Trading in Currency Futures

Why to Trade in Currency Futures

Why to Trade in Currency Futures:
•A separate Asset Class
•Correlation with different Asset Classes

•Commodities •International/COMEX Gold Price
•USD/INR depreciation leads to rise in MCX gold prices

•International Crude Price

Market Potential of USD 34 Billion a day
(Average Daily Volume in the OTC Market)
Conservatively: USD 30 Billion= 30 X 100 X 40 = INR 1, 20, 000 Crs Lets Assume 1 USD = INR 40.00

50% of the above will be Rs 50 – 60, 000 Crs a day

which have been granted Authorized Dealer licenses by the RBI . corporate entities. NRIs and individuals All participants trade within limits or parameters prescribed by the Reserve Bank of India Tenor Amount Direction Past Performance The average daily volume stands at USD 34 billion All foreign currency spot and forward transactions need to be routed through Scheduled Commercial Banks. banks. FIIs.Foreign Exchange Markets in India Regulated by Reserve Bank of India Participants include.

Currency Futures .9025) Cash settled in INR on relevant RBI reference rate Last trading day: two business days prior to last business day of the month (spot convention) Expiring contract will trade till 12:00 noon on the last trading day Market timings 09:00 to 17:00 Order driven market .25 paise or INR 0.0025 (46.Framework Category Underlying Contract Size Contract Months Final Settlement Date Min Price fluctuation Settlement Description Rate of exchange between 1 USD and INR (USDINR) USD 1000 12 near calendar months Last business day of the month 0.9000 – 46.

Currency Futures .Framework All resident Indian entities and individuals permitted to trade No underlying required to be Daily mark to market on the following day . this enables hedging of derived exposures Position limits will determine amount that can be traded Trading member – USD 25 million or 15% of Open Interest whichever is higher Client position limits – USD 5 million or 6% of Open Interest whichever is higher Margins to be posted with the trading / clearing member pre .

OTC vs Currency futures OTC Market Accessibility Price Transparency Liquidity Credit dependent Low Subject to credit limits Exchange Traded Futures High High High Agreements Credit Exposure Margins (collateral) Daily MTM Customized Yes Usually not required No Standard Mitigated through the clearing corporation Required Yes .

OTC vs Currency futures OTC Market Execution Underlying exposure Settlement Position limits Bank Required Physical Delivery Dependent on Underlying Exchange Traded Futures Trading Member Not required Net Settled in INR Higher of USD 5 mio or 6% of Open Interest .

As a client on NSE CDS… Underlying not required to trade on the exchange Immediate trade reversal can be done Margins released when trade is unwound or expires MTM settlement happens the next day and you need not wait for original contract maturity date for cash flow Trading screen accessible to client .price transparency .

CDS .Participation More than 500 Members are Participating 12 Banks are trading members and more are in the pipeline Daily gross traded volume: around Rs. 2000 crs. – – – – Proprietary Corporate Banks Retail : : : : 40% 10% 10% 40% Near month most active Thin Bid-ask spreads .

40 to Rs.40 to Rs.35 This is depreciation of USD But appreciation of INR Holders of Sell position in USD will benefit .Understanding the Rate Fluctuation • INR/USD goes from Rs.45 • Thus more INR will be required to buy the same amount of USD • This is appreciation of USD • But depreciation of INR • Holders of buy position in USD will benefit • • • • If INR/USD goes from Rs.

What factors affect Exchange Rate & hence trading decisions ? Macro economic views Monetary Policy RBI intervention USD sentiment Performance of key commodities affecting trade Flow information Performance of other Asian currencies Performance of equity markets Policy announcements affecting flows – trade or capital REER – Real Effective Exchange Rate Data announcements .

Indian Foreign Exchange Markets: INR trades in a managed floating exchange rate regime INR is fully convertible on India’s current account. but not on the capital account Foreign institutional investors can fully repatriate their investments Resident Indian individuals have been permitted to invest offshore All foreign currency spot and forward transactions need to be routed through schedule commercial banks (Authorized Dealers) Access is restricted to banks and entities having a commercial exposure Volumes and tenor is restricted to underlying exposure Only banks have open position limits .

A new and better alternative for trading: • • • • • • • • • USD-INR cash-settled futures market at NSE Access to all Indians Currently restrictions on NRI / FII No requirement for underlying position Small contract size Low margins Settlements guaranteed & no counter party risks Online real-time screen based trading Convergence of national / international investors Transparent order book .

What drives trading of currencies & who are the participants Directional Views Positioning for INR appreciation or depreciation Hedging existing exposure Importers & Exporters hedging future payables or receivables Borrowers hedging FCY loans – interest or principle payments NRIs looking to hedge their investment in India Resident Indians looking to hedge investments offshore FIIs hedging their investments in India Trade and Capital Flows Remittances for trade or services and capital transactions Arbitrage Entities who can access onshore and non deliverable forward markets .

Taking a View on the Spot Market .

Volatility of USD/INR exchange rate .

20 : 49.Taking a View on Spot INR USD/INR 28th Jan 09 Contract Current Spot Rate (29th Dec ‘08) View Position in Futures Position at maturity (28th Jan 09) Profit / Loss Investment in Margin : 49.60 : Profit Rs.10 : INR to depreciate : Buy USD/INR future Contract at 49. 5% of the Contract size A currency future contract is similar to a futures contract on any Scrip or Index . 400 on 01 Contract : Approx.20 : 49.

Factors Affecting Trading decisions .

Hedge Currency Risk .

8 – 44.45) = Rs.000 (receipt from overseas party) in the spot market at the rate of 44. •Simultaneously sell $25.95 – 44.80.Using Futures to Hedge Currency Risk An exporter wants to protect himself from the likely appreciation in Rupee.80 in September to 44.45 in December = 25. 12.45) = Rs.000 x (44.8.500 •In spot Market: Loss due to currency appreciation from 44.45 •Profit from future contracts = 25.000 by December end.45.000 x (44. •On 5th September sell 25 numbers of USD-INR future contracts (each of $1000) of December month at the prevailing rate of 44.95 •On 28th December cover sell position by purchasing 25 contracts of December month at the then prevailing rate of say 44. Current spot rate of USD-INR is 44. He has dispatched the consignments on 5th September and he is expecting the payment of $25. 750 .

he has not only covered his loss but also earned little profit from the futures transaction.3.Payoff of Hedge vis-à-vis the transaction •His Notional Net Profit as a result of Hedging transactions would be: Rs. 750 o NOTE: Had he not taken position in the currency futures.8. .8. 12. On the contrary.Rs. 750 = Rs.500 . he would have made a loss of Rs. 750.

Remove Forex Risk while trading in the Commodity Market .

Remove Forex Risk while trading Commodities • COMEX gold prices have direct relationship with MCX gold prices • MCX prices decreases along with decrease in COMEX prices • But USD/INR depreciation leads to rise in MCX gold prices • This fluctuation affects the profit margins of corporate/clients • By hedging USD/INR through futures. offsets the deviation caused in COMEX and MCX prices .

860 Buy MCX Gold @ 11.860 Buy MCX Gold @ 11.50/- .100/- Scenario II .USD/INR = 44.30) Sell COMEX Gold @ $830 Buy COMEX Gold @ $820 Profit = $10 Sell MCX Gold @ 11.760 Profit = Rs.30 (Constant) Sell COMEX Gold @ $830 Buy COMEX Gold @ $820 Profit = $10 Sell MCX Gold @ 11.810 Profit = Rs.60 (Depreciates from 44.Pay off from the Hedge Scenario I .USD/INR = 44.

Arbitrage (Futures Market & OTC Market) .

Approx 11 Paisa arbitrage • Arbitrage will be realized at the expiry of the contract.3550 (1 month) • Net Gain = 44.e.3550 = 0.Arbitrage Opportunity • Sell in futures @ 44.1075 • i . .4625 levels (1 month) • Buy in forward @ 44.4625-44.3250 + 3 paisa premium = 44.

Currency Futures Trading at Sharekhan .



CDS WEB site .

Total would be approx.M.M.Currency Futures Trading at Sharekhan: • Market Timing • Contract Size • Maturity Period • Quote • Margin : 9. 10.50 01 Paise = Rs. 5% .00 A. to 5.00 P.00 .0025 INR • Profit/Loss (per Contract) : 01 tick = Rs 2. : 1000 USD per lot : 12 monthly contracts with expire on the last working day (excluding Saturdays) of the month : INR per USD : Initial Margin + SPAN (Maintenance Margin).6% • Tick : 0.

CESS on Service Tax Transaction Charge on T.02375 0.00095 0.0277305 3 5 7 9 11 . CESS on Service Tax Higher Edu.00285 Service Tax On Brok.0063821 0.0002% 0.f.If Price is 47.0000456 0.O.0000285 0.03% 0.00171 0.0095 0.000057 1.0000228 0. SEBI Turnover fees on Value Stamp Duty on T.00095 0.08 Edu.00095 0. 16.e.0000342 0.O.00114 0.0000057 0.0170563 0.50 Brokerage % Absolute Brokerage 0.00057 2.00095 0.019 0.000095 0.25 paise or INR 0.0000171 0.01% 0.002% 0.000095 0.0223934 0.00% 0.0000114 0.00% 0.0117192 0.02% 0.00% 0.0000114 0. Total Tick (0.000095 0.00475 0.05.0025) 12.0000228 0.05% 0.01425 0.00228 0.000095 0.000095 0. w.00095 0.04% 0.

in .in • •Rbi.Important Websites : • ( • •Sharekhan.








0000 0.8500 Last Traded Price 46.8550 Diff.0900 49.1050 49.0050 .0150 0.2500 50.2500 50. 0.Last Trade Date 25-SEP-2008 27-OCT-2008 26-NOV-2008 RBI Reference Rate 46.

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