Currency Derivatives Final

8/8/2019 Currency Derivatives Final

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Group members:KinjalPranav

ManojSrikantMahesh


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Introduction to Currency Derivatives

Global Scenario

Indian Scenario

Regulations

Euro & its effect on India


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UnderlyingCommodities

Metals

DebtSecurities

InterestRates

Shares

Index

Currency


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BOP

Interest rates

Speculation


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Buy or sell currencies at a future date

Rates of exchange agreed on the very day ofdeal

Type of contract Settlement

Cash Same working day

Tom Next working day

Spot Second working day

Forward Beyond spot date


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Determination

Spot USD/INR 40.0250- 40.0300 Spot USD/CHF 1.3685-1.3695

+ 1 month 400- 450 - 1 month 35- 30

1 moth fwd USD/INR 40.0650-40.0750 1 month fwd USD/CHF 1.3650- 1.3665


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Example:

Bank A: Rs 46.7510- 46.7630 Bank B: Rs 46.7680- 46.7770


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Choice 1:

Deposit Rs10,00,000 `

Rate=6%

1 year:

`. 10,60,000


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Choice 2:

Invest @ 4%;

Amountgrows

Convert to Rsagain

Convert Rs

10,00,000 toBritish

pounds; rate=72.50


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Contract to exchange 1 currency with another

at specified date & rate in future

Features:

1. Standardized & exchange traded2. Contract size

3. Initial margin4. Maintenance margin


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Buy base currency (USD)

Expecting base currency to rise in value


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On 1 May, 2008 expects INR will depreciate

against USD

Buys 1USD/INR contract


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New rate 42.4600 x 000 42460

Previous rate 40.5800 x 000 40580

Profit Rs. 880


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Long ositionin f t res Short ositionin f t res

Buying Selling

Buy base currency Sell base currency

Want base currency to rise Want base currency to fall


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Take a position in futures market opposite to

position in physical market


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1 Jan,2008- import 1000 barrels-payment in USD on 1 July

Price= USD 110/barrel ; Rate= 1USD= ` 39.41

Cost of 1 barrel= `4335.10


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New rateon J ly 43.2300 x 0 4755.30

Previous rate 39.4100 x 110 4335.10

Increasedcost Rs. 420.20

Total increasedcost 420.20 x 1000 barrels Rs. 420200


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S ot market Futures market

Jan 1 1 USD= ` 39.41

Current Cost= 39.41*110*1000=4335100

July USD contract at IN` 39.90

Price per contract = 39.90*1000= I`NR

39900

Appro contracts 110000/1000= 110

Buy 110 contracts for 39900*110= 4389000

July 1 1 USD= IN` 43.23

Buy 110000 USD*43.23 = 4755300

Sell 110 contracts, rate= 43.72

Price per contract = 43.72*1000=` 43720

Hence, value of 110 contracts =

43720*110= 4809200

4755300- 4335100= 420200

4809200- 4389000= 420200

4755300- 420200= 4335100


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Holder has the right to exchange a fixed amount of

one currency for another at pre-fixed rate on or

upto a specified date in future.

Types

Call Put


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Importer purchases call option from BOI,

Amount= USD 1 million, rate= R`s 43.25 per

$, Delivery date 30th Sept, premium= R`s0.54/$

On 30th Sept., spot dollar rate

In the money

Spot price = 43.90

- Exercise price = 43.25

Pay off = 0.65

Out the money

Spot rate = 43.10


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Size of contract:62,500

Exercise price

0.90 /

The indicated contract priceis:

62,500 v $0.0125/ = $781.25

One call option gives the holder the right to purchase

62,500 for $56,250 (= 62,500 v $0.90/)Option price for

purchase of 1 at

90 is 1.25

Maturity month

One call option gives the holder

the right to purchase 62,500 for

$56,250. This option costs $781.25.


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EUR Euro to US dollar c.f.

GBP British pound to US dollar c.f.

CHF Swiss Franc to US dollar c.f.

AUD Australian dollar to US dollar c.f.

CAD Canadian dollar to US dollar c.f.

RP Euro to British pound c.f.

RF Euro to Swiss franc c.f.


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RANK EXCHANGE TRADING VOLUME (Numberof contracts)

1 Korea Exchange 2 474 593 261

2 Eurex 1 526 751 9023 Chicago Mercantile Exchange 1 403 264 034

4 Chicago Board of Trade 805 884 413

5 Euronext.liffe 730 303 126

6 Chicago Board Options Exchange 674 735 3487 International Securi-ties Exchange 591 961 518

8 Sao Paulo Stock Ex-change (Bovespa) 287 518 574

9 Bolsa de Mercadorias y Futuros 283 570 241

10 New York Mercantile Exchange 276 152 326


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CURRENCIES VALUE(percentage)

USD/EUR 31

USD/CHF 15

EUR/CHF 14

USD/JPY 11

USD/GBP 6

OTHER 23


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1992 1995 1998 2001 2004 2007

EUR/USD _ _ _ 30 28 27

USD/DEM 25 22 20 _ _ _

USD/FRF 2 4 4 _ _ _

USD/JPY 20 21 18 20 17 13GBP/USD 10 7 8 11 14 12

AUD/USD 2 3 3 4 5 6

USD/CHF 6 5 5 5 4 5

CAD/USD 3 3 3 4 4 4

USD/SEK _ _ _ _ _ 2

USD/other _ 17 25 17 16 19

EUR/JPY _ _ _ 3 3 2

EUR/GBP _ _ _ 2 2 2

EUR/CHF _ _ _ 1 1 2

OTHER 32 18 14 3 6 6


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The relative weight of the core currencies (EUR, USD,JPY and GBP) declined in April 2007.

USD has declined slightly in JPY and the CAD remains

unchanged. EUR as a base currency rose further between 2004

and 2007. TheGBP declined , confirming the global trend. The USD remains the most actively traded currency. Other currencies in futures are South African Rand,Hungarian Forint, Polish ,Zloty, Czech Koruna,Brazilian Real, Swedish Krona.


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Currency price stability

Easy access

Complete transparency Better liquidity

Lower transaction costs

Easy to trade


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Exchange traded instrument

Smaller lot size ($1000)

Elimination of counter-party risk Low brokerage charges

Decent intraday volatility

Transparency, efficiency and speed


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Contract Size USD 1000

Tick size R`s. 0.0025

Trading cycle 12 Months

Expiry day Last working day of month

Settlement basis Daily MTM on T+1 basis and final on cash basis on T+2basis

Settlement price RBI reference rate for last trading day of contract anddaily MTM settlement price is closing price for futures

contract for the trading daySettlement Cash settled


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NSE August 29, 2008

BSE October 1, 2008

MCX October 6, 2008


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Currency futures trading will be of interest to :

1. Investors

2. Hedgers

3. Arbitraguers


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RBI SEBI standing technical committee

BSE taking 15 % stake in United Stock ExchangeofIndia

Average combined daily trading volume aroundR` 2000 Crore

Retail participation increasing due to increasingawareness about the concept


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BIS Triennial Survey FX market in India 16th largestglobally in terms of total daily turnover

MCX SX daily turnover ofRs`

3838 Crore in JulyfromRs` 324 Crore inOctober

SMEs actively participating in the futures market dueto advantage of hedging as well as small brokeragecharges

Assocham wants extension in trade timings till 11.30pm from SEBI.


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NO. of contracts traded 70,000

First trade by East India Securities Ltd.

Among bank participants HDFC bank wasfirst to trade

Largest trade by Standard Chartered bank 15,000 contracts

Most active contract was Sept. 2008 expirywith 43,000 contracts being traded


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Month Avg. Vol.(Contracts)

Avg. daily value(Lakhs)

OI at the end of the month

Jan. 09 245,045 119,899 254,797

Feb.09 337,687 167,271 315,316

Mar.09 521,430 267,459 277,554

Apr.09 490,719 229,094 206,620

May 09 684,123 332,156 318,203


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Month Avg. Vol. (Contracts) Avg. daily value

(Lakhs)

OI at the end of

month

Jan.09 249,480 122,075 238,887

Feb.09 341,467 169,450 204,217

Mar.09 499,013 256,021 194,265

Apr.09 471,695 236,613 105,957

May 09 560,865 292,346 208,805


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MCX and NSE neck to neck competition withregards to volume and turnover

BSE also trying to enter into aggressive strategy

while partnering with USEI NSE offered to its members a free product called

TAME as a powerful tool for charting MCX providing the trading platform in Indian

languages as well for attracting the greatercustomer base from various corners of thecountry

MCX also tying up with trade bodies forregistering their members on its platform


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Perfect hedge not possible as compared to

OTC contract

Cost of hedge increases in futures as

compared to forward contract

FII participation will lead to more speculativeactivities and wide swings in currency trades

thus affecting trade balance


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Clearing Members

ClearingBanks


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The financial soundness of the members.

Upfront initial margin is charged for all the

open positions of a CM. The on line position monitoring system

monitors the member open positions.

Margin violations result in withdrawal of

trading facility.


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Initial margin

The initial security deposit paid by a member.

Minimum Initial margin of 1.75% on day of trade and thereafter 1%

Portfolio based margin

Portfolio margin accounting requires a margin position that is equalto the remaining liability that exists after all offsetting positions have

been netted against each other.

For example, if a position in the portfolio is netting a positive return,then it could offset the liability of a losing position in the sameportfolio.

This would reduce the overall margin requirement that is necessaryfor holding a losing derivatives position.


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Calendar spread margins. A currency futures position at one maturity

which is hedged by an offsetting position at a

different maturity is treated as a calendarspread. It is at a value ofRS`250 for all months of

spread.Extreme loss margin 1% of value of gross open positions. Shall be deducted from the liquid assets of

clearing member.


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Margin collection and enforcement.

Safeguarding clients money.

Periodic risk evaluation report. Surveillance.

Unique client code.


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Securities contracts(regulation)act,1956.

SEBI act,1992 .

RBI-SEBI standing technical committee.

FEMA 1999.


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The trading should take place through an

online.

Required independent clearing corporation. The exchange must have an online

surveillance capability.

The exchange shall have a balance sheet

networth of at least `100 crores.


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Should be a company incorporated under the

companies act,1956.

The CC must perform full novation.

The CC should enforce the stipulated margin

requirements,MTM settlement,EFT


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Coupling ofIndian economy with world

Volatility in currency

Increase in the share of emerging marketforeign exchange in total turnover

Increase in use of euro as invoice currency


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EU is India's largest trading partner

bilateral trade in Goods is expected to exceedEUR 70.7 billion by 2010 and EUR 160.6 billion

by 2015

Bilateral trade in services is expected toexceed EUR 246.8 billion by 2015


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Hedge instruments available to Indian firms will

rise

Advantages of trading on exchange

Low transaction cost

Enhance transparency, safety, and

competitiveness of a financial system

Individuals & SME participation Foreign exchange turnover will rise

Corporate has raised debt from foreign markets


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Currency Derivatives Final

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