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FIM - Currency Futures PPT

1. 11EX-013 Bishnu Kumar11EX-015 Davinder Singh11EX-040 Prateek Wadhwa11EX-041

Priyanka Tyagi
2. � 24 Hour Market because of business overlap� Trade is done by buying one
currency while selling the other� 2 Segments of OTC Market o Interbank o Merchant
3. � Securities under the Securities Contracts Act, 1956 and hence the trading of
derivatives is governed by the regulatory framework under the SC(R)A.� A product
whose value is derived from the value of one or more basic variables called bases�
The underlying asset can be equity, foreign exchange, commodity, interest rate or
any other asset� Has a future settlement date
4. The factors driving the growth of financial derivatives are:� Increased
volatility in asset prices in financial markets� Increased integration of national
financial markets with the international financial markets� Marked improvement in
communication facilities and sharp decline in their costs,� Development of more
sophisticated risk management tools� 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.
5. Unpredicted movements in exchange rates requires investors tohedge these risks.
� Forwards: A customized OTC contract between two parties. � Futures: Exchange-
trade forwards. � Options: Option does not buy or sell the underlying directly but
buys or sells the right without obligation on the underlying. � Swaps: Swaps are
agreements between two parties to exchange cash flows in the future according to a
prearranged formula. � Interest rate swaps: Swapping of interest related cash flows
between the parties in the same currency. � Currency swaps: 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.
6. A currency future, also known as FX future, is astandardized contract , traded
on an exchange, to buy orsell one currency for another at a specified date in
thefuture at a price that is fixed on the purchase date. Bothparties of the futures
contract must fulfill their obligations onthe settlement date.
7. Futures have some distinct advantages over forward contracts:� Price
transparency� Elimination of Counterparty credit risk.� Access to all types of
market participants. The OTC market is restricted to Authorized Dealers (banks
which are licensed by RBI to deal in FX), individuals and entities with FOREX
exposures. Retail speculators with no exposure to FX cannot trade in OTC market.�
Futures offer low cost of trading as compared to OTC market.
8. Hedger� Have real exposure to FX risk on account of their business� Exposure
could be because of Imports/Exports� Objective is to remove FX volatility risk
using currency future Has to pay $ 1 mio after What happens if IMPORTER 3 months
for imports in USD strengthens? march He loses money. Has to receive $ 1 mio What
happens if EXPORTER after 3 months for USD weakens? exports in march He loses
money. Overall portfolio in HEDGING Participant Risk Underlying Position Hedging
Position Importer INR will weaken Short in Fx Long in CF Long Hedger Exporter INR
will strengthen Long in Fx Short in CF Short Hedger
9. Speculator� Also called as Traders� Does not have real exposure to FX risk�
Takes a view on the market direction hoping to make returns by taking the price
risk� Assumes the price risk that hedgers attempt to lay off in the markets
10. Arbitrageurs� Look for mispricing and execute simultaneous buy and sell to
capture the mispricing and make profit� Do not take any view on the market
direction� Neither have exposure to risk and nor they take any risk
11. Initial MarginThe Initial Margin requirement is based on a worst case loss of
aportfolio of an individual client across various scenarios of pricechanges.
Initial margin for each contract is set by the Exchange. USD/INR EUR/INR GBP/INR
JPY/INR Minimum margin requirement on first 1.75% 2.8% 3.2% 4.5% day Minimum margin
requirement after first 1% 2% 2% 2.3% day
12. Calendar SpreadWhen a CF position at one maturity is hedged by an
offsettingposition at a different maturity, Rs. 250/- Calendar Spread Marginper
Calendar Spread contract is charged.Extreme Margin LossComputed as % on the MTM
value of the gross open position. USD/INR EUR/INR GBP/INR JPY/INR Extreme loss 1%
0.3% 0.5% 0.7% marginMarked-to-MarketDefault risk is reduced by marking to market.
MTM value wouldbe calculated on the basis of the last half an hour weightedaverage
traded price of the futures contract.
13. National Securities Clearing Corporation Limited (NSCCL)undertakes clearing and
settlement of all trades executed on thecurrency derivatives segment of the
exchange. It also acts aslegal counterparty to all trades on the currency
derivativessegment and guarantees their financial settlement. � Mark-to-Market
Settlement � Final Settlement of Future