spot forex contracts? 3.a 4.25% per annum while US interest rate is 5. Find out the theoretical price for contracts maturing on 6th month and 8th month from today. In which situation a company would like to enter into fully optional forward contract? 6. he would not enter into cash transaction where trades have to be settled on the same day). Why traders roll over spot contracts? How these rollover contracts are settled? 4.c 10.18 - . 3.a (as the trader is interested to earn interest .b 8. What is the difference between trade date and value/settlement date? 2.75. (d) References: Joint Initiative IITs and IISc – Funded by MHRD .Kharagpur. India’s interest rate 7. IIT. Answers to Multiple Choice Questions: 1. Today’s spot price is INR 46.d 2.5% per annum.

23rd July 2008.cms • Rupee hit by an invisible force.ifinixforex.cmegroup.com/articleshow/msid-3266587.Kharagpur. • Rollover & Interest Policy for spot forex trades http://www.com/finance/fullstory.com • Foreign Exchange Option contract.nseindia.indiatimes. http://www.com/trading/fx/ Annexure 9. DNA MONEY 16th June 2008.com/2policy_rollover_interest.NPTEL International Finance Vinod Gupta School of Management.nseindia. IIT.19 - . The Economic Times.html • Leading exporters unwinding forward contracts.prtpage- 1.php?id=1475907 • Foreign Exchange Futures contract.1 Source: http://www. http://sify. http://www. http://economictimes.com Joint Initiative IITs and IISc – Funded by MHRD .

Two working days prior to the last business day of the expiry month at Last trading day 12 noon. Last working day (excluding Saturdays) of the expiry month. Settlement Daily settlement : T + 1 Final settlement : T + 2 Mode of settlement Cash settled in Indian Rupees Daily settlement price Calculated on the basis of the last half an hour weighted average (DSP) price. 1% thereafter margin Extreme loss margin 1% of MTM value of open position.20 - .m. Contract Specifications INR/USD FUTURES at NSE. to 5:00 p.Kharagpur.75% on day 1. IIT.m. DSP of the contract Tenure upto 6 months Tenure greater than 6 months Price operating range +/-3 % of base price +/.5% of base price Clients Trading Members Banks higher of 6% of total higher of 15% of the higher of 15% of the Position limits open interest or USD 5 total open interest or total open interest or million USD 25 million USD 100 million Minimum initial 1. Base price On all other days.1 unit denotes 1000 USD Underlying The exchange rate in Indian Rupees for US Dollars Tick size Rs. Final settlement price RBI reference rate (FSP) Joint Initiative IITs and IISc – Funded by MHRD .25 paise or INR 0.0.0025 Trading hours Monday to Friday 9:00 a. Symbol USDINR Instrument Type FUTCUR Unit of trading 1 . Contract trading cycle 12 month trading cycle. Final settlement day The last working day will be the same as that for Interbank Settlements in Mumbai. Theoretical price on the 1st day of the contract.NPTEL International Finance Vinod Gupta School of Management.