The term "Derivative" indicates that it has no independent value, i.e. its value is entirely "derived" from the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, live stock or anything else. In other words, Derivative means a forward, future, option or any other hybrid contract of pre determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities. When a person invests in derivative, the underlying asset is usually a commodity, bond, stock, or currency. He bet that the value derived from the underlying asset will increase or decrease by a certain amount within a certain fixed period of time. µFutures¶ and µoptions¶ are two commodity traded types of derivatives. An µoptions¶ contract gives the owner the right to buy or sell an asset at a set price on or before a given date. On the other hand, the owner of a µfutures¶ contract is obligated to buy or sell the asset. The other examples of derivatives are warrants and convertible bonds (similar to shares in that they are assets). But derivatives are usually contracts. Beyond this, the derivatives range is only limited by the imagination of investment banks. It is likely that any person who has funds invested, an insurance policy or a pension fund, that they are investing in, and exposed to, derivatives ± wittingly or unwittingly. Shares or bonds are financial assets where one can claim on another person or corporation; they will be usually be fairly standardised and governed by the property of securities laws in an appropriate country. On the other hand, a contract is merely an agreement between two parties, where the contract details may not be standardised.
RBI and SEBI allowed selected exchanges to offer currency trading and issued guidelines for the same. in exchange traded products the counter-party risk is eliminated by the clearing corporation. In August 2008. product range. Some more specific details in the guidelines about the currency derivatives were:
. The size of the contract will be USD 1000. and participation level. The average daily turnover in the foreign exchange market in March 2007 was a whopping 33 billion USD. The price discovery is more efficient in case of exchange trading because of presence of large number of market players.
INTRODUCTION OF EXCHANGE TRADEDE CURRENCY DERIVATIVES IN INDIA
Over the years the foreign exchange market in India has shown significant growth in terms of volumes. RBI & SEBI allowed USD-INR to be traded on exchange. Benefits of Exchange traded over OTC The exchange trading makes the transaction more transparent. Moreover. these transactions were done in over-the-counter (OTC) market like currency forwards. Settlement price will be the RBI¶s reference rate. It also offers trading opportunity for relatively smaller players because of small contract size compared to OTC market. The contract can have a maximum maturity of 1 year and it should be quoted and settled in Indian Rupees. liquidity. swaps. Using electronic trading superior risk management systems can be used for exchange trading thereby minimizing the overall risk in the portfolio. and options. Due to lack of exchange traded currency instruments. There was always a need for a more developed currency markets in India to match the international standards.Derivatives securities or derivatives products are in real terms contracts rather than solid as it fairly sounds.
US Dollar ± Indian Rupee (US$-INR)
The trading on currency futures would be available from 9 a.
All monthly maturities from 1 to 12 months would be made available.
Final settlement day
The currency futures contract would expire on the last working day (excluding Saturdays) of the month.
The currency futures contract shall be settled in cash in Indian Rupee.m.m.
Tenor of the contract
The currency futures contract shall have a maximum maturity of 12 months.
The settlement price would be the Reserve Bank Reference Rate on the date of expiry. to 5 p.
Size of the contract
The currency futures contract would be quoted in rupee terms.
Currency-derivatives trading volume in the world's most populous democracy has expanded by 90 percent since the United Stock Exchange joined the market late last month. The Securities and Exchange Board of India is the markets regulator.´ the Reserve Bank said in a statement posted on its website. Between September 20 and October 15. 2010. however ± the Securities and Exchange Board of India has not yet allowed it to trade currency options. according to the statement. expanding the tools available for companies to hedge their currency risk. dollar-rupee rate in the currency derivatives segment of the stock exchanges.S. The rise in derivatives trading volume reflects the effect that a new exchange can have on the market. The maturity of the contracts shouldn¶t exceed 12 months and should be settled in rupees. That makes it a larger currency-derivatives player than either of the two exchanges that predated it in the sector. the exchange already has 36 percent of the market. managing risk with the help of derivatives is becoming an imperative. the statement said. recognized by the Securities and Exchange Board of India. It's also emblematic of the growing popularity of currency derivatives ± with volatility on the rise in the currency market. ³It has been decided to permit trading of currency options on spot U.The Reserve Bank of India allowed trading of currency options on stock exchanges. the National Stock Exchange and the MCX-SX. The premium should be quoted in Indian rupees and the outstanding position should be valued in dollar terms. while the MCX-SX's market share was 34 percent.
India¶s RBI Permits Currency Options Trading on Stock Exchanges
July 30. the Hindu Business Line reports± and the volume of derivatives trades has surged as a result.
Indian currency-derivative market heats up
There's a new player in the currency-derivatives market in India. the NSE owned 30 percent of the currency-derivatives market. 11:56 AM EDT
July 30 (Bloomberg) -. The size of each contract will be $1. The latter only trades futures. the central bank said today.000. Even though the USE has only been trading currency derivatives since September 20.
and National Stock Exchange of India Ltd.´ Bhave said at a CII conference on Indian financial markets. currency volumes on any given day are in the range of $6-7 billion and this is when only one pair was allowed three months back and just in futures. ³We will look at this experiment eagerly. dollar. ³Today.´ Bhave said. He said Sebi has also asked institutional investors to pay 100 per cent application money at the time of applying for public offers. to ensure equal norms for different classes of investors. before being reduced further to just seven days within this fiscal. because it will tell us how efficient our markets are.
.At present. 2008. euro. ³We will look into other kinds of derivatives (in currency trading). options to begin with.´ he said. ³We want to do this in two stages. Bhave said the regulator wants to encourage foreign companies to come and list on Indian stock exchanges in the form of IDRs.´ he added. as is required for retail investors. C B Bhave. the Sebi chairman said it would take a while to make this practice a routine. but later it was extended to other pairs. beginning with options. in order to offer increased products that are available. but not the obligation. toexchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date.S. the time taken to list shares from the date of closing of public offers would be reduced to 12 days from the current 22 days. Referring to the money paid to the first set of investors affected by the IPO scams of 2003-05 from the funds collected from wrongdoers. He said that from next month. The currency futures were limited to rupee-dollars only. currency futures are allowed in the MCX Stock Exchange Ltd. Currency option is a derivative instrument which gives the owner the right. The contracts are offered in U. Bhave said that equal treatment for different classes of investors and efficiency in markets are very high on his agenda. a month before the global financial crisis hit the world. Referring to the recently filed prospectus for Indian Depository Receipts (IDR) byStandard Chartered Bank. Bhave said the Securities and Exchange Board of India (Sebi) had launched currency derivatives in India in August. to give a wider choice to investors.
SEBI plans to introduce more currency Derivatives products
Chairman of the Indian securities board Sebi. today said the market watchdog is planning to introduce more currency derivatives products. pound sterling and yen against the Indian rupee.