Dinesh Merani (11) Jaideep Chandok (20) Jitendra Yadav (21) Gaurav Gupta (27) Paridhi Khemka (28)

Currency Future
‡ Currency Futures are standardized contracts to buy or sell a currency at a future date at a rate determined in advance. ‡ The contracts are traded on regulated exchanges in accordance with the guidelines specified in the RBI-SEBI Standing Technical Committee Report on Exchange Traded Currency Futures, 2008.

for JPY it will be 1.000 JPY The settlement price shall be RBI¶s Reference Rate on the last trading day FINAL SETTLMENT DAY: The contract would expire on the last working day (excluding Saturdays) of the month. All the contracts would be cash settled in Indian Rupees The maximum maturity of the contracts shall be 12 months. the quotation will be for 100 JPY in Indian rupees. only USD-INR was allowed. All monthly maturities from one to 12 months would be made available Expiry day & time: All the futures contracts of four currency pairs shall expire at 12 noon.00. EURINR. Euro and Pound Sterling will be quoted for one unit of foreign currency in Indian rupees. Permitted lot size: For USD. EUR and GBP. From 19. three more currency pairs namely. two working days prior to the last business day of the expiry month. for Japanese Yen. Order quotation: While US dollar. GBP-INR and JPY-INR are allowed by RBI).2010.000 foreign currency. the lot size will be 1.01. ‡ ‡ ‡ ‡ .Basic Aspects of Currency Futures ‡ ‡ ‡ ‡ ‡ ‡ Four currency pairs are allowed to be traded (Originally in August 2008.

. which is an agreement to transact at a forward price on a future date and no money changes hands except on the maturity date. transactions are executed on a price time priority ‡ In Currency Futures.Need for Currency Futures ‡ Importers/Exporters may have some obligations in Forex market. trading in Currency Futures will help them hedge their positions. mark to market obligations are settled on a daily basis. ‡ The counter-party risk is eliminated as the clearing corporation guarantees the trades. unlike a forward contract. ‡ By ensuring that the best price is available to all categories of market participants.

2008 ‡ MCX-SX-Started in October.Started in Aug.Started in October.Exchanges engaged in Currency future in India ‡ NSE.2008 ‡ USE-Started in 31st Aug.2010 .2008 ‡ BSE.

Indian Foreign Exchange Markets Participants .

Market Share ² Currency Future .

Trading Strategies .

or different exchanges can exploit arbitrage arising due to pricing differences. just like stocks or commodities or any other asset class ‡ Hedging ± Participants with exposure in currency can use futures to manage risk arising from unfavourable exchange rate movements ‡ Arbitrage ± Entities with access to both Exchange traded Futures and OTC markets. .Trading Strategies of Currency Futures ‡ Speculation/Investment ± Participants with a view on the Forex market can trade futures to profit from these views.

43.5000 Current Spot rate (9 July 08): 43.Trading Strategies ² Speculation/Investment View: INR will depreciate against USD.0000 Economic return: Profit. A futures price ³F´ is traded on screen. Rupees 500 (44. The price is the USDINR exchange rate at a future date. .000 ± 43.0000 Buy 1 July contract: Value Rs.500 (USD 1000 * 43. caused by India¶s sharply rising import bill and poor FII equity flows Trade: USDINR 31 July contract: 43.500) A Currency Futures contract is exactly like a futures contract on the NIFTY or on INFOSYTCH.5000) Hold contract to expiry: RBI fixing rate on 29 July 08 ± 44.

short hedge is taken by someone who already owns the base currency or is expecting a future receipt of the base currency.Trading Strategies ² Short Hedging ‡ A short hedge involves taking a short position in the futures market. . who is expecting a receipt of USD in the future will try to fix the conversion rate by holding a short position in the USD-INR contract. An example where this strategy can be used : ‡ An exporter. In a currency market.

Trading Strategies ² Long Hedging ‡ This strategy is used by those who will need to acquire base currency in the future to pay any liability in the future. An example where this strategy can be used: ‡ An importer who has to make payment for his imports in USD will take a long position in USDINR contracts and fix the rate at which he can buy USD in future by paying INR .

Arbitrage Arbitrage can potentially exist between. OTC forwards and the non-deliverable forwards traded offshore An arbitrage can be executed by an entity having access to any two of the above Corporate entities with an underlying exposure.Trading Strategies . currency futures. can straddle both markets Sell 1st month in currency futures Buy 1 month forward in OTC markets This scenario can exist when currency futures are trading higher than forwards which will also be governed by interest rate differentials and USD supply with banks Restricted access to the OTC and NDF markets could translate to the arbitrage gap not closing .

RBI·s eligibility criteria for banks Banks authorized by RBI as µCategory Authorized Dealers¶ are permitted to become trading and clearing members subject to the following minimum prudential requirements: Minimum net worth of Rs 500 crore Minimum Capital Adequacy Ratio (CRAR) of 10 per cent Net NPA (non-performing assets) should not exceed three per cent Made net profit for the last three years ‡ ‡ ‡ ‡ .

Clearing & Risk Mgmt .NSE ² Trading. Settlement.

1 Crore. Members to be approved by SEBI Foreign Institutional Investors and Non Resident Indians not permitted to trade in the initial phase .Trading Membership: Trading membership of NSE and Clearing membership of NSCCL. 50 Lakhs Separate Certification required. Clearing member Rs 10 crores Minimum Liquid Networth for clearing members Rs. Balance sheet networth: Trading member Rs.


Price Watch Window .

Clearing & Settlement Daily Clearing and Settlement Trades processing Position computation Daily settlement price Mark to market settlement Client margin reporting Final Clearing and Settlement Expiry day processing Final settlement price Final settlement of futures contracts .

Risk Management Real time Upfront portfolio based margins Based on 99% VaR Client level monitoring Initial Margin Margins calculated using SPAN Minimum Initial margin 1.75% on day 1. 250/Monitored at Trading and Clearing Member level . 1% thereafter Calendar spread margins defined at Rs.

Risk Management Extreme Loss Margin 1% on value of gross open positions Monitored at Clearing Member level Positions Limits Client : 6% of total open interest or USD 5 million whichever is higher Trading member : 15% of total open interest or USD 25 million whichever is higher .

Issues .

while margining requirements may effectively drive the cost of hedging in futures up. .not possible to hedge small exposures generally. Cost ±forwards have no upfront cost. The management of margin and settlement of daily mark ± to ± market differences could be cumbersome for some corporate customers. Small lots.Standardization ± it is not possible to obtain a perfect hedge in terms of amount and timing.

like. margin.Open Interest Limit Trader Level Client Level FII & NRI not allowed Currency futures involve some costs. brokerage. . etc. RBI¶s possible intervention in foreign exchange markets to keep the rupee stable may some times impact the participants who have taken exposure to currency futures.

Thank you !! .

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