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Managing

Foreign Exchange Risk via

CURRENCY DERIVATIVES

Prepared By:Vijay Damasiya

(09022)

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Marwadi Shares & FinanceMarwadi Shares & Finance

LimitedLimited Gujarat based financial service group. 70 branches, 475+ channel partners.

5th ranked broking house in India.

CompanyCompany

MISSION & VISIONMISSION & VISION"To be a world-class financial services provider by

arranging all conceivable financial services under one-

roof at affordable costs through cost effective delivery

systems, and achieve organic growth in business by

adding newer lines of business.

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ContCont....

MembershipMembership Equity & Derivatives:

NSE, BSE,

MCX (MCX-SX),

SKSE

Commodities:

NCDEX, MCX

Depository:

NSDL, CDSL

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R

AJ

K

O

T

HQ

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ContCont....

Services:Services:

Equity & DerivativesEquity & Derivatives

CommodityCommodity

IPOIPO

Mutual FundsMutual Funds

ResearchResearchPMSPMS

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IndustryIndustry

1971 fixed foreign

exchange rates

The Chicago

Mercantile Exchange

(CME) created FX

futures in 1972

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Development in IndiaDevelopment in India

RBI & SEBI committee to introduce guideline

for introduction of exchange traded currencyfutures.

On 29th august 2008 trading of currency futures

has been started at NSE. Afterwards BSE & MCX-SX also came with

currency futures

Presently, USE started mock trading of currency

futures.

RBI & SEBI had given some clues related to

introduction of currency options also.

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ObjectivesObjectives

Primary objectives:Primary objectives:

To study the basic concept of currency future.

To study exchange traded currency future.

To analyze different currency derivatives

products.

Secondary objective:Secondary objective:

To know how the currency futures are usedas risk management tool.

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MethodologyMethodology

To achieve my objectives:

Currency Derivatives

Types of derivatives used at exchanges in

currency segment.

Tried to understand with the help of some

examples of importers & exporters.

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What is Derivatives?What is Derivatives?

A derivative security is a financial contract

whose value is derived from the value of

something else, such as a stock price, a

commodity price, an exchange rate, aninterest rate, or even an index of prices.

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Types of Financial DerivativesTypes of Financial Derivatives

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Trading of Financial DerivativesTrading of Financial Derivatives

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What is Currency Future?What is 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 an exchange

rate, the contract is termed a currency

futures contract.

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Utility of Currency FutureUtility of Currency Future

For the import and export needs ofcompanies and individuals (Hedging)

For direct foreign investment (MNCs)

To profit from the short-term fluctuations in

exchange rates (Speculators)

To purchase foreign financial instruments

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Parties Involved in Trading of CurrencyParties Involved in Trading of Currency

FutureFuture

Exporters

Importers

Investors

MNCs

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Base Currency & Term CurrencyBase Currency & Term Currency

In foreign exchange markets, the basecurrency is the first currency in a currency

pair. The second currency is called as the

terms currency.

Ex:

Dollar-Rupee (USD-INR), tells that the

Dollar is being quoted in terms of the Rupee.

The Dollar is the base currency and the

Rupee is the terms currency.

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Example: How to Hedge?Example: How to Hedge?

Suppose an edible oil importerwants to import edible oil worth USD

100,000 and places his import order on June 17, 2010, with the deliverydate being 4 months ahead. At the time of placing the contract one USD

is worth Rs 46.50 in the spot market. But, suppose the Indian Rupee

depreciates to INR 46.75 per USD when the payment is due in October

2010, the value of the payment for the importer goes up to

Rs.4,675,000, rather than Rs 4,650,000. The hedging strategy for the

importer, thus, would be:

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Current Spot Rate (17th June '10) 46.5000

Buy 100 USD - INR Oct '10 Contracts on 17th June 10 (1000 x 46.5500) x 100 (The Oct '10 contract is trading

at 46.5500 on 17th June, '10)

Sell 100 USD - INR Oct '10 Contracts in Oct '10 Profit/Loss 46.75001000 x (46.75 46.55) x 100 = 20,000

Purchases in spot market @ 46.75 Total cost of hedged

transaction

46.75 x 100,000

100,000 x 46.75 20,000 = Rs 4,655,000

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ExEx:: 11:: ImporterImporter

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ExEx:: 22:: ExporterExporter

A Jeweller of Rajkot who is exporting gold jewellery worth

USD 50,000, wants protection against possible IndianRupee appreciation in Dec 10, i.e. when he receives his

payment. He wants to lock-in the exchange rate for the

above transaction. His strategy would be:

17

One USD - INR contract size USD 1,000

Sell 50 USD - INR Dec '10 Contracts (17th June'10) 47.2925

Buy 50 USD - INR Dec '10 Contracts in Dec '10 47.1025

Sell USD 50,000 in spot market @ 47.1025 in Dec '10 (Assume that initially Indian rupee depreciated ,

but later appreciated to 47.1025 per USD as foreseen by the exporter by end of Dec '10)

Profit/Loss from futures (Dec '10 contract) 50 * 1000 *(47.2925 47.1025)

= 0.19 *50 * 1000

= Rs 9,500

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Advantages of Currency FuturesAdvantages of Currency Futures

Low Transaction CostLow Transaction Cost::

Transparency:Transparency: Verify trade details

Affordability:Affordability:

Margins are very low and the contract size is

very small.

No Middlemen:No Middlemen:

Directly on the exchange platform.

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ConclusionConclusion

The purpose of currency hedging isnt to

generate gains. The purpose should be tomitigate risk.

A hedging strategy should minimize the risksyour company is exposed to.

Much restrictions are there from authorities,so larger importers & exporters has

continued to deal in OTC.

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SuggestionSuggestion

SEBI BI t r urr ri ti ( t Exchanges) except currency

futures. ccor ing to the Indian financial

growth now its necessary to introduce othercurrency deri ati es products in Exchange

traded currency deri ati es segment.

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BibliographyBibliography

Websites:Websites:

www.mcx-sx.com www.rbi.org.in

www.economywatch.com

www.nseindia.com

www.commodityonline.com

www.indiaaprwire.com

Other sources:Other sources:

NCFM & NICM: Currency Future Module

Currency Derivatives: A Beginners Module curriculum

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ThankThank

You!!!You!!!

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