CONTENTS

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Foreword I-3
Acknowledgement I-5
About NISM Certifications I-7
About the NISM-Series-I: Currency Derivatives Certification Examination I-9

CHAPTER 1
INTRODUCTION TO CURRENCY MARKETS

1.1 Brief history of foreign exchange markets 1

1.2 Major currency pairs 3
1.3 Overview of international currency markets 6
1.4 Basics of currency markets and peculiarities in India 7
1.5 Settlement date or value date 12
1.6 OTC forward market 14
1.7 Exchange rate arithmetic-Cross rate 15
1.8 Impact of economic factors on currency prices 17
1.9 Economic indicators 18

CHAPTER 2
FOREIGN EXCHANGE DERIVATIVES

2.1 Derivatives - Definition 23

2.2 Derivative products 24

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2.3 Growth drivers of derivatives 25
2.4 Market players 25
2.5 Key economic function of derivatives 26
2.6 Financial market stability: Exchange-traded vs. OTC derivatives 27

CHAPTER 3
EXCHANGE TRADED CURRENCY FUTURES
3.1 Currency futures - Definition 29
3.2 Futures terminology 30
3.3 Rationale behind currency futures 31
3.4 Distinction between futures and forward contracts 32
3.5 Interest rate parity and pricing of currency futures 33

CHAPTER 4
STRATEGIES USING CURRENCY FUTURES

4.1 Market participants 37

4.2 Computing payoffs from a portfolio of futures and trade remittances 39
4.3 Using currency futures for hedging various kinds of FX exposures 42
4.4 Use of currency futures by speculators 44
4.5 Use of currency futures by arbitrageurs 44
4.6 Trading spreads using currency futures 46
4.7 Limitations of currency futures for hedgers 47
4.8 Conclusion 47

CHAPTER 5
TRADING IN CURRENCY FUTURES

5.1 Currency futures contract specification 49

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5.2 Other terminologies with respect to contract specifications 52
5.3 Trader Workstation Screen (TWS) 53
5.4 Entities in the trading system 53
5.5 Types of orders 54
5.6 Price Limit Circuit Filter 56
5.7 Rules, Regulations and Bye-laws of Exchange 57

CHAPTER 6
CLEARING, SETTLEMENT AND RISK MANAGEMENT
IN CURRENCY FUTURES

6.1 Clearing vs. Settlement 59

6.2 Clearing entities 60
6.3 Clearing mechanism 60
6.4 Regulatory guidelines on open position limits 62
6.5 Settlement mechanism 63
6.6 Risk management measures 68
6.7 Margin requirements 69
6.8 Mark-to-Market Settlement 71
6.9 Margin collection and enforcement 72
6.10 Periodic Risk Evaluation Report 73
6.11 Surveillance 73
6.12 Unique Client Code (UCC) 74

CHAPTER 7
EXCHANGE TRADED CURRENCY OPTIONS

7.1 Options - Definition, basic terms 75

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7.2 Difference between futures and options 78
7.3 Options in financial market 78
7.4 Style of options 80
7.5 Moneyness of an option 80
7.6 Basics of option pricing and option Greeks 81
7.7 Option pricing methodology 83
7.8 Option payoffs 83
7.9 Option strategies 85
7.10 Uses of currency options 91
7.11 Contract Specification of Option Contracts 93

CHAPTER 8
ACCOUNTING AND TAXATION

8.1 Accounting 97
8.2 Name of accounts 97
8.3 Accounting entries for live positions 98
8.4 Accounting entries in case of default by a client 99
8.5 Disclosure requirements 99
8.6 Taxation of Currency Derivatives 100

CHAPTER 9
REGULATORY FRAMEWORK FOR CURRENCY
DERIVATIVES

9.1 Securities Contracts (Regulation) Act, 1956 [SC(R)A] 104

9.2 RBI-SEBI standing technical committee on exchange traded currency 105
and interest rate derivatives

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9.3 Foreign Exchange Management Act, 1999 - Provisions 106
9.4 Regulatory framework for exchanges 110
9.5 Regulatory framework for clearing corporations 111
9.6 Governing council of the exchange and clearing corporation 111
9.7 Eligibility criteria for members 112

CHAPTER 10
CODES OF CONDUCT AND INVESTOR PROTECTION
MEASURES

10.1 Adherence to SEBI codes of conduct for brokers 117

10.2 Adherence to codes of conduct specific to currency derivatives segment 120
10.3 Grievance redressal mechanism for investors 123
Appendix A: Safeguards for Investors 131
Appendix B: Combination Strategies 136
Appendix C: Cases of Combination Strategies 155
Appendix D: Sample Questions 157

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