FORIGEN EXCHANGE ASSIGNMENT

 Foreign currency trading legal in India ?

 The basic of forex trading:

As is the case in many other countries around the world, Forex
trading in permitted in India under certain regulations and guidelines.
Forex trading, the buying and selling of global currencies, is said to be
the largest and most liquid market in the world. The two currencies that
are involved in a transaction are called currency pairs and, in most
countries, often involve trading USD and other major Forex
currencies in order to truly capitalise on market activity. India’s
currency is the Indian Rupee (INR), with the Reserve Bank of India
(RBI) being the one to monitor market movement and activity in the
country. This means that it is tasked with intervening where
necessary.In early August 2021, the INR continued on an upward
trajectory, marking a six-week high prompted by gains in local stocks,
amongst other factors. Commenting on the matter, a senior trader at a
private bank was quoted as saying, “There seems to be good flows into
the market and not much resistance from the RBI so far.”

 Legalities of trading India:

Although Forex trading is permitted in India, citizens are not permitted
to do so via electronic and online Forex trading platforms. This is
different compared to other countries, as most international Forex
trading activity is conducted electronically/online. In India, however, it
is only permitted and considered legal when conducted through
specified Forex trading places with the base currency being INR. For
clarity, this simply means that trading in the country is only permitted
for currency pairs that are benchmarked against the INR. This is
believed to have been implemented after the RBI’s circulars that were
publicised in 2013. Moreover, one faces the risk of imprisonment or a
fine should they be found to be trading Forex illegally.
According to reports, and as previously mentioned, only the following
currency pairs can be traded in India: INR/USD, INR/GBP, INR/JPY,
INR/EUR, EUR/USD, GBP/USD and JPY/USD. The last three listed
currency pairs are amongst the most traded and most popular across the
globe because of their respective economies and the role the countries
play in international trade activity.

Forex trading activity is taxable in India, however, following the

introduction of the Good and Service tax (GST) in July 2017, the tax
structure has changed from earlier years. Fortunately, it has changed
for the better because the GST payable is less; according to reports, it
is now between 0.058% and 0.18% of the taxable portion of the Forex
transaction. GST is the only form of tax that applies to Forex trading
activity in India, however, the taxable value can be further subdivided
into one of three categories or thresholds. 

 WHAT PART IS ALLOWED IN INDIA ?

What are currency derivatives ?

Currency derivatives are contracts to buy or sell currencies at a future

date. The major types of currency derivatives are forward contracts,
futures contracts, options and swaps.Despite having an average daily
turnover of Rs 44,859 crores, currency derivatives in India are largely
unknown to small retail investors.The currency derivatives trading
segment in India is dominated by importers, exporters, central banks,
banks and corporations.While currency derivatives in India are
primarily used for hedging, retail investors can create wealth in the
currency derivatives segment by speculating and arbitraging.

MEANING : Currency derivatives are financial contracts (futures,

options and swaps) which have no value of their own. They derive
their value from the value of the underlying asset, in this case,
currencies.For example, assume that the current USD/INR rate is
73.2450. A 1 month USD/INR futures contract is trading at Rs
73.3650.Here, the underlying asset is the USD/INR exchange rate and
the 1 month futures contract being traded is the currency
derivative.The underlying asset and the derivatives contract have
different values. But the value of the derivative is dependent and
derived from the value of the USD/INR current exchange rate.

 What are currency future & options ?

Currency futures are exchange traded futures contracts which specify

the quantity, the date, and the price at which currencies will be
exchanged in the future. Speculators are the most active participants in
the futures market but close their positions before expiry.

So, in reality, they do not physically deliver the currencies, rather they
make or lose money based on the price changes of the futures contract.

Currency options are contracts that give the buyer the right, but not the
obligation, to buy or sell a certain currency on a future date at a pre-
decided price. There are two types of currency options: ‘Call’ option
and ‘Put’ option.

The below table demonstrates the relationship between options and

currency pairs.

Buy a call option The price of the currency pair is expected to rise
Buy a put option The price of the currency pair is expected to fall
Sell a call option The price of the currency pair is expected to fall
Sell a put option The price of the currency pair is expected to rise

 What are cross future & options ?

A cross currency refers to a currency pair or transaction that does not

involve the U.S. dollar. A cross currency transaction, for example,
doesn't use the U.S. dollar as a contract settlement currency. A cross
currency pair is one that consists of a pair of currencies traded
in forex that does not include the U.S. dollar. Common cross currency
pairs involve the euro and the Japanese yen. 

Cross currency pairs can be excellent tools for forex traders. Some
cross currency trades can be set up to position traders on particular
world events, such as using the EUR/GBP to bet on the
ongoing Brexit saga. The same trade would be more complex and
capital intensive setting up separate positions with the USD/GBP and
USD/EUR, but this method is still used to create exotic cross currency
pairs that are not widely traded. Common cross currency rates involve
the Japanese yen. Many traders take advantage of the carry trade where
they own a high yielding currency like the Australian dollar or the New
Zealand dollar and short the Japanese yen - the low yielding currency.

 When did they start in India ?

While currency futures were introduced in India in 2008 and currency

options in 2010, currency derivatives in India are still mostly
dominated by central banks and importers-exporters.The daily volume
of 44,859 Crores is mostly contributed by banks, corporations,
importers and exporters. But speculators and arbitrageurs have also
increased their participation in the currency markets.As more retail
investors begin to discover the scope of profit generation in the forex
market, the popularity and demand for currency derivatives in India
will witness a substantial growth.

 Contract Signification:

Currency futures & options contracts also referred to as foreign

exchange future & options or FX , future for short, are a type of future
contract to exchange a currency for another at a fixed exchange rate
exchange rate on a specific date in the future

Since the value of the contract is based on the underlying currency

exchange rate, currency futures are considered a financial derivative .
these futures are very similar to currency forwards however futures
contacts are standradized and traded on centralized exchange rather
than customized

 Forex trading for retail Investors :

individual investors can directly buy and sell foreign currencies,

much like they do with equity stocks. Currently, retail investors trade
foreign exchange (forex) via an authorised dealer bank at a cost 1-2
per cent higher than market prices. 
Though some electronic platforms of banks and multi-bank portals
allow retail investors to trade directly, it is limited to a minimum
order size. Authorised dealer banks are free to determine the charges
on forex transactions, subject to RBI’s guidelines that stipulate: 1)
banks should ensure that the charges are reasonable and are not out of
line with the average cost of providing services; 2) they are in line
with the FX Global Code — developed by market participants and a
pool of 16 central banks including RBI — that allows banks to
include a Markup, spread or charge towards the final transaction
price, provided it’s fair and reasonable. Banks also have to ensure
that customers with a low volume are not penalised. 
However, with customers raising pricing concerns, the RBI hopes
that they will be put to rest once the proposed electronic trading
platform goes live in August. The central bank is expected to issue
operational guidelines this month. 
Initially, the facility will be available only for US dollars, but more
currencies will be added gradually. The minimum order is $1,000
with multiples of $500 thereof, while the maximum order size is
$500,000. 
Forex market is broadly divided into two: inter-bank and retail
segment. 
The participants in the inter-bank segment are banks (authorised
under FEMA, 1999) and transactions are conducted through trading
platforms like Thomson Reuters, Clearing Corporation of India Ltd
(CCIL) before being settled by CCIL for cash, TOM, SPOT and
forward USD-INR transactions. Banks also fix card rates for various
forex pairs at the beginning of the day, when purchases and sales
 from/to retail customers are made regardless of the intraday
movement of the currency. 
Authorised dealers Category-1 banks may access both inter-bank and
retail markets, but retail customers can access only retail market for
trade during market hours between 9 am and 5 pm. 
 Forward currency contract ?
A forward exchange contract (FEC) is a special type of over-the-
counter (OTC) foreign currency (forex) transaction entered into in
order to exchange currencies that are not often traded in forex markets.
These may include minor currencies as well as blocked or otherwise
inconvertible currencies. An FEC involving such a blocked currency is
known as a non-deliverable forward, or NDF.

Broadly speaking, forward contracts are contractual agreements

between two parties to exchange a pair of currencies at a specific time
in the future. These transactions typically take place on a date after the
date that the spot contract settles and are used to protect the buyer from
fluctuations in currency prices.

KEY TAKEAWAYS

 A forward exchange contract (FEC) is an agreement between two

parties to effect a currency transaction, usually involving a
currency pair not readily accessible on forex markets.
 FECs are traded OTC with customizable terms and conditions,
many times referencing currencies that are illiquid, blocked, or
inconvertible.
 FECs are used as a hedge against risk as it protects both parties
from unexpected or adverse movements in the currencies' future
spot rates when FX trading is otherwise unavailable.

What are the uses of Currency Derivatives in India?

Currency derivatives in India are primarily used for:

 Hedging: By importers / exporters and other hedgers

 Speculating: By speculative traders
 Arbitraging: By arbitrage traders
How hedgers use currency derivatives?

Mr Agarwal imports 10,000 kgs of Washington apples from the US

worth Rs 14,64,900 at the current USD/INR rate of 73.2450.

If he were to make the payment today, then he will have to shell out Rs
14,64,900. But the payment has to be made after 2 months.

Mr Agarwal is worried. He is expecting the USD/INR rate to go up

from 73.2450 to 75.2450 in the next couple of months. This means that
Mr Agarwal will now end up paying Rs 15,04,900 instead of Rs
14,64,900 i.e. Rs 40,000 more!

Such losses can be disastrous for his business.

But Mr Agarwal can hedge this Rs 40,000 loss by using currency

derivatives. As he expects the USD/INR to increase, he can buy 22 lots
of currency futures of USD/INR at the current rate of 73.3650.

By buying 22 lots, he has taken a position of Rs 16,14,030 (covering

his purchase cost). Let’s say his prediction comes true and the
USD/INR rate appreciates to 75.2450. Then he will end up making a
profit of Rs 41,360 by closing his position. So, his Rs 40,000 loss is
offset by his Rs 41,360 profit.

This is how currency derivatives help importers and exporters hedge

against currency fluctuations.

How speculators use currency derivatives?

Mr Sharma, a teacher, wants to make some quick profit and decides to

try his luck at currency derivatives trading.

He is bearish about USD/INR and believes that a poor US

unemployment data will result in the USD/INR rate falling from
73.2450 to 72.2450 in the coming weeks.
So, he shorts (sells) 10 lots of USD/INR at Rs 73.2450. He has now
taken a position of Rs 7,32,450. After the data is released, there is
volatility in the USD/INR rate and USD/INR falls to 71.2450 intraday.

Mr Sharma, quickly covers his short position by buying back the 10

lots at 71.2450. He ends up making a profit of Rs 20,000 in intraday!

Speculators use various indicators and forex trading strategies to

identify profit making opportunities in the forex markets using
currency derivatives.

 How arbitrageurs use currency derivatives?

In India, Currency derivatives are traded on NSE, BSE and MCX-SX

platforms. There is always a small price difference between the price of
the same currency contract between the three exchanges. Arbitrageurs
make money using this small price difference.

Mr Verma noticed that the USD/INR October futures was trading at

73.39 on NSE and at 73.35 on BSE.

So, he decided to buy 25 lots from BSE and sell them on the NSE. By
capitalising on the spread between the two exchanges, Mr Verma made
7.4% on his investment of Rs 20,000 in a matter of minutes!

Buy on BSE Rs 73.33/lot

Total position taken Rs 18,33,250
Sell on NSE Rs 73.39/lot
Total Sell Value Rs 18,34,750
Profit Rs 1,500
Less: Brokerage Rs 20
Realised Profit Rs 1,480
 Profit % 7.72%

Now that we understand how various market participants use currency

derivatives in India to their advantage.

 WHAT PARTS IS NOT ALLOWED IN INDIA ?

 Overseas Forex Trading Is not legal in india ?
Overseas Forex Trading From India is illegal for Indian. An Indian
citizen cannot send directly or indirectly fund to Overseas forex
Brokers.Overseas forex trading through electronic / internet trading
portals.As per RBI circular RBI/2013-14/265 A.P. (DIR Series)
Circular No. 46 Overseas forex trading through electronic or internet
trading portals not permitted. let us find out Overseas Forex Trading
India–Legal or Illegal.

If someone is found Trading in Overseas forex trading through

electronic or internet trading portals by the Reserve Bank of India’s
representative he or she is immediately charged with violation of law
Act (FEMA), 1999 & may send him to jail for illegal activity.

RBI also found that many Overseas Forex brokers open account in the
name of individuals or proprietary concerns at different bank branches
for collecting the margin money, investment money, etc. in connection
with such transactions. It has been observed By RBI that some banking
customers continue to online trading in foreign exchange on portals OR
websites offering such schemes wherein they initially remit funds from
Indian bank accounts using credit cards or other electronic channels to
overseas websites OR entities & subsequently receive cash refunds
from the same overseas entities into their credit card or bank accounts.

Banks who offer online banking facilities or credit cards to their clients
should advise their customers that any person resident in India
collecting & effecting OR remitting payments directly OR indirectly
outside India in any form toward overseas foreign exchange trading
through electronic OR internet trading portals would make himself OR
herself OR themselves liable to be proceeded against with for
contravention of the Foreign Exchange Management Act (FEMA),
1999 besides being liable for violation of regulations relating to Know
Your Customer (KYC) norms OR Anti Money Laundering (AML)
standards

 Why RBI not allowed Overseas forex trading?

RBI had noticed that advertisement issued by electronic / internet

portals offering trading or investing in foreign exchange with
guaranteed high returns. Many companies even engage agents who
personally contact gullible people to undertake forex trading/
investment schemes & entice them with promises of
disproportionate/exorbitant returns.
The Reserve Bank of India cautions the public not to remit or deposit
money for such unauthorized transactions. The advice has become
necessary in the wake of many residents falling prey to such tempting
offers & losing money heavily in the recent past.
 Calculating forex trading profit and losses ?
forex trading offers a challenging and profitable opportunity for well-
educated investors. However, it is also a risky market, and traders must
always remain alert to their positions—after all, the success or failure
is measured in terms of the profits and losses (P&L) on their trades.

It is important for traders to have a clear understanding of their P&L

because it directly affects the margin balance they have in their trading
account. If prices move against you, your margin balance reduces, and
you will have less money available for trading.

Realized and Unrealized Profit and Loss?

All your foreign exchange trades will be marked to market in real-time.
The mark-to-market calculation shows the unrealized P&L in your
trades. The term "unrealized," here, means that the trades are still open
and can be closed by you any time.

The mark-to-market value is the value at which you can close your
trade at that moment. If you have a long position, the mark-to-market
calculation typically is the price at which you can sell. In the case of a
short position, it is the price at which you can buy to close the position.

Until a position is closed, the P&L will remain unrealized. The profit
or loss is realized (realized P&L) when you close out a trade position.
In case of a profit, the margin balance is increased, and in case of a
loss, it is decreased.

The total margin balance in your account will always be equal to the
sum of the initial margin deposit, realized P&L and unrealized P&L.
Since the unrealized P&L is marked to market, it keeps fluctuating, as
the prices of your investments change constantly. Due to this, the
margin balance also keeps changing constantly.

calculating Profit and Loss?

The actual calculation of profit and loss in a position is quite

straightforward. To calculate the P&L of a position, what you need is
the position size and the number of pips the price has moved. The
actual profit or loss will be equal to the position size multiplied by the
pip movement.

Let's look at an example:

Assume that you have a 100,000 GBP/USD position currently trading

at 1.3147. If the prices move from GBP/USD 1.3147 to 1.3162, then
they jumped 15 pips. For a 100,000 GBP/USD position, the 15-pips
movement equates to $150 (100,000 x .0015).

To determine if it's a profit or loss, we need to know whether we were

long or short for each trade.

Long position: In the case of a long position, if the prices move up, it
will be a profit, and if the prices move down it will be a loss. In our
earlier example, if the position is long GBP/USD, then it would be a
$150 profit. Alternatively, if the prices had moved down from
GBP/USD 1.3147 to 1.3127, then it will be a $200 loss (100,000 x -
0.0020).
 Short position: In the case of a short position, if the prices move up, it
will be a loss, and if the prices move down it will be a profit. In the
same example, if we had a short GBP/USD position and the prices
moved up by 15 pips, it would be a loss of $150. If the prices moved
down by 20 pips, it would be a $200 profit.

The following table summarizes the calculation of P&L:

100,000 GBP/USD Long position Short position

 Prices up 15 pips  Profit $150  Loss $150
 Prices down 20 pips  Loss $200  Profit $200

Another aspect of the P&L is the currency in which it is denominated.

In our example, the P&L was denominated in dollars. However, this
may not always be the case.

In our example, the GBP/USD is quoted in terms of the number of

USD per GBP. GBP is the base currency and USD is the quote
currency. At a rate of GBP/USD 1.3147, it costs USD 1.3147 to buy
one GBP. So, if the price fluctuates, it will be a change in the dollar
value. For a standard lot, each pip will be worth $10, and the profit and
loss will be in USD. As a general rule, the P&L will be denominated in
the quote currency, so if it's not in USD, you will have to convert it
into USD for margin calculations.

Consider you have a 100,000 short position on USD/CHF. In this case,

your P&L will be denominated in Swiss francs. The current rate is
roughly 0.9970. For a standard lot, each pip will be worth CHF 10. If
the price has moved down by 10 pips to 0.9960, it will be a profit of
CHF 100. To convert this P&L into USD, you will have to divide the
P&L by the USD/CHF rate, i.e., CHF 100 ÷ 0.9960, which will be
$100.4016.

Once we have the P&L values, these can easily be used to calculate the
margin balance available in the trading account. Margin calculations
are typically in USD.