Chapter 1

Executive summary

INTRODUCTION

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 Each country has its own currency through which both national and international transactions
are performed. All the international business transactions involve an exchange of one currency for
another.
For example,

If any Indian firm borrows funds from international financial market in US dollars for
short or long term then at maturity the same would be refunded in particular agreed currency along
with accrued interest on borrowed money. It means that the borrowed foreign currency brought in
the country will be converted into Indian currency, and when borrowed fund are paid to the lender
then the home currency will be converted into foreign lender’s currency. Thus, the currency units
of a country involve an exchange of one currency for another. The price of one currency in terms of
other currency is known as exchange rate.

The foreign exchange markets of a country provide the mechanism of exchanging different
currencies with one and another, and thus, facilitating transfer of purchasing power from one
country to another.

With the multiple growths of international trade and finance all over the world, trading in
foreign currencies has grown tremendously over the past several decades. Since the exchange rates
are continuously changing, so the firms are exposed to the risk of exchange rate movements. As a
result the assets or liability or cash flows of a firm which are denominated in foreign currencies
undergo a change in value over a period of time due to variation in exchange rates.

This variability in the value of assets or liabilities or cash flows is referred to exchange rate
risk. Since the fixed exchange rate system has been fallen in the early 1970s, specifically in
developed countries, the currency risk has become substantial for many business firms. As a result,
these firms are increasingly turning to various risk hedging products like foreign currency futures,
foreign currency forwards, foreign currency options, and foreign currency swaps.

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 Chapter 2
Organization Profile

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 1. Industry Profile

The stock exchanges in India came into existence in the early eighteenth century and since then
they have traveled a long way. To analyze and understand it’s working, a need was felt to undergo a
detailed study of the same and find out what do the investors feel and have to say about the stock
exchanges.

The stock market provides a place where securities are traded.

 Stock exchange is a market place where industrial securities like equity shares, preference share,
debentures and bonds of listed public limited companies and the government securities are traded.
 The stock market is the backbone of the capital market. However, if it is not properly organized,
regulated and controlled, it is liable to be misused by the vested investors because it is concerned
with dealing in money titles.

Stocks or share capital is the capital raised by a corporation through the issue of shares entitling
holders to an ownership interest (equity); "he owns a controlling share of the company's stock". It
consists of two markets viz. the primary market and the secondary market.

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 Angel Broking Limited is one of the leading and professionally managed stock broking firm
involved in quality services and research. Angel Broking Limited is a corporate member of The
Stock Exchange, Mumbai.

The membership of the company with The Stock Exchange Mumbai was originally in the name
of Mukesh R. Gandhi, which was eventually turned into a corporate membership in the name
of Angel Broking Limited.

Angel Broking Limited is managed by Mr. Dinesh Thakkar and he is well supported by Mr.
Mukesh Gandhi, a fifteen years veteran.
In a short span of 18 years since inception, the Angel Group has emerged as one of the five
retail stock broking houses in India, having membership of BSE, NSE and the two leading
Commodity Exchanges in the country i.e. NCDEX & MCX. Angel Broking is also registered
as a Depository Participant with CDSL.

ANGEL GROUP is a leading full service securities firm founded in 1987 by Mr. DINESH
THAKAR. Today ANGEL GROUP provides wealth management, investment banking,
corporate advisory, brokerage & distribution of equities, commodities, mutual funds and
insurance, structured products - all of which are supported by powerful research teams.

The entire firm activities are divided across distinct client groups: Individuals, Private Clients,
Corporate and Institutions and was recently they have emerged as one of the top 5 retail stock
broking houses in India.

Today the ANGEL GROUP is manage by a team of 100 profession and nationwide 21 hubs,
presence in 21 cities, 6984 sub broker & business associate and above 6,09,368 retail clients &
about 13,370 Trade Terminals.

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 Angel believes in reaching out to the customer at the farthest end rather than by reaching out to
them. The company in its Endeavour to give its client the best has opened up several branches
all over Mumbai, which are efficiently integrated with the Head Office.

Angel Broking Limited is primarily into retail stock broking, with a customer base of retail
investors, which has been increasing at a compounded growth rate of 100% every year. The
company has huge network sub-brokers in Mumbai and other places outside Mumbai,
registered with SEBI, who act as channel partners for the company. The company presently has
total staff strength of around 150 employees who are spread accordingly across the head office
and all the branches.

Angel has empowered its physical presence throughout India through various strategies which
it has been adopting efficiently and effectively over a period of time, like opening up of
branches at various places, tie-ups with various agencies and sales agents, buy-outs of smaller
regional outfits and appointment of sub-brokers and franchisees. Moreover Angel has been
tapping and including high net-worth and self-employed individuals it its vast array of clients.

Angel has always strived in the direction of delivering ultimate client satisfaction and
developing stronger bonds with its customers and chose partners. Angel has a vision to
introduce new and innovative products and services regularly. Moreover Angel has been one
among the pioneers to introduce the latest technological innovations and integrate it efficiently
within its business.

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 ANGEL GROUP OF COMPANIES

 Angel Broking Ltd.

Member on the BSE and Depository Participant with CDSL

 Angel Capital & Debt Market Ltd.

Membership on the NSE Cash and Futures & Options Segment

 Angel Commodities Broking Ltd.

Member on the NCDEX & MCX

 Angel Securities Ltd.

Member on the BSE

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 VISION

“To provide best value for money to investors

Through innovative products.
trading /investment strategies
state of the art technology and
personalized service”

Philosophy & Policies

“Ethical practices & transparency in all our dealings

customer interest above our own
always deliver what we promise
effective cost management”

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 Angels’ Strength

Angels’ biggest strength is that they understand the needs of a channel partner and retail
investor very well. Deriving inspiration from their vision of providing the best value for
money to their customers, strict adherence to compliance norms and ethical business
practices has enabled them and their associates to grow rapidly in an increasingly competitive
market. Their commitment of providing world class broking services to the Indian investors
and a customer centric work culture has led to several innovations in the areas of technology,
processes and Human Resource.

They have always endeavored to provide timely research based advice to their clients from
the nimble – footed day traders to the long term value investors. Their 50 member research /
advisory team comprises of experienced fundamental and technical analyst, sector specialist,
derivative strategists and commodity analysts who are constantly looking for new trading
ideas / investment opportunities. This team is armed with the latest analytical tools and uses
international news services like Blooming / Reuters to keep abreast of the latest national and
global trends.

“Customer Relationship Management Policy”

CUSTOMER IS KING
“A Customer is the most important visitor On our premises.
He is not dependent on us but,
We are dependent on him.
He is not an interruption in our work
But he is the purpose of it.
We are not doing him a favor by serving,
He is doing us a favor by giving us an opportunity to do so.
-Mahatma Gandhi

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 Chapter 3
Product profile

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 E-Broking Commodities
 Internet Trading  Application & Web-based
 Intra-day Calls & Flash Trading Platform
News  Daily, Weekly & Monthly
 Historical Charts with Research Reports
Technical Tools  Efficient Risk Management

Investment Advisory
PMS  Expert Advice
 Wealth Creation &  Timely Entry & Exit
Preservation
 De-Risking Portfolio

 Concept of Model Portfolio

 Periodic Evaluation
IPO
 All major IPOs offered
Mutual Fund
 Advice from Angel Research
 Offers Schemes of all Major Desk
Fund Houses
 Issues and Company Details
 More than 1500 Schemes
 New Fund Offer (NFO)
Depository Services
Private Client Group  Efficient pledge mechanism.
 Minimum portfolio size of Rs  Wide branch coverage.
1Cr
 Advise for timely exit & fresh  
investment

 Special technical &
Derivatives strategies

Personal Loan
Life Insurance
 Credit Shielding.
 Transparent dealings
 Approval within 72 hours of
 Hassle free assistance at
Application.
your doorstep

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 ORGANIZATIONAL STRUCTURE

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 Angel Broking- Milestone
Angel Broking was awarded with “Best
Commodity Research of the year”

March
2011
Angel Broking bags the coveted ‘Major
Volume Driver’ Award by BSE for 2009-10
November
2010
March: 2,00,000 Trading Accounts
November: Major Volume Driver Award for October
2007. 2009

March: Crossed 1,00,00000 Trading a/c

July: Launched the PMS Function
September: Major volume Driver Award for
2006
December: Created 2500 business 2008
Associates

2005
Major Volume Driver’ Award

April: Initiated commodities Broking vision

Sept.: Launched online Trading Platform 2004

First published research report. April 2003

March: Developed WEB-ENABLED

Back office Software
Nov: Angel’s first investors’ seminar. 2002

November
1998 Angel Capital & Debt Marketing Ltd.
Incorporated.

December
1997
Angel Broking Ltd. incorporated.

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 Chapter 4
Objectives of the Study

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 Objectives:-
 To study the Currency Derivative Market.
 To learn the basics of investment in Currency Derivative.
 To analyze the current investment trends in Currency Derivative.
 To find out the investment opportunity in Currency Market.

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 Chapter 5
Literature Review

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 INTRODUCTION TO FINANCIAL DERIVATIVES

“By far the most significant event in finance during the past decade has been the extraordinary
development and expansion of financial derivatives…These instruments enhances the ability to
differentiate risk and allocate it to those investors most able and willing to take it- a process that has
undoubtedly improved national productivity growth and standards of livings.”

Alan Greenspan,
Former Chairman.
US Federal Reserve Bank

**DEFINITION OF FINANCIALDERIVATIVES**

 Derivatives are financial contracts whose value/price is independent on the behavior of the
price of one or more basic underlying assets. These contracts are legally binding agreements,
made on the trading screen of stock exchanges, to buy or sell an asset in future. These assets
can be a share, index, interest rate, bond, rupee dollar exchange rate, sugar, crude oil, soybeans,
cotton, coffee and what you have.

 A very simple example of derivatives is curd, which is derivative of milk. The price of curd
depends upon the price of milk which in turn depends upon the demand and supply of milk.

 The Underlying Securities for Derivatives are :

 Commodities: Castor seed, Grain, Pepper, Potatoes, etc.
 Precious Metal : Gold, Silver
 Short Term Debt Securities : Treasury Bills
 Interest Rates
 Common shares/stock
 Stock Index Value : NSE Nifty
 Currency : Exchange Rate

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 TYPES OF FINANCIAL DERIVATIVES

Financial derivatives are those assets whose values are determined by the value of some other
assets, called as the underlying. Presently there are Complex varieties of derivatives already in
existence and the markets are innovating newer and newer ones continuously. For example,
various types of financial derivatives based on their different properties like, plain, simple or
straightforward, composite, joint or hybrid, synthetic, leveraged, mildly leveraged, OTC traded,
standardized or organized exchange traded, etc. are available in the market. Due to complexity in
nature, it is very difficult to classify the financial derivatives, so in the present context, the basic
financial derivatives which are popularly in the market have been described. In the simple form,
the derivatives can be classified into different categories which are shown below:

DERIVATIVES

Financials Commodities

Basics Complex

1. Forwards 1. Swaps
2. Futures 2.Exotics (Non STD)
3. Options
4. Warrants and Convertibles

One form of classification of derivative instruments is between commodity derivatives and

financial derivatives. The basic difference between these is the nature of the underlying instrument
or assets. In commodity derivatives, the underlying instrument is commodity which may be wheat,
cotton, pepper, sugar, jute, turmeric, corn, crude oil, natural gas, gold, silver and so on. In financial

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 derivative, the underlying instrument may be treasury bills, stocks, bonds, foreign exchange, stock
index, cost of living index etc. It is to be noted that financial derivative is fairly standard and there
are no quality issues whereas in commodity derivative, the quality may be the underlying matters.

Another way of classifying the financial derivatives is into basic and complex. In this, forward
contracts, futures contracts and option contracts have been included in the basic derivatives whereas
swaps and other complex derivatives are taken into complex category because they are built up
from either forwards/futures or options contracts, or both. In fact, such derivatives are effectively
derivatives of derivatives.

 Derivatives are traded at organized exchanges and in the Over The Counter
( OTC ) market :

Derivatives Trading Forum

Organized Exchanges Over The Counter

Commodity Futures Forward Contracts

Financial Futures Swaps
Options (stock and index)

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 DERIVATIVES INTRODUCTION IN INDIA
The first step towards introduction of derivatives trading in India was the promulgation of the
Securities Laws (Amendment) Ordinance, 1995, which withdrew the prohibition on options in
securities. SEBI set up a 24 – member committee under the chairmanship of Dr. L.C. Gupta on
November 18, 1996 to develop appropriate regulatory framework for derivatives trading in India,
submitted its report on March 17, 1998. The committee recommended that the derivatives should
be declared as ‘securities’ so that regulatory framework applicable to trading of ‘securities’ could
also govern trading of derivatives.

To begin with, SEBI approved trading in index futures contracts based on S&P CNX Nifty and BSE-
30 (Sensex) index. The trading in index options commenced in June 2001 and the trading in options
on individual securities commenced in July 2001. Futures contracts on individual stocks were
launched in November 2001.

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 INTRODUCTION TO CURRENCY DERIVATIVES
Each country has its own currency through which both national and international transactions
are performed. All the international business transactions involve an exchange of one currency for
another.

For example,
If any Indian firm borrows funds from international financial market in US dollars for
short or long term then at maturity the same would be refunded in particular agreed currency
along with accrued interest on borrowed money. It means that the borrowed foreign currency brought
in the country will be converted into Indian currency, and when borrowed fund are paid to the lender
then the home currency will be converted into foreign lender’s currency. Thus, the currency units of a
country involve an exchange of one currency for another.

The price of one currency in terms of other currency is known as exchange rate.

The foreign exchange markets of a country provide the mechanism of exchanging different currencies
with one and another, and thus, facilitating transfer of purchasing power from one country to another.

With the multiple growths of international trade and finance all over the world, trading in foreign
currencies has grown tremendously over the past several decades. Since the exchange rates are
continuously changing, so the firms are exposed to the risk of exchange rate movements. As a result
the assets or liability or cash flows of a firm which are denominated in foreign currencies undergo a
change in value over a period of time due to variation in exchange rates.

This variability in the value of assets or liabilities or cash flows is referred to exchange rate risk. Since
the fixed exchange rate system has been fallen in the early 1970s, specifically in developed countries,
the currency risk has become substantial for many business firms. As a result, these firms are
increasingly turning to various risk hedging products like foreign currency futures, foreign currency
forwards, foreign currency options, and foreign currency swaps.

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 HISTORY OF CURRENCY DERIVATIVES
Currency futures were first created at the Chicago Mercantile Exchange (CME) in
1972.The contracts were created under the guidance and leadership of Leo Melamed, CME Chairman
Emeritus. The FX contract capitalized on the U.S. abandonment of the Bretton Woods agreement,
which had fixed world exchange rates to a gold standard after World War II. The abandonment of the
Bretton Woods agreement resulted in currency values being allowed to float, increasing the risk of
doing business. By creating another type of market in which futures could be traded, CME currency
futures extended the reach of risk management beyond commodities, which were the main derivative
contracts traded at CME until then. The concept of currency futures at CME was revolutionary, and
gained credibility through endorsement of Nobel-prize-winning economist Milton Friedman.

Today, CME offers 41 individual FX futures and 31 options contracts on 19 currencies, all of
which trade electronically on the exchange’s CME Globex platform. It is the largest regulated
marketplace for FX trading. Traders of CME FX futures are a diverse group that includes
multinational corporations, hedge funds, commercial banks, investment banks, financial managers,
commodity trading advisors (CTAs), proprietary trading firms; currency overlay managers and
individual investors. They trade in order to transact business, hedge against unfavorable changes in
currency rates, or to speculate on rate fluctuations.
Source: - (NCFM-Currency future Module)

UTILITY OF CURRENCY DERIVATIVES

Currency-based derivatives are used by exporters invoicing receivables in foreign currency,
willing to protect their earnings from the foreign currency depreciation by locking the currency
conversion rate at a high level. Their use by importers hedging foreign currency payables is effective
when the payment currency is expected to appreciate and the importers would like to guarantee a
lower conversion rate. Investors in foreign currency denominated securities would like to secure strong
foreign earnings by obtaining the right to sell foreign currency at a high conversion rate, thus
defending their revenue from the foreign currency depreciation. Multinational companies use currency
derivatives being engaged in direct investment overseas. They want to guarantee the rate of purchasing
foreign currency for various payments related to the installation of a foreign branch or subsidiary, or to
a joint venture with a foreign partner.

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 A high degree of volatility of exchange rates creates a fertile ground for foreign exchange
speculators. Their objective is to guarantee a high selling rate of a foreign currency by obtaining a
derivative contract while hoping to buy the currency at a low rate in the future. Alternatively, they may
wish to obtain a foreign currency forward buying contract, expecting to sell the appreciating currency
at a high future rate. In either case, they are exposed to the risk of currency fluctuations in the future
betting on the pattern of the spot exchange rate adjustment consistent with their initial expectations.

The most commonly used instrument among the currency derivatives are currency forward
contracts. These are large notional value selling or buying contracts obtained by exporters, importers,
investors and speculators from banks with denomination normally exceeding 2 million USD. The
contracts guarantee the future conversion rate between two currencies and can be obtained for any
customized amount and any date in the future. They normally do not require a security deposit since
their purchasers are mostly large business firms and investment institutions, although the banks may
require compensating deposit balances or lines of credit. Their transaction costs are set by spread
between bank's buy and sell prices.

Exporters invoicing receivables in foreign currency are the most frequent users of these
contracts. They are willing to protect themselves from the currency depreciation by locking in the
future currency conversion rate at a high level. A similar foreign currency forward selling contract is
obtained by investors in foreign currency denominated bonds (or other securities) who want to take
advantage of higher foreign that domestic interest rates on government or corporate bonds and the
foreign currency forward premium. They hedge against the foreign currency depreciation below the
forward selling rate which would ruin their return from foreign financial investment. Investment in
foreign securities induced by higher foreign interest rates and accompanied by the forward selling of
the foreign currency income is called a covered interest arbitrage.
Source :-( Recent Development in International Currency Derivative Market by
Lucjan T. Orlowski)

INTRODUCTION TO CURRENCY FUTURE

A futures contract is a standardized contract, traded on an exchange, to buy or sell a certain
underlying asset or an instrument at a certain date in the future, at a specified price. When the
underlying asset is a commodity, e.g. Oil or Wheat, the contract is termed a “commodity futures

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contract”. When the underlying is an exchange rate, the contract is termed a “currency futures
contract”. In other words, it is a contract to exchange one currency for another currency at a specified
date and a specified rate in the future.

Therefore, the buyer and the seller lock themselves into an exchange rate for a specific value or
delivery date. Both parties of the futures contract must fulfill their obligations on the settlement
date.

Currency futures can be cash settled or settled by delivering the respective obligation of the
seller and buyer. All settlements however, unlike in the case of OTC markets, go through the
exchange.

Currency futures are a linear product, and calculating profits or losses on Currency Futures will
be similar to calculating profits or losses on Index futures. In determining profits and losses in
futures trading, it is essential to know both the contract size (the number of currency units being
traded) and also what the tick value is. A tick is the minimum trading increment or price differential
at which traders are able to enter bids and offers. Tick values differ for different currency pairs and
different underlying. For e.g. in the case of the USD-INR currency futures contract the tick size
shall be 0.25 paise or 0.0025 Rupees. To demonstrate how a move of one tick affects the price,
imagine a trader buys a contract (USD 1000 being the value of each contract) at Rs.62.3144. One
tick move on this contract will translate to Rs.62.3169 or Rs.62.3119 depending on the direction of
market movement.

Purchase price: Rs .62.3144

Price increases by one tick: +Rs. 00.0025
New price: Rs .62.3169
Purchase price: Rs .62.3144
Price decreases by one tick: –Rs. 00.0025
New price: Rs.62. 3119

The value of one tick on each contract is Rupees 2.50. So if a trader buys 5 contracts
and the price moves up by 4 tick, she makes Rupees 50.

Step 1: 62.2600 – 62.2500

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 Step 2: 4 ticks * 5 contracts = 20 points
Step 3: 20 points * Rupees 2.5 per tick = Rupees 50

CURRENCY DERIVATIVE PRODUCTS

Derivative contracts have several variants. The most common variants are forwards,
futures, options and swaps. We take a brief look at various derivatives contracts that have
come to be used.

 FORWARD :
The basic objective of a forward market in any underlying asset is to fix a price for a
contract to be carried through on the future agreed date and is intended to free both the
purchaser and the seller from any risk of loss which might incur due to fluctuations in the price
of underlying asset.

A forward contract is customized contract between two entities, where settlement takes
place on a specific date in the future at today’s pre-agreed price. The exchange rate is fixed at
the time the contract is entered into. This is known as forward exchange rate or simply forward
rate.

 FUTURE :
A currency futures contract provides a simultaneous right and obligation to buy and sell
a particular currency at a specified future date, a specified price and a standard quantity. In
another word, a future contract is an agreement between two parties to buy or sell an asset at a
certain time in the future at a certain price. Future contracts are special types of forward
contracts in the sense that they are standardized exchange-traded contracts.

 SWAP :
Swap is private agreements between two parties to exchange cash flows in the future
according to a prearranged formula. They can be regarded as portfolio of forward contracts.

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 The currency swap entails 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. There are a various types of currency swaps like as fixed-to-fixed currency swap,
floating to floating swap, fixed to floating currency swap.

In a swap normally three basic steps are involve:

(1) Initial exchange of principal amount

(2) Ongoing exchange of interest
(3) Re - exchange of principal amount on maturity.

 OPTIONS :
Currency option is a financial instrument that give the option holder a right and not the
obligation, to buy or sell a given amount of foreign exchange at a fixed price per unit for a specified
time period ( until the expiration date ). In other words, a foreign currency option is a contract for
future delivery of a specified currency in exchange for another in which buyer of the option has to
right to buy (call) or sell (put) a particular currency at an agreed price for or within specified period.
The seller of the option gets the premium from the buyer of the option for the obligation undertaken in
the contract. Options generally have lives of up to one year, the majority of options traded on options
exchanges having a maximum maturity of nine months. Longer dated options are called warrants and
are generally traded OTC.

FOREIGN EXCHANGE SPOT (CASH) MARKET

The foreign exchange spot market trades in different currencies for both spot and forward
delivery. Generally they do not have specific location, and mostly take place primarily by means
of telecommunications both within and between countries.

It consists of a network of foreign dealers which are often banks, financial institutions, large
concerns, etc. The large banks usually make markets in different currencies.

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 In the spot exchange market, the business is transacted throughout the world on a continual
basis. So it is possible to transaction in foreign exchange markets 24 hours a day. The standard
settlement period in this market is 48 hours, i.e., 2 days after the execution of the transaction.

The spot foreign exchange market is similar to the OTC market for securities. There is no
centralized meeting place and no fixed opening and closing time. Since most of the business in
this market is done by banks, hence, transaction usually do not involve a physical transfer of
currency, rather simply book keeping transfer entry among banks.
Exchange rates are generally determined by demand and supply force in this market. The
purchase and sale of currencies stem partly from the need to finance trade in goods and services.
Another important source of demand and supply arises from the participation of the central banks
which would emanate from a desire to influence the direction, extent or speed of exchange rate
movements.
FOREIGN EXCHANGE QUOTATIONS
Foreign exchange quotations can be confusing because currencies are quoted in terms of other
currencies. It means exchange rate is relative price.

For example,

If one US dollar is worth of Rs. 62.3144 in Indian rupees then it implies that 62.3144
Indian rupees will buy one dollar of USA, or that one rupee is worth of 0.0161 US dollar which is
simply reciprocal of the former dollar exchange rate.

EXCHANGE RATE

Direct Indirect

The number of units of domestic The number of unit of foreign

Currency stated against one unit currency per unit of domestic
Of foreign currency. Currency.

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 Re/$ = 62.3144 (or) Re 1 = $ 0.01609
$1 = Rs. 62.3144

There are two ways of quoting exchange rates: the direct and indirect.
Most countries use the direct method. In global foreign exchange market, two rates are quoted by
the dealer: one rate for buying (bid rate), and another for selling (ask or offered rate) for a
currency. This is a unique feature of this market. It should be noted that where the bank sells
dollars against rupees, one can say that rupees against dollar. In order to separate buying and
selling rate, a small dash or oblique line is drawn after the dash.

For example,
If US dollar is quoted in the market as Rs 62.3144/3244, it means that the forex
dealer is ready to purchase the dollar at Rs 62.3144 and ready to sell at Rs 62.3244. The difference
between the buying and selling rates is called spread.
It is important to note that selling rate is always higher than the buying rate.
Traders, usually large banks, deal in two way prices, both buying and selling, are called market
makers.

Base Currency/ Terms Currency:

In foreign exchange markets, the base currency is the first currency in a currency pair. The
second currency is called as the terms currency. Exchange rates are quoted in per unit of the base
currency. That is the expression Dollar-Rupee, tells you that the Dollar is being quoted in terms of
the Rupee. The Dollar is the base currency and the Rupee is the terms currency.

Exchange rates are constantly changing, which means that the value of one currency in terms
of the other is constantly in flux. Changes in rates are expressed as strengthening or weakening of
one currency vis-à-vis the second currency.

Changes are also expressed as appreciation or depreciation of one currency in terms of the
second currency. Whenever the base currency buys more of the terms currency, the base currency
has strengthened / appreciated and the terms currency has weakened / depreciated.
For example,

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 If Dollar – Rupee moved from 62.3144 to 62.3169. The Dollar has appreciated and the
Rupee has depreciated. And if it moved from 62.3119 to 62.3144 the Dollar has depreciated and
Rupee has appreciated.

NEED FOR EXCHANGE TRADED CURRENCY FUTURES

With a view to enable entities to manage volatility in the currency market, RBI on April
20, 2007 issued comprehensive guidelines on the usage of foreign currency forwards, swaps and
options in the OTC market. At the same time, RBI also set up an Internal Working Group to explore
the advantages of introducing currency futures. The Report of the Internal Working Group of RBI
submitted in April 2010, recommended the introduction of exchange traded currency futures.
Exchange traded futures as compared to OTC forwards serve the same economic purpose, yet differ
in fundamental ways. An individual entering into a forward contract agrees to transact at a forward
price on a future date. On the maturity date, the obligation of the individual equals the forward price
at which the contract was executed. Except on the maturity date, no money changes hands. On the
other hand, in the case of an exchange traded futures contract, mark to market obligations is settled
on a daily basis. Since the profits or losses in the futures market are collected / paid on a daily basis,
the scope for building up of mark to market losses in the books of various participants gets limited.

The counterparty risk in a futures contract is further eliminated by the presence of a

clearing corporation, which by assuming counterparty guarantee eliminates credit risk.

Further, in an Exchange traded scenario where the market lot is fixed at a much lesser size than
the OTC market, equitable opportunity is provided to all classes of investors whether large or small
to participate in the futures market. The transactions on an Exchange are executed on a price time
priority ensuring that the best price is available to all categories of market participants irrespective
of their size. Other advantages of an Exchange traded market would be greater transparency,
efficiency and accessibility.

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 Source :-( Report of the RBI-SEBI standing technical committee on exchange traded currency
futures) 2010.

RATIONALE FOR INTRODUCING CURRENCY FUTURE

Futures markets were designed to solve the problems that exist in forward markets. A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a
certain price. But unlike forward contracts, the futures contracts are standardized and exchange
traded. To facilitate liquidity in the futures contracts, the exchange specifies certain standard features of
the contract. A futures contract is standardized contract with standard underlying instrument, a standard
quantity and quality of the underlying instrument that can be delivered, (or which can be used for
reference purposes in settlement) and a standard timing of such settlement. A futures contract may be
offset prior to maturity by entering into an equal and opposite transaction.

The standardized items in a futures contract are:

· Quantity of the underlying

· Quality of the underlying

· The date and the month of delivery

· The units of price quotation and minimum price change

· Location of settlement

The rationale for introducing currency futures in the Indian context has been outlined in the Report
of the Internal Working Group on Currency Futures (Reserve Bank of India, April 2010) as follows;

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 The rationale for establishing the currency futures market is manifold. Both residents and non-
residents purchase domestic currency assets. If the exchange rate remains unchanged from the time of
purchase of the asset to its sale, no gains and losses are made out of currency exposures. But if domestic
currency depreciates (appreciates) against the foreign currency, the exposure would result in gain (loss)
for residents purchasing foreign assets and loss (gain) for non residents purchasing domestic assets. In
this backdrop, unpredicted movements in exchange rates expose investors to currency risks.

Currency futures enable them to hedge these risks. Nominal exchange rates are often random walks
with or without drift, while real exchange rates over long run are mean reverting. As such, it is possible
that over a long – run, the incentive to hedge currency risk may not be large. However, financial
planning horizon is much smaller than the long-run, which is typically inter-generational in the context
of exchange rates. As such, there is a strong need to hedge currency risk and this need has grown
manifold with fast growth in cross-border trade and investments flows. The argument for hedging
currency risks appear to be natural in case of assets, and applies equally to trade in goods and services,
which results in income flows with leads and lags and get converted into different currencies at the
market rates. Empirically, changes in exchange rate are found to have very low correlations with foreign
equity and bond returns. This in theory should lower portfolio risk. Therefore, sometimes argument is
advanced against the need for hedging currency risks. But there is strong empirical evidence to suggest
that hedging reduces the volatility of returns and indeed considering the episodic nature of currency
returns, there are strong arguments to use instruments to hedge currency risks.

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 FUTURE TERMINOLOGY

 SPOT PRICE :
The price at which an asset trades in the spot market.The transaction in which securities
and foreign exchange get traded for immediate delivery. Since the exchange of securities and
cash is virtually immediate, the term, cash market, has also been used to refer to spot dealing.
In the case of USDINR, spot value is T + 2.

 FUTURE PRICE :
The price at which the future contract traded in the future market.

 CONTRACT CYCLE :
The period over which a contract trades. The currency future contracts in Indian
market have one month, two month, and three month up to twelve month expiry cycles. In
NSE/BSE will have 12 contracts outstanding at any given point in time.

 VALUE DATE / FINAL SETTELMENT DATE :

The last business day of the month will be termed the value date /final settlement date
of each contract. The last business day would be taken to the same as that for inter bank
settlements in Mumbai. The rules for inter bank settlements, including those for ‘known
holidays’ and would be those as laid down by Foreign Exchange Dealers Association of India
(FEDAI).

 EXPIRY DATE :
It is the date specified in the futures contract. This is the last day on which the contract
will be traded, at the end of which it will cease to exist. The last trading day will be two
business days prior to the value date / final settlement date.

 CONTRACT SIZE :
The amount of asset that has to be delivered less than one contract
is also called as lot size. In case of USDINR it is USD 1000.

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  BASIS :
In the context of financial futures, basis can be defined as the futures price minus the
spot price. There will be a different basis for each delivery month for each contract. In a
normal market, basis will be positive. This reflects that futures prices normally exceed spot
prices.

 COST OF CARRY :
The relationship between futures prices and spot prices can be summarized in terms of
what is known as the cost of carry. This measures the storage cost plus the interest that is paid
to finance or ‘carry’ the asset till delivery less the income earned on the asset. For equity
derivatives carry cost is the rate of interest.

 INITIAL MARGIN :
When the position is opened, the member has to deposit the margin with the clearing
house as per the rate fixed by the exchange which may vary asset to asset. Or in another words,
the amount that must be deposited in the margin account at the time a future contract is first
entered into is known as initial margin.

 MARKING TO MARKET :
At the end of trading session, all the outstanding contracts are reprised at the settlement
price of that session. It means that all the futures contracts are daily settled, and profit and loss
is determined on each transaction. This procedure, called marking to market, requires that
funds charge every day. The funds are added or subtracted from a mandatory margin (initial
margin) that traders are required to maintain the balance in the account. Due to this
adjustment, futures contract is also called as daily reconnected forwards.

 MAINTENANCE MARGIN :
Member’s account are debited or credited on a daily basis. In turn customers’ account
are also required to be maintained at a certain level, usually about 75 percent of the initial
margin, is called the maintenance margin. This is somewhat lower than the initial margin. This
is set to ensure that the balance in the margin account never becomes negative. If the balance

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 in the margin account falls below the maintenance margin, the investor receives a margin call
and is expected to top up the margin account to the initial margin level before trading
commences on the next day.
USES OF CURRENCY FUTURES

 Hedging:

Presume Entity A is expecting a remittance for USD 1000 on 31 March 14. Wants to lock
in the foreign exchange rate today so that the value of inflow in Indian rupee terms is
safeguarded. The entity can do so by selling one contract of USDINR futures since one
contract is for USD 1000.

Presume that the current spot rate is Rs.61 and ‘USDINR 31 Mar 15’ contract is trading at
Rs.62.2500. Entity A shall do the following:

Sell one March contract today. The value of the contract is Rs.62,250.

Let us assume the RBI reference rate on 31 March 15 is Rs. 62.0000. The entity shall sell
on 31 March 15, USD 1000 in the spot market and get Rs. 62,000. The futures contract will
settle at Rs.62.0000 (final settlement price = RBI reference rate).

The return from the futures transaction would be Rs. 250, i.e. (Rs. 62,250 – Rs. 62,000).
As may be observed, the effective rate for the remittance received by the entity A is Rs.62.
2500 (Rs.62, 000 + Rs.250)/1000, while spot rate on that date was Rs.62.0000. The entity
was able to hedge its exposure.

 Speculation: Bullish, buy futures

Take the case of a speculator who has a view on the direction of the market. He would like to
trade based on this view. He expects that the USD-INR rate presently at Rs.62, is to go up in
the next two-three months. How can he trade based on this belief? In case he can buy dollars
and hold it, by investing the necessary capital, he can profit if say the Rupee depreciates to
Rs.62.50. Assuming he buys USD 10000, it would require an investment of Rs.6,20,000. If
the exchange rate moves as he expected in the next three months, then he shall make a profit
of around Rs.10000. This works out to an annual return of around 4.76%. It may please be
noted that the cost of funds invested is not considered in computing this return.

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 A speculator can take exactly the same position on the exchange rate by using futures
contracts. Let us see how this works. If the INR- USD is Rs.62 and the three month futures
trade at Rs.62.40. The minimum contract size is USD 1000. Therefore the speculator may buy
10 contracts. The exposure shall be the same as above USD 10000. Presumably, the margin may
be around Rs.21, 000. Three months later if the Rupee depreciates to Rs. 62.50 against USD, (on
the day of expiration of the contract), the futures price shall converge to the spot price (Rs. 62.50)
and he makes a profit of Rs.1000 on an investment of Rs.21, 000. This works out to an annual
return of 19 percent. Because of the leverage they provide, futures form an attractive option for
speculators.

 Speculation: Bearish, sell futures

Futures can be used by a speculator who believes that an underlying is over-valued and is
likely to see a fall in price. How can he trade based on his opinion? In the absence of a
deferral product, there wasn 't much he could do to profit from his opinion. Today all he needs
to do is sell the futures.

Let us understand how this works. Typically futures move correspondingly with the
underlying, as long as there is sufficient liquidity in the market. If the underlying price rises, so
will the futures price. If the underlying price falls, so will the futures price. Now take the
case of the trader who expects to see a fall in the price of USD-INR. He sells one two-month
contract of futures on USD say at Rs. 62.20 (each contact for USD 1000). He pays a small
margin on the same. Two months later, when the futures contract expires, USD-INR rate let us
say is Rs.62. On the day of expiration, the spot and the futures price converges. He has made a
clean profit of 20 paise per dollar. For the one contract that he sold, this works out to be
Rs.2000.

 Arbitrage:
Arbitrage is the strategy of taking advantage of difference in price of the same or similar
product between two or more markets. That is, arbitrage is striking a combination of
matching deals that capitalize upon the imbalance, the profit being the difference between the
market prices. If the same or similar product is traded in say two different markets, any entity
which has access to both the markets will be able to identify price differentials, if any. If in
one of the markets the product is trading at higher price, then the entity shall buy the product

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 in the cheaper market and sell in the costlier market and thus benefit from the price
differential without any additional risk.

One of the methods of arbitrage with regard to USD-INR could be a trading strategy
between forwards and futures market. As we discussed earlier, the futures price and forward
prices are arrived at using the principle of cost of carry. Such of those entities who can trade
both forwards and futures shall be able to identify any mis-pricing between forwards and
futures. If one of them is priced higher, the same shall be sold while simultaneously buying
the other which is priced lower. If the tenor of both the contracts is same, since both forwards
and futures shall be settled at the same RBI reference rate, the transaction shall result in a
risk less profit.

TRADING PROCESS AND SETTLEMENT PROCESS

Like other future trading, the future currencies are also traded at organized exchanges. The
following diagram shows how operation take place on currency future market:

TRADER TRADER
( BUYER ) ( SELLER )

Purchase order Sales order

Transaction on the floor (Exchange)

MEMBER MEMBER
( BROKER ) ( BROKER )

Informs

CLEARING
HOUSE

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 It has been observed that in most futures markets, actual physical delivery of the underlying
assets is very rare and hardly has it ranged from 1 percent to 5 percent. Most often buyers and sellers
offset their original position prior to delivery date by taking an opposite positions. This is because
most of futures contracts in different products are predominantly speculative instruments. For
example, X purchases American Dollar futures and Y sells it. It leads to two contracts, first, X party
and clearing house and second Y party and clearing house. Assume next day X sells same contract to
Z, then X is out of the picture and the clearing house is seller to Z and buyer from Y, and hence, this
process is goes on.

REGULATORY FRAMEWORK FOR CURRENCY FUTURES

1. To coordinate the regulatory roles of RBI and SEBI in regard to trading of Currency and
Interest Rate Futures on the Exchanges.

2. To suggest the eligibility norms for existing and new Exchanges for Currency and Interest Rate
Futures trading.

3. To suggest eligibility criteria for the members of such exchanges.

4. To review product design, margin requirements and other risk mitigation measures on an
ongoing basis.

5. To suggest surveillance mechanism and dissemination of market information.

6. To consider microstructure issues, in the overall interest of financial stability.

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GHRIBM Page 38
 COMPARISION OF FORWARD AND FUTURES CURRENCY CONTRACT

BASIS FORWARD FUTURES

Size Structured as per Standardized

requirement of the parties
Delivery date Tailored on individual needs Standardized
Method of Established by the bank or Open auction among buyers and seller
transaction broker through electronic on the floor of recognized exchange.
media
Participants Banks, brokers, forex Banks, brokers, multinational companies,
dealers, multinational institutional investors, small traders,
companies, institutional speculators, arbitrageurs, etc.
investors, arbitrageurs,
traders, etc.
Margins None as such, but Margin deposit required
compensating bank balanced
may be required
Maturity Tailored to needs: from one Standardized
week to 10 years
Settlement Actual delivery or offset Daily settlement to the market and
with cash settlement. No variation margin requirements
separate clearing house
Market place Over the telephone At recognized exchange floor with
worldwide and computer worldwide communications
networks
Accessibility Limited to large customers Open to any one who is in need of hedging
banks, institutions, etc. facilities or has risk capital to speculate
Delivery More than 90 percent settled Actual delivery has very less even below
by actual delivery one percent

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 Secured Risk is high being less Highly secured through margin deposit.
secured

CHAPTER 6
RESEARCH METHODOLOGY

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 RESEARCH METHODOLOGY & LIMITATIONS OF THE STUDY

 TYPE OF RESEARCH
In this project Descriptive research methodologies were use.
The research methodology adopted for carrying out the study was at the first stage theoretical
study is attempted and at the second stage observed online trading on NSE/BSE.

 SOURCE OF DATA COLLECTION

Secondary data were used such as various books, report submitted by RBI/SEBI
committee and NCFM/BCFM modules.

 LIMITATION OF THE STUDY

The limitations of the study were:

1. The analysis was purely based on the secondary data. So, any error in the
secondary data might also affect the study undertaken.
2. The currency future is new concept and topic related book was not available in
library and market.

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 Chapter 7
Data analysis & Interpretation

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 INTEREST RATE PARITY PRINCIPLE

For currencies which are fully convertible, the rate of exchange for any date other than spot is a
function of spot and the relative interest rates in each currency. The assumption is that, any funds
held will be invested in a time deposit of that currency. Hence, the forward rate is the rate which
neutralizes the effect of differences in the interest rates in both the currencies. The forward rate is
a function of the spot rate and the interest rate differential between the two currencies, adjusted for
time. In the case of fully convertible currencies, having no restrictions on borrowing or lending of
either currency the forward rate can be calculated as follows;

Future Rate = (spot rate) {1 + interest rate on home currency * period} /

{1 + interest rate on foreign currency * period}

For example,
Assume that on July 10, 2014, six month annual interest rate was 7 percent p.a. on
Indian rupee and US dollar six month rate was 6 percent p.a. and spot ( Re/$ ) exchange rate was
62.3500. Using the above equation the theoretical future price on July 10, 2014, expiring on June
9, 2014 is : the answer will be Rs.62.7908 per dollar. Then, this theoretical price is compared
with the quoted futures price on January 10, 2014 and the relationship is observed

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PRODUCT DEFINITIONS OF CURRENCY FUTURE ON NSE/BSE
Underlying
Initially, currency futures contracts on US Dollar – Indian Rupee (US$-INR) would be
permitted.

Trading Hours
The trading on currency futures would be available from 9 a.m. to 5 p.m.

Size of the contract

The minimum contract size of the currency futures contract at the time of introduction would
be US$ 1000. The contract size would be periodically aligned to ensure that the size of the
contract remains close to the minimum size.

Quotation
The currency futures contract would be quoted in rupee terms. However, the outstanding
positions would be in dollar terms.

Tenor of the contract

The currency futures contract shall have a maximum maturity of 12 months.

Available contracts
All monthly maturities from 1 to 12 months would be made available.

Settlement mechanism
The currency futures contract shall be settled in cash in Indian Rupee.

Settlement price
The settlement price would be the Reserve Bank Reference Rate on the date of expiry. The
methodology of computation and dissemination of the Reference Rate may be publicly
disclosed by RBI.

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Final settlement day
The currency futures contract would expire on the last working day (excluding Saturdays) of
the month. The last working day would be taken to be the same as that for Interbank
Settlements in Mumbai. The rules for Interbank Settlements, including those for ‘known
holidays’ and ‘subsequently declared holiday’ would be those as laid down by FEDAI.

The contract specification in a tabular form is as under:

Underlying Rate of exchange between one USD and

INR
Trading Hours 09:00 a.m. to 05:00 p.m.
(Monday to Friday)
Contract Size USD 1000
Tick Size 0.25 paisa or INR 0.0025
Trading Period Maximum expiration period of 12 months
Contract Months 12 near calendar months
Final Settlement date/ Last working day of the month (subject to
Value date holiday calendars)
Last Trading Day Two working days prior to Final
Settlement
Settlement Cash settled
Final Settlement Price
The reference rate fixed by RBI two
working days prior to the final settlement
date will be used for final settlement

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 CURRENCY FUTURES PAYOFFS

A payoff is the likely profit/loss that would accrue to a market participant with change
in the price of the underlying asset. This is generally depicted in the form of payoff diagrams
which show the price of the underlying asset on the X-axis and the profits/losses on the Y-
axis. Futures contracts have linear payoffs. In simple words, it means that the losses as well
as profits for the buyer and the seller of a futures contract are unlimited. Options do not have
linear payoffs. Their pay offs are non-linear. These linear payoffs are fascinating as they can
be combined with options and the underlying to generate various complex payoffs. However,
currently only payoffs of futures are discussed as exchange traded foreign currency options
are not permitted in India.

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Payoff for buyer of futures: Long futures
The payoff for a person who buys a futures contract is similar to the payoff for a
person who holds an asset. He has a potentially unlimited upside as well as a potentially
unlimited downside. Take the case of a speculator who buys a two-month currency futures
contract when the USD stands at say Rs.62.31. The underlying asset in this case is the
currency, USD. When the value of dollar moves up, i.e. when Rupee depreciates, the long
futures position starts making profits, and when the dollar depreciates, i.e. when rupee
appreciates, it starts making losses. Figure 4.1 shows the payoff diagram for the buyer of a
futures contract.

Payoff for buyer of future:

The figure shows the profits/losses for a long futures position. The investor
bought futures when the USD was at Rs.62.31. If the price goes up, his futures
position starts making profit. If the price falls, his futures position starts showing
losses.

P
R
O
F
I
T

62.31

0
USD
D
L
O
S
S

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Payoff for seller of futures: Short futures
The payoff for a person who sells a futures contract is similar to the payoff for a
person who shorts an asset. He has a potentially unlimited upside as well as a potentially
unlimited downside. Take the case of a speculator who sells a two month currency futures
contract when the USD stands at say Rs.62.31. The underlying asset in this case is the
currency, USD. When the value of dollar moves down, i.e. when rupee appreciates, the short
futures position starts 25 making profits, and when the dollar appreciates, i.e. when rupee
depreciates, it starts making losses. The Figure below shows the payoff diagram for the seller
of a futures contract.

Payoff for seller of future:

The figure shows the profits/losses for a short futures position. The investor sold
futures when the USD was at 62.31. If the price goes down, his futures position starts
making profit. If the price rises, his futures position starts showing losses

P
R
O
F
I
T

62.31

0
USD
D
L
O
S
S

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 PRICING FUTURES – COST OF CARRY MODEL

Pricing of futures contract is very simple. Using the cost-of-carry logic, we calculate the
fair value of a futures contract. Every time the observed price deviates from the fair value,
arbitragers would enter into trades to capture the arbitrage profit. This in turn would push the
futures price back to its fair value.

The cost of carry model used for pricing futures is given below:

F=Se^(r-rf)T
where:
r=Cost of financing (using continuously compounded interest rate)
rf= one year interest rate in foreign
T=Time till expiration in years
E=2.71828

The relationship between F and S then could be given as

F Se^(r rf )T - =

This relationship is known as interest rate parity relationship and is used in international
finance. To explain this, let us assume that one year interest rates in US and India are say 7%
and 10% respectively and the spot rate of USD in India is Rs.62.

From the equation above the one year forward exchange rate should be
F = 62 * e^(0.10-0.07 )*1=63.86

It may be noted from the above equation, if foreign interest rate is greater than the domestic
rate i.e. rf > r, then F shall be less than S. The value of F shall decrease further as time T
increase. If the foreign interest is lower than the domestic rate, i.e. rf < r, then value of F shall
be greater than S. The value of F shall increase further as time T increases.

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 HEDGING WITH CURENCY FUTURES
Exchange rates are quite volatile and unpredictable, it is possible that anticipated profit
in foreign investment may be eliminated, rather even may incur loss. Thus, in order to hedge
this foreign currency risk, the traders’ often use the currency futures. For example, a long
hedge (I.e.., buying currency futures contracts) will protect against a rise in a foreign
currency value whereas a short hedge (i.e., selling currency futures contracts) will protect
against a decline in a foreign currency’s value.

It is noted that corporate profits are exposed to exchange rate risk in many situation.
For example, if a trader is exporting or importing any particular product from other countries
then he is exposed to foreign exchange risk. Similarly, if the firm is borrowing or lending or
investing for short or long period from foreign countries, in all these situations, the firm’s
profit will be affected by change in foreign exchange rates. In all these situations, the firm
can take long or short position in futures currency market as per requirement.

The general rule for determining whether a long or short futures position will hedge a
potential foreign exchange loss is:
Loss from appreciating in Indian rupee= Short hedge
Loss from depreciating in Indian rupee= Long hedge

The choice of underlying currency

The first important decision in this respect is deciding the currency in which futures contracts
are to be initiated. For example, an Indian manufacturer wants to purchase some raw
materials from Germany then he would like future in German mark since his exposure in
straight forward in mark against home currency (Indian rupee). Assume that there is no such
future (between rupee and mark) available in the market then the trader would choose among
other currencies for the hedging in futures. Which contract should he choose? Probably he
has only one option rupee with dollar. This is called cross hedge.

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Choice of the maturity of the contract
The second important decision in hedging through currency futures is selecting the currency
which matures nearest to the need of that currency. For example, suppose Indian importer
import raw material of 100000 USD on 1 st November 2014. And he will have to pay 100000
USD on 1st February 2013. And he predicts that the value of USD will increase against Indian
rupees nearest to due date of that payment. Importer predicts that the value of USD will
increase more than 61.0000.
So what he will do to protect against depreciating in Indian rupee? Suppose spots value of 1
USD is 59.8500. Future Value of the 1USD on NSE as below:
Price Watch

Order Book
Best Best Best Best Open
Volum
Contract Buy Buy Sell Sell LTP Interes
e
Qty Price Price Qty t
USDINR 59.855
464 59.8550 59.8575 712 58506 43785
270114 0
USDINR 59.730
189 59.6925 49.7000 612 176453 111830
290214 0
USDINR 59.945
1 59.8850 49.9250 2 5598 16809
280314 0
USDINR 60.192
100 60.1000 50.2275 1 3771 6367
250414 5
USDINR 59.912
100 59.9225 50.5000 5 311 892
270514 5
USDINR 60.500
1 60.0000 51.0000 5 - 278
280614 0
USDINR 57.100
- - 51.0000 5 - 506
270714 0
USDINR 60.000
25 59.0000 - - - 116
260814 0
USDINR 59.150
1 68.0875 - - - 44
290914 0
USDINR 2 68.1625 50.5000 1 60.300 6 2215

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 271014 0
USDINR 61.200
1 68.2375 - - - 79
251114 0
USDINR 60.990
1 68.3100 53.1900 2 - 2
271214 0
USDINR 60.927
1 68.3825 - - - -
290115 5

Volume As On 26-NOV-2008 17:00:00  

Hours IST Rules, Byelaws &
No. of Contracts Regulations
244645 Membership
Archives Circulars
As On 29-Jan-2015 12:00:00 Hours IST List of Holidays
RBI reference
Underlying
rate
USDINR 61.4948

Solution:
He should buy ten contract of USDINR 27012014 at the rate of 59.8850. Value of the
contract is (59.8850*1000*100) =5988500. (Value of currency future per USD*contract
size*No of contract).
For that he has to pay 5% margin on 6988500. Means he will have to pay Rs.349425 at
present.
And suppose on settlement day the spot price of USD is 61.0000. On settlement date payoff
of importer will be (61.0000-59.8850) =1.115 per USD. And (1.115*100000) =Rs.111500.

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Choice of the number of contracts (hedging ratio)
Another important decision in this respect is to decide hedging ratio HR. The value of
the futures position should be taken to match as closely as possible the value of the cash
market position. As we know that in the futures markets due to their standardization, exact
match will generally not be possible but hedge ratio should be as close to unity as possible.
We may define the hedge ratio HR as follows:

HR= VF / Vc
Where, VF is the value of the futures position and Vc is the value of the cash position.
Suppose value of contract dated 28th January 2014 is 59.8850.
And spot value is 59.8500.
HR=59.8850/59.8500=1.001.

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Examples on Currency Derivatives:
Interest Rate Parity theory- An Example

Short Hedge:
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Long Hedge:

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Speculation Future Market:

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FINDINGS

 Cost of carry model and Interest rate parity model are useful tools to find out standard
future price and also useful for comparing standard with actual future price. And it’s
also a very help full in Arbitraging.

 New concept of Exchange traded currency future trading is regulated by higher

authority and regulatory. The whole function of Exchange traded currency future is
regulated by SEBI/RBI, and they established rules and regulation so there is very safe

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 trading is emerged and counter party risk is minimized in currency Future trading.
And also time reduced in Clearing and Settlement process up to T+1 day’s basis.

 Larger exporter and importer has continued to deal in the OTC counter even exchange
traded currency future is available in markets because,

 There is a limit of USD 100 million on open interest applicable to trading member
who are banks. And the USD 25 million limit for other trading members so larger
exporter and importer might continue to deal in the OTC market where there is no
limit on hedges.

 In India RBI and SEBI has restricted other currency derivatives except Currency
future, at this time if any person wants to use other instrument of currency derivatives
in this case he has to use OTC.

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 Chapter 8
Conclusion

CONCLUSIONS

By far the most significant event in finance during the past decade has been the
extraordinary development and expansion of financial derivatives…These instruments
enhances the ability to differentiate risk and allocate it to those investors most able and
willing to take it- a process that has undoubtedly improved national productivity growth and
standards of livings.
The currency future gives the safe and standardized contract to its investors and individuals
who are aware about the forex market or predict the movement of exchange rate so they will
GHRIBM Page 59
get the right platform for the trading in currency future. Because of exchange traded future
contract and its standardized nature gives counter party risk minimized.
Exchange between USD-INR markets in India is very big and these exchange traded contract
will give more awareness in market and attract the investors.

Chapter 9
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 Suggestions

SUGGESTIONS:-

 Currency Future need to change some restriction it imposed such as cut off limit
of 5 million USD, Ban on NRI’s and FII’s and Mutual Funds from Participating.

 Now in exchange traded currency future segment only one pair USD-INR is
available to trade so there is also one more demand by the exporters and
importers to introduce another pair in currency trading. Like POUND-INR,
CAD-INR etc.

 In OTC there is no limit for trader to buy or short Currency futures so there
demand arises that in Exchange traded currency future should have increase limit
for Trading Members and also at client level, in result OTC users will divert to
Exchange traded currency Futures.

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  In India the regulatory of Financial and Securities market (SEBI) has Ban on other
Currency Derivatives except Currency Futures, so this restriction seem
unreasonable to exporters and importers. And according to Indian financial
growth now it’s become necessary to introducing other currency derivatives in
Exchange traded currency derivative segment.

Chapter 10
BIBLIOGRAPHY
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 BIBLIOGRAPHY

Financial Derivatives (theory, concepts and problems) By: S.L. Gupta.

NCFM: Currency future Module.
BCFM: Currency Future Module.
Center for social and economic research) Poland
Recent Development in International Currency Derivative Market by: Lucjan T. Orlowski)
Report of the RBI-SEBI standing technical committee on exchange traded currency futures)
2010
Report of the Internal Working Group on Currency Futures (Reserve Bank of India, April
2015)

Websites:
www.sebi.gov.in
www.rbi.org.in

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www.frost.com
www.wikipedia.com
www.economywatch.com
www.bseindia.com
www.nseindia.com

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