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Currency FuturesCurrency Futures

Currency OptionsCurrency Options

Interest rate FuturesInterest rate Futures

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DefinitionDefinition

A contract to exchange one currency foranother currency at a specified dateand a specified rate in the future.

Internationally, currency futures can becash settled or settled by deliveringthe respective obligation of the seller

and buyer.NSE, BSE, MCX-SX offer currency

futures on USD/INR, EUR/INR,

GBP/INR, JPY/INR

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Contract SpecificationContract Specification

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Symbol USD/INR

Instrument type FUTCUR

Unit of trading 1 (1 Unit denotes 1000 USD)

Underlying USD

Tick Size Re. 0.0025

Trading hours Monday to Friday(9.00 A.M to 5.00 P.M)

Contract Trading Cycle 12 months

Last Trading day 2 days prior to the last business day of the expiry month at12 noon

Final settlement day Last working day (excl. Saturday)

Base Price Theoretical price on the 1st day of the contract

Price operating range Tenure up to 6 months + 3% of base priceTenure greater than 6 months + 5% of base price

Settlement Daily settlement T+1Final Settlement T+2

Mode of settlement Cash settled in Rupees

Final settlement price RBI Reference Rate

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Profit or loss calculationProfit or loss calculation

Depends on tick size and contract size Ex: purchase price: Rs.42.2500

Price increase by one tick : +0.0025 ReNew Price: Rs.42.2525Value of 1 tick on each contract is

Rs.2.50 (1000*0.0025) So if trader buys 5 contracts and the

price moves by 4 ticks he makesRs.50

Rs.2.50*4*5 = Rs.50

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ExampleExample

On 1st

August 2009, Indian importerenters into a contract to import 2000barrels of oil with payment to bemade in USD on 1st Dec 2009.

Price of each barrel of oil is $80/barrel

Spot price Rs45/$

The importer has the risk that USD

might strengthen over next 4 months

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Date Spot Market Futures market

1st

Aug 2009 Current Cost2000*80*45 = Rs.72,00,000 Dec USD contract is at Rs.45.50. so price percontract is 1000*45.50 = 45,500Contracts required to hedge= (2000*80)/1000 =160. Thus buy 160 contracts for 45,500*160 =Rs.72,80,000

1st Dec 2009 Spot Rate is Rs.47.25. Buy USD1,60,000 to make payment forimport.Cost 1,60,000*47.25 =Rs.75,60,000

Sell 160 contracts at RBI reference rate ofRs.48/$Value of the contract= 160*1000*48 = Rs. 76,80,000

Analysis Importer paid Rs75,60,000 for oil i.eRs.75,60,000-Rs.72,00,000 =Rs.3,60,000 more

Profit on futures contractRs.76,80,000-Rs.72,80,000 = Rs.4,00,000

Payment byimporter on due

date

Rs.75,60,000 Rs.4,00,000(gain) = Rs.71,60,000

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Currency OptionsCurrency Options

Elements of currency options

Strike Price/Exercise Price the price at

which the contract is honored. Spot rate current market price of the

underlying

Expiration Date/maturity date thedate on which the contract expires

Premium price paid to get the right

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Call option and put options American option option that can be

exercised at any time up to the expiration

date Ex: Individual securities options

European option option that can beexercised only on the expiration date.

Ex: Index options Intrinsic value

Time value

On 30th July 2010, SEBI allowed Currency

option trading for USD/INR. Yet to take off inIndia

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Interest Rate Futures (IRF)Interest Rate Futures (IRF)

The underlying for IRF are bonds

Underlying bonds in India is a notional

Government Bond which may notexist in reality

In India RBI and SEBI have defined thecharacteristics

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Contract Specification

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Symbol 10YGS7

Instrument Type FUTIRD

Unit of trading 1 lot 1 lot is equal to notional bonds of FV Rs. 2 Lakhs

Underlying 10 year Notional Coupon bearing Government of India(GOI) Security. (Notional coupon 7% with semiannualCompounding)Tick Size Rs.0.0025 or 0.25 paisa

Trading days Monday to Friday9.00 AM to 5.00 PM

Contract Trading Cycle4 fixed quarterly contracts for entire year, expiring inMarch, June, September and December

Quotation Similar to quoted price of GOI securities up to 4 decimalswith 30/360 day count convention

Last trading day 2 business days proceeding the last business day of thedelivery month

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Conversion FactorConversion Factor

Brings the notional bond on par with thetheoretical bond available for trading

To facilitate delivery it is necessary tomake bonds comparable with eachother and with the notional bond.

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Invoice priceInvoice price

Futures are traded in clean price termsi.e accrued interest is not included inthe traded futures price.

But for the purpose of settlement dirtyprice is taken into account whichincludes accrued interest.

Invoice price = (Futures Settlement price*Conversion

Factor) + accrued Interest

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ExampleExample

For a futures contract on bonds withface value of Rs. 100

Futures settlement price is Rs.90,conversion factor for the bond to bedelivered is 1.3800 and accruedinterest on this bond at the time ofdelivery is Rs.3.

The cash received by the party with theshort position and paid by party withlong position is (1.3800*90) +3 =

Rs.127.20

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Cheapest to deliverCheapest to deliver

The short position holders of IRFs areallowed to decide which bond theywould like to give to the buyers onthe settlement date.

The sellers normally choose that bondfrom the basket which is either

Least expensive IlliquidWhich gives maximum profit or

minimum loss