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Currency Derivatives

By Me

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What are Derivatives Derivatives are the financial instruments that derive their

value from the underlying assets.

Types of Derivatives

Futures

Options

SwapsSwapoption

Types of Assets

Index- NIFTY, SENSEX

Stocks

Currency

Interest Rate

Debt

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What is a Future Contract A futures contract is a standardized contract between

two parties to buy or sell a specified asset (e.g. Oranges,Oil, Gold) of standardized quantity and quality at aspecified future date at a price agreed today (thefuturesprice).

Future Date Expiry date( last Thursday of every month).

e.g.- Two parties agree to exchange a $1000 at a price ofRs45 on 27-Jan-2011( irrespective of the spot price ).

Marked-to-Market everyday. Exchanged Traded.

Used by traders to hedge against fluctuations.

Forward Contracts- OTC, Non-Standard.

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What is an Option Contract

Th

e buyer of th

e option gains th

e righ

t, but not th

eobligation, to engage in some specific transaction

on the asset, while the seller incurs the obligation

to fulfill the transaction if so requested by the

buyer. E.g. A Person buys an option to purchase 100

shares of Tata Steel at Rs700 on 27-Jan-2011 at a

premium of Rs 5.

If the spot price = Rs750, profit = Rs(50-5)45.

Max loss= Rs 5(if Spot price < 700).

Marked-to-Market( Option writers, Unlimited loss)

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Currency Derivatives These are the instruments that derive their value from the

underlying currency.

Worldwide - $45 trillion market

Exchange offering currency derivatives

- NSE Futures Options

- BSE Futures- USE* Futures Options.

- MCX-SX Futures

*USE- United Stock Exchange

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Products BSE

- Futures INRUSD

NSE

- Futures USDINR EURINR GBPINR JPYINR

- Options INRUSD

USE

- Futures USDINR EURINR GBPINR JPYINR

- Option INRUSD

MCX-SX

- Futures USDINR EURINR GBPINR JPYINR

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How does the Indian Forex market

work? The Foreign Exchange Management Act

Regulators RBI and SEBI

Who can trade in the Currency Futures Market?

Except FIIs and NRIs, everyindividual/corporate/institution/bank etc. is allowed totrade in the Currency Futures market.

What is Counter-party or Credit Risk?

The ICCL (the Clearing Corporation of Bombay Stock

Exchange Ltd.) gives an unconditional guarantee for the netsettlement obligations of all clearing members in thecurrency derivative segment. As such, in case of default of aclearing member, ICCL becomes counter-party for his netsettlement obligations and thus other market participantsremain unaffected.

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Underlying asset is a CU

RREN

CY. Are standard contracts of a specified quantity.

To exchange one currency for another.

At a specified date in the future called.

Settlement date.

At a price that is fixed on the purchase date

called futures price.

What are Currency Futures?

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Why trade in Currency Futures?

Currency Futures allows investors to take a view

on the movement of the Indian Rupee (INR)

against other currencies.

What do we mean by Currency Forward?

A currency forward contract is traded in theover-the-counter market.

They may not standardized contracts

They are traded OTC(Over the Counter )

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Which currencies are allowed to trade on ?

To begin with, only US Dollar ($) futures were traded againstthe Indian Rupee (INR). The contract for say the month of

September will be called USDJAN2011. Now- Euro, GBP, YEN

The Currency Futures are presently available for trading from9.00 am till 5.00 pm Monday through Friday.

There are 12 near calendar months contract available for

trading along with spread contracts for every combination. Spread Contract are positions where by a trader takes a long

/buy position in one month and short/sell position in thesecond month through one single order.

The underlying value is the rate of exchange between one

unit of foreign currency and Indian Rupee. USD is the base currency and the variable currency is INR.

One unit of USD (One Dollar) is priced in terms of INR.Example: 1USD = INR 41.8525/8550

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The tick size or minimum variation is INR 0.25Example: If the last order was INR 42.1525, the nextorder will be either INR 42.1550 or INR 42.1500.

The minimum Lot Size/Contract Size is USD 1000 (and inmultiples of USD 1000 thereafter).

You do not need to own the underlying currency whenyou enter into a futures contract. The contract simplyrepresents a commitment to either sell or buy the asseton the set expiry date.

The Currency Futures are cash-settled.

The Reserve Bank Reference Rate on the date of expirywill be the Settlement Price.

Settlement Price = Avg. ofTrades in Last 30 mins. The Currency Futures contract expires on the last

working day (excluding Saturdays and FEDAI holidays) ofthe month.

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What are Currency Options

Gives the buyer the right(but not the obligation)to buy/sell the currency at an agreed on price

on a specified date.

Newly introduced in the market NSE and USE

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Types Of Margins The four types of margins mandated by SEBI are

- Initial Margin- Extreme Loss Margin

- Calendar Spread Margin

- Mark-to-Market Margin.

Th

e Initial Margin is 1.75% on th

e first day of currency futurestrading and 1% thereafter .

Extreme Loss Margin is 1% on the Mark-to-Market value ofthe Gross Open Positions .

Calendar Spread Margin is Rs. 250.00 for all months of spread.

Th

e benefit for a calendar spread would continue till expiry ofthe near month contract.

Mark-to-Market margin is the daily profit or loss obtained bymarking the Member's outstanding position to the market.