Final Currency Derivatives

8/16/2019 Final Currency Derivatives

1/60

PROJECT REPORT

ON

“ANALYTICAL STUDY ON CURRENCY

DERIVATIVES IN INDIA”

By: -

Nitin Gupta

Reg. N. !"#$""%&&

Gui'e' By:-

B(upin'e) Sing(

*+anage),

SY+BIOSIS CENTRE OR DISTANCE LEARNING

Yea) -!"#$-#


2/60

NO OB/ECTION CERTIICATE

This is to certify that Nitin Gupta is permitted to use relevant data / information of this

organization for his project in fulfillment of the PGDBA Program

!e "ish him all the success

#ignature

Place$

Date$


3/60

DECLARATION

This is to declare that & have carried out this project "or' myself in part fulfillment of the

PGDBA Program of #(D)

The "or' is original* has not +een copied from any"here else and has not +een su+mitted to

any other

,niversity/&nstitute for an a"ard of any degree/diploma

#ignature

Nitin Gupta


4/60

CERTIICATE O GUIDE

(ertified that the "or' incorporated in this Project .eport “ANALYTICAL STUDY

ON CURRENCY DERIVATIVES IN INDIA” su+mitted +y Nitin Gupta is his original

"or' and completed under my supervision aterial o+tained from other sources has +een

duly ac'no"ledged in the Project .eport

Date$

Place$ #ignature of Guide$


5/60

TABLE O CONTENTS

1 &ntroduction

% 2+jectives of the study

- )iterature revie" 3 pro+lem formulation

i 4istory and Development of (urrency Derivative

ii Brief overvie" of foreign e5change mar'et

iii .ationale for &ntroducing (urrency 6utures

0 .esearch methodology

7 Analysis 3 &nterpretation

8 9ey findings

: #uggestion

; )imitation of the study


6/60

INTRODUCTION

>ach country has its o"n currency through "hich +oth national and international transactions

are performed All the inter national +usiness transactions involve an e5change of onecurrency for another

The foreign e5change mar'ets of a country provide the mechanism of e5changing different

currencies "ith one and another* and thus* facilitating transfer of purchasing po"er

from one country to another

!ith the multiple gro"ths of international trade and finance all over the "orld* trading

in foreign currencies has gro"n tremendously over the past several decades

#ince the e5change rates are continuously changing* so the firms are e5posed to the ris' of e5change rate movements As a result the assets or lia+ility or cash flo"s of a firm "hich are

denominated in foreign currencies undergo a change in value over a period of time due to

variation in e5change rates

This varia+ility in value of assets or lia+ilities or cash flo"s is referred to e5change

rate ris' #ince the fi5ed e5change rate system has +een fallen in the early

1


7/60


currencies "ith one and another* and thus* facilitating transfer of purchasing po"er from one

country to another

!ith the multiple gro"ths of international trade and finance all over the "orld* trading in

foreign currencies has gro"n tremendously over the past several decades #ince the

e5change rates are continuously changing* so the firms are e5posed to the ris' of e5change

rate movements As a result the assets or lia+ility or cash flo"s of a firm "hich are



This varia+ility in the value of assets or lia+ilities or cash flo"s is referred to e5change rate

ris' #ince the fi5ed e5change rate system has +een fallen in the early 1


8/60

OB/ECTIVES O STUDY

The primary o+jective of the study is first to gain some practical 'no"ledge regarding the

functioning of (urrency Derivatives and ho" are they traded in the mar'et Also it is

necessary to understand there primary functions and 'no"ledge a+out various futurederivatives instruments

The other o+jectives "ere$

To study the &mportance of (urrency Derivatives

To study the role of "or'ing of future and options mar'et

To study the process and functions of (urrency Derivatives To e5plore the

methodology and types of Derivatives provided in &ndia

To study the purpose* process* principle* functions of the (urrency Derivatives

To study the different types of methods/techni@ues used to evaluate them

To study the level of evaluations

9no" the challenges "hich are faced in present mar'et scenario


9/60

INTRODUCTION TO INANCIAL DERIVATIVES

By far the most significant event in finance during the past decade has +een the

e5traordinary development and e5pansion of financial derivativesThese instruments

enhances the a+ility to differentiate ris' and allocate it to those investors most a+le and

"illing to ta'e itC a process that has undou+tedly improved national productivity gro"th

and standards of livings

A0an G)een1pan 2 )3e) C(ai)3an

US e'e)a0 Re1e)4e Ban5

The past decades has "itnessed the multiple gro"ths in the volume of international trade

and +usiness due to the "ave of glo+alization and li+eralization all over the "orld As a

result* the demand for the international money and financial instruments increased

significantly at the glo+al level &n this respect* changes in the interest rates* e5change rate

and stoc' mar'et prices at the different financial mar'et have increased the financial ris's

to the corporate "orld

66DEINITION O INANCIALDERIVATIVES66

A "ord formed +y derivation &t means* this "ord has +een arisen +y derivation

#omething derivedE it means that some things have to +e derived or arisen out of the

underlying varia+les A financial derivative is an indeed derived from the financial

mar'et

Derivatives are financial contracts "hose value/price is independent on the +ehavior

of the price of one or more +asic underlying assets These contracts are legally

+inding agreements* made on the trading screen of stoc' e5changes* to +uy or sell an


10/60

asset in future These assets can +e a share* inde5* interest rate* +ond* rupee dollar

e5change rate* sugar* crude oil* soy+eans* cotton* coffee and "hat you have

A very simple e5ample of derivatives is curd* "hich is derivative of mil' The price

of curd depends upon the price of mil' "hich in turn depends upon the demand and

supply of mil'

T(e Un'e)0ying Se7u)itie1 8) De)i4ati4e1 a)e :

(ommodities$ (astor seed* Grain* Pepper* Potatoes* etc

Precious etal $ Gold* #ilver

#hort Term De+t #ecurities $ Treasury Bills

&nterest .ates

(ommon shares/stoc'

#toc' &nde5 Falue $ N#> Nifty

(urrency $ >5change .ate


11/60


12/60


13/60

DERIVATIVES INTRODUCTION IN INDIA

The first step to"ards introduction of derivatives trading in &ndia "as the promulgation of

the #ecurities )a"s Amendment 2rdinance* 1 (hairman

>meritus The 6K contract capitalized on the ,# a+andonment of the Bretton !oods

agreement* "hich had fi5ed "orld e5change rates to a gold standard after !orld !ar && The

a+andonment of the Bretton !oods agreement resulted in currency values +eing allo"ed to

float* increasing the ris' of doing +usiness By creating another type of mar'et in "hich

futures could +e traded* (> currency futures e5tended the reach of ris' management

+eyond commodities* "hich "ere the main derivative contracts traded at (> until then The

concept of currency futures at (> "as revolutionary* and gained credi+ility through

endorsement of No+elCprizeC"inning economist ilton 6riedman

Today* (> offers 01 individual 6K futures and -1 options contracts on 1< currencies* all of

"hich trade electronically on the e5change?s (> Glo+e5 platform &t is the largest regulated

mar'etplace for 6K trading Traders of (> 6K futures are a diverse group that includes

multinational corporations* hedge funds* commercial +an's* investment +an's* financial

managers* commodity trading advisors (TAs* proprietary trading firmsE currency overlay


14/60

managers and individual investors They trade in order to transact +usiness* hedge against

unfavora+le changes in currency rates* or to speculate on rate fluctuations

Source: - (NCF-Currency !uture o"u#e$

UTILITY O CURRENCY DERIVATIVES

(urrencyC+ased derivatives are used +y e5porters invoicing receiva+les in foreign currency*

"illing to protect their earnings from the foreign currency depreciation +y loc'ing the

currency conversion rate at a high level Their use +y importers hedging foreign currency

paya+les is effective "hen the payment currency is e5pected to appreciate and the importers

"ould li'e to guarantee a lo"er conversion rate &nvestors in foreign currency denominated

securities "ould li'e to secure strong foreign earnings +y o+taining the right to sell foreign

currency at a high conversion rate* thus defending their revenue from the foreign currency

depreciation ultinational companies use currency derivatives +eing engaged in direct

investment overseas They "ant to guarantee the rate of purchasing foreign currency for

various payments related to the installation of a foreign +ranch or su+sidiary* or to a joint

venture "ith a foreign partner

A high degree of volatility of e5change rates creates a fertile ground for foreign e5change

speculators Their o+jective is to guarantee a high selling rate of a foreign currency +y

o+taining a derivative contract "hile hoping to +uy the currency at a lo" rate in the future

Alternatively* they may "ish to o+tain a foreign currency for"ard +uying contract* e5pecting

to sell the appreciating currency at a high future rate &n either case* they are e5posed to the

ris' of currency fluctuations in the future +etting on the pattern of the spot e5change rate

adjustment consistent "ith their initial e5pectations

The most commonly used instrument among the currency derivatives are currency 8);a)'

7nt)a7t1 These are large notional value selling or +uying contracts o+tained +y e5porters*

importers* investors and speculators from +an's "ith denomination normally e5ceeding %

million ,#D The contracts guarantee the future conversion rate +et"een t"o currencies and

can +e o+tained for any customized amount and any date in the future They normally do not

re@uire a security deposit since their purchasers are mostly large +usiness firms and


15/60

investment institutions* although the +an's may re@uire compensating deposit +alances or

lines of credit Their transaction costs are set +y spread +et"een +an'Ms +uy and sell prices

>5porters invoicing receiva+les in foreign currency are the most fre@uent users of these

contracts They are "illing to protect themselves from the currency depreciation +y loc'ing in

the future currency conversion rate at a high level A similar foreign currency for"ard selling

contract is o+tained +y investors in foreign currency denominated +onds or other securities

"ho "ant to ta'e advantage of higher foreign that domestic interest rates on government or

corporate +onds and the foreign currency for"ard premium They hedge against the foreign

currency depreciation +elo" the for"ard selling rate "hich "ould ruin their return from

foreign financial investment &nvestment in foreign securities induced +y higher foreign

interest rates and accompanied +y the for"ard selling of the foreign currency income is called

a 74e)e' inte)e1t a)=it)age

Source :-( Recent %e&e#op'ent in nternationa# Currency %eri&ati&e arket )y *uc+an T.

Or#o,ski$


16/60

INTRODUCTION TO CURRENCY DERIVATIVES

>ach country has its o"n currency through "hich +oth national and international

transactions are performed All the international +usiness transactions involve an

e5change of one currency for another

6or e5ample*

&f any &ndian firm +orro"s funds from international financial mar'et in ,#

dollars for short or long term then at maturity the same "ould +e refunded in particular

agreed currency along "ith accrued interest on +orro"ed money &t means that the

+orro"ed foreign currency +rought in the country "ill +e converted into &ndian currency*

and "hen +orro"ed fund are paid to the lender then the home currency "ill +e converted

into foreign lender?s currency Thus* the currency units of a country involve an e5change

of one currency for another

The price of one currency in terms of other currency is 'no"n as exchange rate.


currencies "ith one and another* and thus* facilitating transfer of purchasing po"er from

one country to another

!ith the multiple gro"ths of international trade and finance all over the "orld* trading in

foreign currencies has gro"n tremendously over the past several decades #ince the

e5change rates are continuously changing* so the firms are e5posed to the ris' of e5change

rate movements As a result the assets or lia+ility or cash flo"s of a firm "hich are



This varia+ility in the value of assets or lia+ilities or cash flo"s is referred to e5change

rate ris' #ince the fi5ed e5change rate system has +een fallen in the early 1


17/60

INTRODUCTION TO CURRENCY UTURE

A futures contract is a standardized contract* traded on an e5change* to +uy or sell a certain

underlying asset or an instrument at a certain date in the future* at a specified price !hen

the underlying asset is a commodity* eg 2il or !heat* the contract is termed a

commodity futures contract !hen the underlying is an e5change rate* the contract is

termed a “7u))en7y 8utu)e1 7nt)a7t”. &n other "ords* it is a contract to e5change one

currency for another currency at a specified date and a specified rate in the future

Therefore* the +uyer and the seller loc' themselves into an e5change rate for a specific

value or delivery date Both parties of the futures contract must fulfill their o+ligations onthe settlement date

(urrency futures can +e cash settled or settled +y delivering the respective o+ligation of

the seller and +uyer All settlements ho"ever* unli'e in the case of 2T( mar'ets* go

through the e5change

(urrency futures are a linear product* and calculating profits or losses on (urrency 6utures

"ill +e similar to calculating profits or losses on &nde5 futures &n determining profits and

losses in futures trading* it is essential to 'no" +oth the contract size the num+er of

currency units +eing traded and also "hat is the tic' value A tic' is the minimum trading

increment or price differential at "hich traders are a+le to enter +ids and offers Tic'

values differ for different currency pairs and different underlying 6or eg in the case of

the ,#DC&N. currency futures contract the tic' size shall +e =%7 paise or ===%7 .upees

To demonstrate ho" a move of one tic' affects the price* imagine a trader +uys a contract

,#D 1=== +eing the value of each contract at .s0%%7== 2ne tic' move on thiscontract "ill translate to .s0%%0:7 or .s0%%7%7 depending on the direction of mar'et

movement

9u)7(a1e p)i7e: R1 .&!.!@""

9)i7e in7)ea1e1 =y ne ti75: R1. "".""!@

Ne; p)i7e: R1 .&!.!@!@


18/60

9u)7(a1e p)i7e: R1 .&!.!@""

9)i7e 'e7)ea1e1 =y ne ti75: R1. "".""!@

Ne; p)i7e: R1.&!. !&%@

The value of one tic' on each contract is .upees %7= #o if a trader +uys 7 contracts and

the price moves up +y 0 tic'* she ma'es .upees 7=

#tep 1$ 0%%8== I 0%%7==

#tep %$ 0 tic's 7 contracts O %= points

#tep -$ %= points .upees %7 per tic' O .upees 7=

BRIE OVERVIE< O OREIGN EC?ANGE +ARET

OVERVIE< O T?E OREIGN EC?ANGE +ARET IN INDIA

During the early 1


19/60

e5plore the advantages of introducing currency futures The .eport of the &nternal !or'ing

Group of .B& su+mitted in April %==;* recommended the introduction of >5change Traded

(urrency 6utures

#u+se@uently* .B& and #>B& jointly constituted a #tanding Technical (ommittee to analyze

the (urrency 6or"ard and 6uture mar'et around the "orld and lay do"n the guidelines to

introduce >5change Traded (urrency 6utures in the &ndian mar'et The (ommittee su+mitted

its report on ay %B& also issued circulars in this regard on

August =8* %==;

(urrently* &ndia is a ,#D -0 +illion 2T( mar'et* "here all the major currencies li'e ,#D*

>,.2* >N* Pound* #"iss 6ranc etc are traded !ith the help of electronic trading andefficient ris' management systems* >5change Traded (urrency 6utures "ill +ring in more

transparency and efficiency in price discovery* eliminate counterparty credit ris'* provide

access to all types of mar'et participants* offer standardized products and provide transparent

trading platform Ban's are also allo"ed to +ecome mem+ers of this segment on the

>5change* there+y providing them "ith a ne" opportunity

Source :-( Report o! the R-SE stan"ing technica# co''ittee on exchange tra"e"

currency !utures$ //0.

http://www.bseindia.com/deri/Downloads/CDX/rbirep_290508.pdfhttp://www.bseindia.com/deri/Downloads/CDX/rbi_circular060808.pdfhttp://www.bseindia.com/deri/Downloads/CDX/sebi_060808.pdfhttp://www.bseindia.com/deri/Downloads/CDX/rbi_circular060808.pdfhttp://www.bseindia.com/deri/Downloads/CDX/sebi_060808.pdfhttp://www.bseindia.com/deri/Downloads/CDX/rbirep_290508.pdf


20/60

CURRENCY DERIVATIVE 9RODUCTS

Derivative contracts have several variants The most common variants are for"ards*

futures* options and s"aps !e ta'e a +rief loo' at various derivatives contracts that have

come to +e used

OR


21/60

The currency s"ap entails s"apping +oth principal and interest +et"een the parties*

"ith the cash flo"s in one direction +eing in a different currency than those in the

opposite direction There are a various types of currency s"aps li'e as fi5edCtoCfi5ed

currency s"ap* floating to floating s"ap* fi5ed to floating currency s"ap

&n a s"ap normally three +asic steps are involveQQQ

1 &nitial e5change of principal amount

% 2ngoing e5change of interest

- .e C e5change of principal amount on maturity

O9TIONS :

(urrency option is a financial instrument that give the option holder a right and not

the o+ligation* to +uy or sell a given amount of foreign e5change at a fi5ed price per

unit for a specified time period until the e5piration date &n other "ords* a foreign

currency option is a contract for future delivery of a specified currency in e5change

for another in "hich +uyer of the option has to right to +uy call or sell put a

particular currency at an agreed price for or "ithin specified period The seller of the

option gets the premium from the +uyer of the option for the o+ligation underta'en in

the contract 2ptions generally have lives of up to one year* the majority of options

traded on options e5changes having a ma5imum maturity of nine months )onger

dated options are called ,arrants and are generally traded 2T(


22/60

OREIGN EC?ANGE S9OT *CAS?, +ARET

The foreign e5change spot mar'et trades in different currencies for +oth spot and for"ard

delivery Generally they do not have specific location* and mostly ta'e place primarily +y

means of telecommunications +oth "ithin and +et"een countries

&t consists of a net"or' of foreign dealers "hich are oftenly +an's* financial institutions*

large concerns* etc The large +an's usually ma'e mar'ets in different currencies

&n the spot e5change mar'et* the +usiness is transacted throughout the "orld on a

continual +asis #o it is possi+le to transaction in foreign e5change mar'ets %0 hours a

day The standard settlement period in this mar'et is 0; hours* ie* % days after the

e5ecution of the transaction

The spot foreign e5change mar'et is similar to the 2T( mar'et for securities There is no

centralized meeting place and no fi5ed opening and closing time #ince most of the

+usiness in this mar'et is done +y +an's* hence* transaction usually do not involve a

physical transfer of currency* rather simply +oo' 'eeping transfer entry among +an's

>5change rates are generally determined +y "e'an" an" supp#y !orce in this mar'et

The purchase and sale of currencies stem partly from the need to finance trade in goods

and services Another important source of demand and supply arises from the

participation of the central +an's "hich "ould emanate from a desire to influence the

direction* e5tent or speed of e5change rate movements


23/60

OREIGN EC?ANGE UOTATIONS

6oreign e5change @uotations can +e confusing +ecause currencies are @uoted in terms of

other currencies &t means e5change rate is relative price

6or e5ample*

&f one ,# dollar is "orth of .s 07 in &ndian rupees then it implies that 07

&ndian rupees "ill +uy one dollar of ,#A* or that one rupee is "orth of ==%% ,# dollar

"hich is simply reciprocal of the former dollar e5change rate

EC?ANGE RATE

Di)e7t In'i)e7t

The num+er of units of domestic The num+er of unit of foreign

(urrency stated against one unit currency per unit of domestic

of foreign currency currency

.e/R O 07:%7= or .e 1 O R ==%1;:

R1 O .s 07:%7=

There are t"o "ays of @uoting e5change rates$ the direct and indirect

ost countries use the direct method &n glo+al foreign e5change mar'et* t"o rates are

@uoted +y the dealer$ one rate for +uying *=i' )ate,2 and another for selling *a15 )

88e)e' )ate, for a currency This is a uni@ue feature of this mar'et &t should +e noted

that "here the +an' sells dollars against rupees* one can say that rupees against dollar &n

order to separate +uying and selling rate* a small dash or o+li@ue line is dra"n after the

dash


24/60

6or e5ample*

&f ,# dollar is @uoted in the mar'et as .s 08-7==/-77=* it means that the

fore5 dealer is ready to purchase the dollar at .s 08-7== and ready to sell at .s 08-77=

The difference +et"een the +uying and selling rates is called sprea".

&t is important to note that selling rate is al"ays higher than the +uying rate

Traders* usually large +an's* deal in t"o "ay prices* +oth +uying and selling* are called

'arket 'akers.

Ba1e Cu))en7yF Te)31 Cu))en7y:

&n foreign e5change mar'ets* the +ase currency is the first currency in a currency pair The

second currency is called as the terms currency >5change rates are @uoted in per unit of

the +ase currency That is the e5pression DollarC.upee* tells you that the Dollar is +eing

@uoted in terms of the .upee The Dollar is the +ase currency and the .upee is the terms

currency

>5change rates are constantly changing* "hich means that the value of one currency in

terms of the other is constantly in flu5 (hanges in rates are e5pressed as strengthening or

"ea'ening of one currency visCSCvis the second currency

(hanges are also e5pressed as appreciation or "epreciation of one currency in terms of

the second currency !henever the +ase currency +uys more of the terms currency* the

+ase currency has strengthened / appreciated and the terms currency has "ea'ened /

depreciated


25/60

6or e5ample*

&f Dollar I .upee moved from 0-== to 0-%7 The Dollar has appreciated and

the .upee has depreciated And if it moved from 0-==== to 0%:7%7 the Dollar has

depreciated and .upee has appreciated

NEED OR EC?ANGE TRADED CURRENCY UTURES

!ith a vie" to ena+le entities to manage volatility in the currency mar'et* .B& on April

%=* %==: issued comprehensive guidelines on the usage of foreign currency for"ards*

s"aps and options in the 2T( mar'et At the same time* .B& also set up an &nternal

!or'ing Group to e5plore the advantages of introducing currency futures The .eport of

the &nternal !or'ing Group of .B& su+mitted in April %==;* recommended the

introduction of e5change traded currency futures. >5change traded futures as compared to

2T( for"ards serve the same economic purpose* yet differ in fundamental "ays An

individual entering into a for"ard contract agrees to transact at a for"ard price on a future

date 2n the maturity date* the o+ligation of the individual e@uals the for"ard price at

"hich the contract "as e5ecuted >5cept on the maturity date* no money changes hands

2n the other hand* in the case of an e5change traded futures contract* mar' to mar'et

o+ligations is settled on a daily +asis #ince the profits or losses in the futures mar'et are

collected / paid on a daily +asis* the scope for +uilding up of mar' to mar'et losses in the

+oo's of various participants gets limited

The counterparty ris' in a futures contract is further eliminated +y the presence of a

clearing corporation* "hich +y assuming counterparty guarantee eliminates credit ris'

6urther* in an >5change traded scenario "here the mar'et lot is fi5ed at a much lesser size

than the 2T( mar'et* e@uita+le opportunity is provided to all classes of investors "hether

large or small to participate in the futures mar'et The transactions on an >5change are

e5ecuted on a price time priority ensuring that the +est price is availa+le to all categories

of mar'et participants irrespective of their size 2ther advantages of an >5change traded

mar'et "ould +e greater transparency* efficiency and accessi+ility

Source :-( Report o! the R-SE stan"ing technica# co''ittee on exchange tra"e"

currency !utures$ //0.


26/60

RATIONALE OR INTRODUCING CURRENCY UTURE

6utures mar'ets "ere designed to solve the pro+lems that e5ist in for"ard mar'ets A futures

contract is an agreement +et"een t"o parties to +uy or sell an asset at a certain time in the

future at a certain price But unli'e for"ard contracts* the futures contracts are standardized

and e5change traded To facilitate li@uidity in the futures contracts* the e5change specifies

certain standard features of the contract A futures contract is standardized contract "ith

standard underlying instrument* a standard @uantity and @uality of the underlying instrument that

can +e delivered* or "hich can +e used for reference purposes in settlement and a standard

timing of such settlement A futures contract may +e offset prior to maturity +y entering into an

e@ual and opposite transaction

T(e 1tan'a)'i>e' ite31 in a 8utu)e1 7nt)a7t a)e:

• uantity of the underlying

• uality of the underlying

• The date and the month of delivery

• The units of price @uotation and minimum price change

• )ocation of settlement

The rationale for introducing currency futures in the &ndian conte5t has +een outlined in the

.eport of the &nternal !or'ing Group on (urrency 6utures .eserve Ban' of &ndia* April %==;

as follo"sE

The rationale for esta+lishing the currency futures mar'et is manifold Both residents and nonC

residents purchase domestic currency assets &f the e5change rate remains unchanged from the

time of purchase of the asset to its sale* no gains and losses are made out of currency e5posures

But if domestic currency depreciates appreciates against the foreign currency* the e5posure

"ould result in gain loss for residents purchasing foreign assets and loss gain for non

residents purchasing domestic assets &n this +ac'drop* unpredicted movements in e5change

rates e5pose investors to currency ris's


27/60

(urrency futures ena+le them to hedge these ris's Nominal e5change rates are often random

"al's "ith or "ithout drift* "hile real e5change rates over long run are mean reverting As

such* it is possi+le that over a long I run* the incentive to hedge currency ris' may not +e large

4o"ever* financial planning horizon is much smaller than the longCrun* "hich is typically interC

generational in the conte5t of e5change rates As such* there is a strong need to hedge currency

ris' and this need has gro"n manifold "ith fast gro"th in crossC+order trade and investments

flo"s The argument for hedging currency ris's appear to +e natural in case of assets* and

applies e@ually to trade in goods and services* "hich results in income flo"s "ith leads and

lags and

get converted into different currencies at the mar'et rates >mpirically* changes in e5change

rate are found to have very lo" correlations "ith foreign e@uity and +ond returns This in

theory should lo"er portfolio ris' Therefore* sometimes argument is advanced against the need

for hedging currency ris's But there is strong empirical evidence to suggest that hedging

reduces the volatility of returns and indeed considering the episodic nature of currency returns*

there are strong arguments to use instruments to hedge currency ris's

UTURE TER+INOLOGY

S9OT 9RICE :


28/60

The price at "hich an asset trades in the spot mar'et The transaction in "hich

securities and foreign e5change get traded for immediate delivery #ince the

e5change of securities and cash is virtually immediate* the term* cash mar'et* has also

+een used to refer to spot dealing &n the case of ,#D&N.* spot value is T U %

UTURE 9RICE :

The price at "hich the future contract traded in the future mar'et

CONTRACT CYCLE :

The period over "hich a contract trades The currency future contracts in &ndian

mar'et have one month* t"o month* three month up to t"elve month e5piry cycles &n

N#>/B#> "ill have 1% contracts outstanding at any given point in time

VALUE DATE F INAL SETTEL+ENT DATE :

The last +usiness day of the month "ill +e termed the value date /final settlement date

of each contract The last +usiness day "ould +e ta'en to the same as that for inter

+an' settlements in um+ai The rules for inter +an' settlements* including those for

J'no"n holidays? and "ould +e those as laid do"n +y 6oreign >5change Dealers

Association of &ndia 6>DA&

E9IRY DATE :

&t is the date specified in the futures contract This is the last day on "hich the

contract "ill +e traded* at the end of "hich it "ill cease to e5ist The last trading day

"ill +e t"o +usiness days prior to the value date / final settlement date

CONTRACT SIE :


29/60

The amount of asset that has to +e delivered under one contract

Also called as lot size &n case of ,#D&N. it is ,#D 1===

BASIS :

&n the conte5t of financial futures* +asis can +e defined as the futures price minus the

spot price There "ill +e a different +asis for each delivery month for each contract

&n a normal mar'et* +asis "ill +e positive This reflects that futures prices normally

e5ceed spot prices

COST O CARRY :

The relationship +et"een futures prices and spot prices can +e summarized in terms of

"hat is 'no"n as the cost of carry This measures the storage cost plus the interest

that is paid to finance or Jcarry? the asset till delivery less the income earned on the

asset 6or e@uity derivatives carry cost is the rate of interest

INITIAL +ARGIN :

!hen the position is opened* the mem+er has to deposit the margin "ith the clearing

house as per the rate fi5ed +y the e5change "hich may vary asset to asset 2r in

another "ords* the amount that must +e deposited in the margin account at the time a

future contract is first entered into is 'no"n as initial margin

+ARING TO +ARET :

At the end of trading session* all the outstanding contracts are reprised at the

settlement price of that session &t means that all the futures contracts are daily

settled* and profit and loss is determined on each transaction This procedure* called

mar'ing to mar'et* re@uires that funds charge every day The funds are added or

su+tracted from a mandatory margin initial margin that traders are re@uired to

maintain the +alance in the account Due to this adjustment* futures contract is also

called as daily reconnected for"ards


30/60

+AINTENANCE +ARGIN :

em+er?s account are de+ited or credited on a daily +asis &n turn customers? accountare also re@uired to +e maintained at a certain level* usually a+out :7 percent of the

initial margin* is called the maintenance margin This is some"hat lo"er than the

initial margin

This is set to ensure that the +alance in the margin account never +ecomes negative

&f the +alance in the margin account falls +elo" the maintenance margin* the investor

receives a margin call and is e5pected to top up the margin account to the initial

margin level +efore trading commences on the ne5t day

USES O CURRENCY UTURES

?e'ging:

Presume >ntity A is e5pecting a remittance for ,#D 1=== on %: August =; !ants to

loc' in the foreign e5change rate today so that the value of inflo" in &ndian rupee

terms is safeguarded The entity can do so +y selling one contract of ,#D&N.

futures since one contract is for ,#D 1===

Presume that the current spot rate is .s0- and J,#D&N. %: Aug =;? contract is

trading at .s00%7== >ntity A shall do the follo"ing$

#ell one August contract today The value of the contract is .s00*%7=

)et us assume the .B& reference rate on August %:* %==; is .s00==== The entity

shall sell on August %:* %==;* ,#D 1=== in the spot mar'et and get .s 00*=== The

futures contract "ill settle at .s00==== final settlement price O .B& reference

rate

The return from the futures transaction "ould +e .s %7=* ie .s 00*%7= I .s

00*=== As may +e o+served* the effective rate for the remittance received +y the


31/60

entity A is .s00 %7== .s00*=== U .s%7=/1===* "hile spot rate on that date "as

.s00==== The entity "as a+le to hedge its e5posure

Spe7u0atin: Bu00i1(2 =uy 8utu)e1

Ta'e the case of a speculator "ho has a vie" on the direction of the mar'et 4e "ould

li'e to trade +ased on this vie" 4e e5pects that the ,#DC&N. rate presently at

.s0%* is to go up in the ne5t t"oCthree months 4o" can he trade +ased on this

+eliefV &n case he can +uy dollars and hold it* +y investing the necessary capital* he

can profit if say the .upee depreciates to .s0%7= Assuming he +uys ,#D 1====* it

"ould re@uire an investment of .s0*%=*=== &f the e5change rate moves as he

e5pected in the ne5t three months* then he shall ma'e a profit of around .s1====

This "or's out to an annual return of around 0:8W &t may please +e noted that the

cost of funds invested is not considered in computing this return

A speculator can ta'e e5actly the same position on the e5change rate +y using

futures contracts )et us see ho" this "or's &f the &N.C ,#D is .s0% and the three

month futures trade at .s0%0= The minimum contract size is ,#D 1=== Therefore

the speculator may +uy 1= contracts The e5posure shall +e the same as a+ove ,#D

1==== Presuma+ly* the margin may +e around .s%1* === Three months later if the

.upee depreciates to .s 0%7= against ,#D* on the day of e5piration of the contract*

the futures price shall converge to the spot price .s 0%7= and he ma'es a profit of

.s1=== on an investment of .s%1* === This "or's out to an annual return of 1< percent

Because of the leverage they provide* futures form an attractive option for speculators

Spe7u0atin: Bea)i1(2 1e00 8utu)e1

6utures can +e used +y a speculator "ho +elieves that an underlying is overCvalued and

is li'ely to see a fall in price 4o" can he trade +ased on his opinionV &n the a+sence

of a deferral product* there "asn Mt much he could do to profit from his opinion

Today all he needs to do is sell the futures

)et us understand ho" this "or's Typically futures move correspondingly "ith the

underlying* as long as there is sufficient li@uidity in the mar'et &f the underlying

price rises* so "ill the futures price &f the underlying price falls* so "ill the futures price No" ta'e the case of the trader "ho e5pects to see a fall in the price of ,#DC


32/60

&N. 4e sells one t"oCmonth contract of futures on ,#D say at .s 0%%= each

contact for ,#D 1=== 4e pays a small margin on the same T"o months later*

"hen the futures contract e5pires* ,#DC&N. rate let us say is .s0% 2n the day of

e5piration* the spot and the futures price converges 4e has made a clean profit of %=

paise per dollar 6or the one contract that he sold* this "or's out to +e .s%===

A)=it)age:

Ar+itrage is the strategy of ta'ing advantage of difference in price of the same or

similar product +et"een t"o or more mar'ets That is* ar+itrage is stri'ing a

com+ination of matching deals that capitalize upon the im+alance* the profit +eing

the difference +et"een the mar'et prices &f the same or similar product is traded insay t"o different mar'ets* any entity "hich has access to +oth the mar'ets "ill +e

a+le to identify price differentials* if any &f in one of the mar'ets the product is

trading at higher price* then the entity shall +uy the product in the cheaper mar'et

and sell in the costlier mar'et and thus +enefit from the price differential "ithout

any additional ris'

2ne of the methods of ar+itrage "ith regard to ,#DC&N. could +e a trading strategy

+et"een for"ards and futures mar'et As "e discussed earlier* the futures price and

for"ard prices are arrived at using the principle of cost of carry #uch of those

entities "ho can trade +oth for"ards and futures shall +e a+le to identify any misC

pricing +et"een for"ards and futures &f one of them is priced higher* the same shall

+e sold "hile simultaneously +uying the other "hich is priced lo"er &f the tenor of

+oth the contracts is same* since +oth for"ards and futures shall +e settled at the

same .B& reference rate* the transaction shall result in a ris' less profit


33/60

TRADING 9ROCESS AND SETTLE+ENT 9ROCESS

)i'e other future trading* the future currencies are also traded at organized e5changes

The follo"ing diagram sho"s ho" operation ta'e place on currency future mar'et$

&t has +een o+served that in most futures mar'ets* actual physical delivery of the underlying

assets is very rare and hardly it ranges from 1 percent to 7 percent ost often +uyers and

sellers offset their original position prior to delivery date +y ta'ing an opposite positions This

is +ecause most of futures contracts in different products are predominantly speculative

instruments 6or e5ample* K purchases American Dollar futures and sells it &t leads to t"o

contracts* first* K party and clearing house and second party and clearing house Assume

ne5t day K sells same contract to X* then K is out of the picture and the clearing house is

seller to X and +uyer from * and hence* this process is goes on

TRADER

* BUYER ,

TRADER

* SELLER ,

+E+BER

* BROER ,

+E+BER

* BROER ,

CLEARING

?OUSE

Purchase order #ales order

Transaction on the floor >5change

&nforms


34/60

REGULATORY RA+EB& on 6e+ruary %;* %==;* that an .B&C#>B&

#tanding Technical (ommittee on >5change Traded (urrency and &nterest .ate Derivatives

"ould +e constituted To +egin "ith* the (ommittee "ould evolve norms and oversee the

implementation of >5change traded currency futures The Terms of .eference to the

(ommittee "as as under$

1 To coordinate the regulatory roles of .B& and #>B& in regard to trading of (urrency

and &nterest .ate 6utures on the >5changes

% To suggest the eligi+ility norms for e5isting and ne" >5changes for (urrency and

&nterest .ate 6utures trading

- To suggest eligi+ility criteria for the mem+ers of such e5changes

0 To revie" product design* margin re@uirements and other ris' mitigation measures on

an ongoing +asis

7 To suggest surveillance mechanism and dissemination of mar'et information

8 To consider microstructure issues* in the overall interest of financial sta+ility


35/60

CO+9ARISION O OR


36/60

The research methodology adopted for carrying out the study "as at the first stage

theoretical study is attempted and at the second stage o+served online trading on

N#>/B#>

SOURCE O DATA COLLECTION

#econdary data "ere used such as various +oo's* report su+mitted +y

.B&/#>B& committee and N(6/B(6 modules

OB/ECTIVES O T?E STUDY

The +asic idea +ehind underta'ing (urrency Derivatives project to gain

'no"ledge a+out currency future mar'et

To study the +asic concept of (urrency future

To study the e5change traded currency future

To understand the practical considerations and "ays of considering currency future

price

To analyze different currency derivatives products


37/60

SCO9E O 9RO9OSED STUDY:

(urrencyC+ased derivatives are used +y e5porters invoicing receiva+les in foreign currency*

"illing to protect their earnings from the foreign currency depreciation +y loc'ing the

currency conversion rate at a high level Their use +y importers hedging foreign currency

paya+les is effective "hen the payment currency is e5pected to appreciate and the importers

"ould li'e to guarantee a lo"er conversion rate &nvestors in foreign currency denominated

securities "ould li'e to secure strong foreign earnings +y o+taining the right to sell foreign

currency at a high conversion rate* thus defending their revenue from the foreign currency

depreciation ultinational companies use currency derivatives +eing engaged in direct

investment overseas They "ant to guarantee the rate of purchasing foreign currency for

various payments related to the installation of a foreign +ranch or su+sidiary* or to a joint

venture "ith a foreign partner

A high degree of volatility of e5change rates creates a fertile ground for foreign e5change

speculators Their o+jective is to guarantee a high selling rate of a foreign currency +y

o+taining a derivative contract "hile hoping to +uy the currency at a lo" rate in the future

Alternatively* they may "ish to o+tain a foreign currency for"ard +uying contract* e5pecting

to sell the appreciating currency at a high future rate &n either case* they are e5posed to the

ris' of currency fluctuations in the future +etting on the pattern of the spot e5change rate

adjustment consistent "ith their initial e5pectations

The most commonly used instrument among the currency derivatives are currency 8);a)'

7nt)a7t1 These are large notional value selling or +uying contracts o+tained +y e5porters*

importers* investors and speculators from +an's "ith denomination normally e5ceeding %

million ,#D The contracts guarantee the future conversion rate +et"een t"o currencies and

can +e o+tained for any customized amount and any date in the future They normally do not

re@uire a security deposit since their purchasers are mostly large +usiness firms and

investment institutions* although the +an's may re@uire compensating deposit +alances or

lines of credit Their transaction costs are set +y spread +et"een +an'Ms +uy and sell prices

>5porters invoicing receiva+les in foreign currency are the most fre@uent users of these

contracts They are "illing to protect themselves from the currency depreciation +y loc'ing in

the future currency conversion rate at a high level A similar foreign currency for"ard selling

contract is o+tained +y investors in foreign currency denominated +onds or other securities


38/60

"ho "ant to ta'e advantage of higher foreign that domestic interest rates on government or

corporate +onds and the foreign currency for"ard premium They hedge against the foreign

currency depreciation +elo" the for"ard selling rate "hich "ould ruin their return from

foreign financial investment &nvestment in foreign securities induced +y higher foreign

interest rates and accompanied +y the for"ard selling of the foreign currency income is called

a 74e)e' inte)e1t a)=it)age

DATA COLLECTION

Data collection is a term used to descri+e a process of preparing and

collecting +usiness data C for e5ample as part of a process improvement or

similar project Data collection usually ta'es place early on in an improvement

project* and is often formalized through a data collection Plan "hich often

contains the follo"ing activity

#. Pre collection activity I Agree goals* target data* definitions* methods

!. (ollection I data collection

$. Present 6indings I usually involves some form of sorting analysis and/or

presentation

There are t"o methods of data collection "hich are discussed +elo"$


39/60

DATA (2))>(T&2N

Primary Data #econdary Data

Data collection techni@ues

uestionnaire &ntervie" >5ternal &nternet &ntrenal

#ource source

9RI+ARY DATA

&n primary data collection* you collect the data yourself using methods such as intervie"s and

@uestionnaires The 'ey point here is that the data you collect is uni@ue to you and your

research and* until you pu+lish* no one else has access to it & have tried to collect the data

using methods such as intervie"s and @uestionnaires The 'ey point here is that the data

collected is uni@ue and research and* no one else has access to it &t is done to get the real

scenario and to get the original data of present

DATA COLLECTION TEC?NIUE

ue1tinnai)e:

uestionnaire are a popular means of collecting data* +ut are difficult to design and often

re@uire many re"rites +efore an accepta+le @uestionnaire is produced The features included

in @uestionnaire are$

• T(e3e an' 74e)ing 0ette)

• In1t)u7tin 8) 73p0etin


40/60

• Type1 8 Hue1tin1

• Lengt(

Inte)4ie;:

This techni@ue is primarily used to gain an understanding of the underlying reasons and

motivations for people?s attitudes* preferences or +ehavior The intervie" "as done +y as'ing

a general @uestion & encourage the respondent to tal' freely & have used an unstructured

format* the su+se@uent direction of the intervie" +eing determined +y the respondent?s initial

reply* and come to 'no" "hat is its initial pro+lem is

SA+9LING +ET?ODOLOGY

Sa3p0ing te7(niHue:

&nitially* a rough draft "as prepared 'eeping in mind the o+jective of the research A pilot

study "as done in order to 'no" the accuracy of the @uestionnaire The final @uestionnaire

"as arrived only after certain important changes "ere done Thus my sampling came out to

+e judgmental and continent

Sa3p0ing Unit:

The respondents "ho "ere as'ed to fill out @uestionnaires are the sampling units

Sa3p0ing Si>e: !"

SECONDARY DATA

All methods of data collection can supply @uantitative data num+ers* statistics or financial

or @ualitative data usually "ords or te5t uantitative data may often +e presented in

ta+ular or graphical form #econdary data is data that has already +een collected +y someone

else for a different purpose to yours

Nee' 8 u1ing 1e7n'a)y 'ata


41/60

1 Data is of use in the collection of primary data

% They are one of the cheapest and easiest means of access to information

- #econdary data may actually provided enough information to resolve the Pro+lem +eing

investigated

0 #econdary data can +e a valua+le source of ne" ideas that can +e e5plored later through

primary research

Li3itatin 8 1e7n'a)y 'ata

1 ay +e outdated

% No control over data collection

- ay not +e reported in the re@uired form

0 ay not +e reported in the re@uired form

7 ay not +e very accurate

8 (ollection for some other purpose

ANALYSIS


42/60


43/60

9RODUCT DEINITIONS O CURRENCY UTURE ON NSEFBSE

Un'e)0ying

&nitially* currency futures contracts on ,# Dollar I &ndian .upee ,#RC&N. "ould +e

permitted

T)a'ing ?u)1

The trading on currency futures "ould +e availa+le from < am to 7 pm

Si>e 8 t(e 7nt)a7t

The minimum contract size of the currency futures contract at the time of introduction

"ould +e ,#R 1=== The contract size "ould +e periodically aligned to ensure that the size

of the contract remains close to the minimum size

utatin

The currency futures contract "ould +e @uoted in rupee terms 4o"ever* the outstanding

positions "ould +e in dollar terms

Ten) 8 t(e 7nt)a7t

The currency futures contract shall have a ma5imum maturity of 1% months

A4ai0a=0e 7nt)a7t1

All monthly maturities from 1 to 1% months "ould +e made availa+le

Sett0e3ent 3e7(ani13

The currency futures contract shall +e settled in cash in &ndian .upee


44/60

Sett0e3ent p)i7e

The settlement price "ould +e the .eserve Ban' .eference .ate on the date of e5piry The

methodology of computation and dissemination of the .eference .ate may +e pu+licly

disclosed +y .B&

ina0 1ett0e3ent 'ay

The currency futures contract "ould e5pire on the last "or'ing day e5cluding #aturdays of

the month The last "or'ing day "ould +e ta'en to +e the same as that for &nter+an'

#ettlements in um+ai The rules for &nter+an' #ettlements* including those for J'no"n

holidays? and Jsu+se@uently declared holiday? "ould +e those as laid do"n +y 6>DA&

The contract specification in a ta+ular form is as under$

Un'e)0ying .ate of e5change +et"een one ,#D and

&N.

T)a'ing ?u)1

*+n'ay t )i'ay,

=e ,#D 1===

Ti75 Si>e =%7 paisa or &N. ===%7

T)a'ing 9e)i' a5imum e5piration period of 1% months

Cnt)a7t +nt(1 1% near calendar months

ina0 Sett0e3ent 'ateF

Va0ue 'ate

)ast "or'ing day of the month su+ject to

4oliday calendars

La1t T)a'ing Day T"o "or'ing days prior to 6inal #ettlement

Date

Sett0e3ent (ash settled

ina0 Sett0e3ent 9)i7e The reference rate fi5ed +y

.B& t"o

"or'ing days prior to the final settlement

00


45/60

CURRENCY UTURES 9AYOS

A payoff is the li'ely profit/loss that "ould accrue to a mar'et participant "ith change in the

price of the underlying asset This is generally depicted in the form of payoff diagrams

"hich sho" the price of the underlying asset on the KCa5is and the profits/losses on the C

a5is 6utures contracts have linear payoffs &n simple "ords* it means that the losses as "ell

as profits for the +uyer and the seller of a futures contract are unlimited 2ptions do not have

linear payoffs Their pay offs are nonClinear These linear payoffs are fascinating as they can

+e com+ined "ith options and the underlying to generate various comple5 payoffs

4o"ever* currently only payoffs of futures are discussed as e5change traded foreign

currency options are not permitted in &ndia

9ay88 8) =uye) 8 8utu)e1: Lng 8utu)e1

The payoff for a person "ho +uys a futures contract is similar to the payoff for a person "ho

holds an asset 4e has a potentially unlimited upside as "ell as a potentially unlimited

do"nside Ta'e the case of a speculator "ho +uys a t"oCmonth currency futures contract

"hen the ,#D stands at say .s0-1


46/60

9ay88 8) 1e00e) 8 8utu)e1: S()t 8utu)e1

The payoff for a person "ho sells a futures contract is similar to the payoff for a person "ho

shorts an asset 4e has a potentially unlimited upside as "ell as a potentially unlimiteddo"nside Ta'e the case of a speculator "ho sells a t"o month currency futures contract

"hen the ,#D stands at say .s0-1


47/60

9RICING UTURES COST O CARRY +ODEL

Pricing of futures contract is very simple ,sing the costCofCcarry logic* "e calculate the fair value of a futures contract >very time the o+served price deviates from the fair value*

ar+itragers "ould enter into trades to capture the ar+itrage profit This in turn "ould push the

futures price +ac' to its fair value

The cost of carry model used for pricing futures is given +elo"$

SeJ*)-) !$T

"here$

rO(ost of financing using continuously compounded interest rate

r f O one year interest rate in foreign

TOTime till e5piration in years

>O%:1;%;

P

.

2

6

&

T

)

2

#

#

,#D

D

=

0-1<

0:


48/60

The relationship +et"een 6 and # then could +e given as

F Se^ r rf T C O

This relationship is 'no"n as interest rate parity relationship and is used in international

finance To e5plain this* let us assume that one year interest rates in ,# and &ndia are say :W

and 1=W respectively and the spot rate of ,#D in &ndia is .s 00

6rom the e@uation a+ove the one year for"ard e5change rate should +e

F O 00 e^ =1=C==: 1O07-0

&t may +e noted from the a+ove e@uation* if foreign interest rate is greater than the domestic

rate ie rf [ r* then 6 shall +e less than # The value of 6 shall decrease further as time T

increase &f the foreign interest is lo"er than the domestic rate* ie rf \ r* then value of 6

shall +e greater than # The value of 6 shall increase further as time T increases

?EDGING 5change rates are @uite volatile and unpredicta+le* it is possi+le that anticipated profit in

foreign investment may +e eliminated* rather even may incur loss Thus* in order to hedge

this foreign currency ris'* the traders? oftenly use the currency futures 6or e5ample* a long

hedge &e* +uying currency futures contracts "ill protect against a rise in a foreign

currency value "hereas a short hedge ie* selling currency futures contracts "ill protect

against a decline in a foreign currency?s value

&t is noted that corporate profits are e5posed to e5change rate ris' in many situation 6or

e5ample* if a trader is e5porting or importing any particular product from other countries

then he is e5posed to foreign e5change ris' #imilarly* if the firm is +orro"ing or lending or

investing for short or long period from foreign countries* in all these situations* the firm?s

profit "ill +e affected +y change in foreign e5change rates &n all these situations* the firm

can ta'e long or short position in futures currency mar'et as per re@uirement

0;


49/60

The general rule for determining "hether a long or short futures position "ill hedge a

potential foreign e5change loss is$

)oss from appreciating in &ndian rupeeO #hort hedge

)oss form depreciating in &ndian rupeeO )ong hedge

T(e 7(i7e 8 un'e)0ying 7u))en7y

The first important decision in this respect is deciding the currency in "hich futures

contracts are to +e initiated 6or e5ample* an &ndian manufacturer "ants to purchase some

ra" materials from Germany then he "ould li'e future in German mar' since his e5posure

in straight for"ard in mar' against home currency &ndian rupee Assume that there is no

such future +et"een rupee and mar' availa+le in the mar'et then the trader "ould choose

among other currencies for the hedging in futures !hich contract should he chooseV

Pro+a+ly he has only one option rupee "ith dollar This is called cross hedge

C(i7e 8 t(e 3atu)ity 8 t(e 7nt)a7t

The second important decision in hedging through currency futures is selecting the currency

"hich matures nearest to the need of that currency 6or e5ample* suppose &ndian importer

import ra" material of 1===== ,#D on 1st Novem+er %==; And he "ill have to pay 1=====

,#D on 1st 6e+ruary %==


50/60

9)i7e


51/60

4e should +uy ten contract of ,#D&N. %;=1%==< at the rate of 05change traded currency future is

71


52/60

regulated +y #>B&/.B&* and they esta+lished rules and regulation so there is very

safe trading is emerged and counter party ris' is minimized in currency 6uture

trading And also time reduced in (learing and #ettlement process up to TU1 day?s

+asis

)arger e5porter and importer has continued to deal in the 2T( counter even

e5change traded currency future is availa+le in mar'ets +ecause*

There is a limit of ,#D 1== million on open interest applica+le to trading mem+er

"ho are +an's And the ,#D %7 million limit for other trading mem+ers so larger

e5porter and importer might continue to deal in the 2T( mar'et "here there is no

limit on hedges

&n &ndia .B& and #>B& has restricted other currency derivatives e5cept (urrency

future* at this time if any person "ants to use other instrument of currency

derivatives in this case he has to use 2T(

SUGGESTIONS

(urrency 6uture need to change some restriction it imposed such as cut off limit

of 7 million ,#D* Ban on N.&?s and 6&&?s and utual 6unds from Participating

No" in e5change traded currency future segment only one pair ,#DC&N. is

availa+le to trade so there is also one more demand +y the e5porters and

7%


53/60

importers to introduce another pair in currency trading )i'e P2,NDC&N.*

(ADC&N. etc

&n 2T( there is no limit for trader to +uy or short (urrency futures so there

demand arises that in >5change traded currency future should have increase limit

for Trading em+ers and also at client level* in result 2T( users "ill divert to

>5change traded currency 6utures

&n &ndia the regulatory of 6inancial and #ecurities mar'et #>B& has Ban on

other (urrency Derivatives e5cept (urrency 6utures* so this restriction seem

unreasona+le to e5porters and importers And according to &ndian financial

gro"th no" it?s +ecome necessary to introducing other currency derivatives in

>5change traded currency derivative segment

7-


54/60

CONCLUSIONS

By far the most significant event in finance during the past decade has +een the

e5traordinary development and e5pansion of financial derivativesThese instruments

enhances the a+ility to differentiate ris' and allocate it to those investors most a+le and

"illing to ta'e itC a process that has undou+tedly improved national productivity gro"th and

standards of livings

The currency future gives the safe and standardized contract to its investors and individuals

"ho are a"are a+out the fore5 mar'et or predict the movement of e5change rate so they "ill

get the right platform for the trading in currency future Because of e5change traded future

contract and its standardized nature gives counter party ris' minimized

&nitially only N#> had the permission +ut no" B#> and (K has also started currency

future &t is sho"s that ho" currency future covers ground in the compare of other availa+le

derivatives instruments Not only +ig +usinessmen and e5porter and importers use this +ut

individual "ho are interested and having 'no"ledge a+out fore5 mar'et they can also invest

in currency future

>5change +et"een ,#DC&N. mar'ets in &ndia is very +ig and these e5change traded

contract "ill give more a"areness in mar'et and attract the investors

70


55/60

LI+ITATION O T?E STUDY

T(e 0i3itatin1 8 t(e 1tu'y ;e)e

The analysis "as purely +ased on the secondary data #o* any error in the secondary

data might also affect the study underta'en

The currency future is ne" concept and topic related +oo' "as not availa+le in

li+rary and mar'et

The study is +ased only on secondary 3 primary data so lac' of 'een

o+servations and interactions "ere also the limiting factors in the proper conclusion

of the study

77


56/60

ANNEURE

UESTIONNAIRE

#,


57/60

&, *i, A8te) t(e t)aining 2(a4e yu gi4en 8ee'=a75 8 it

a es

+ No

*ii, I8 ye12 t()ug( ;(i7( 3et('*7an 1e0e7t 3)e t(an ne,

a uestionnaire

+ &ntervie"

c #upplement test

d &f any other please specify QQQQQQQQQQQQQQQ

@,


58/60

%, 91t t)aining e4a0uatin 87u1 n )e1u0t )at(e) t(an n t(e e88)t epen'e' in

7n'u7ting t)aining.

a (ompletely agree

+ Partially agree

c Disagree

d ,nsure

K,


59/60

e All of a+ove

#!, Any 1ugge1tin 8) i3p)4ing t(e p1t t)aining 8ee'=a75 p)7e'u)e ei1t1 in Sa(a)a

In'ia 9a)i;a)

7


60/60

BIBLIOGRA9?Y

6inancial Derivatives theory* concepts and pro+lems By$ #) Gupta

N(6$ (urrency future odule

B(6$ (urrency 6uture odule

(enter for social and economic research Poland

.ecent Development in &nternational (urrency Derivative ar'et +y$ )ucjan T 2rlo"s'i

.eport of the .B&C#>B& standing technical committee on e5change traded currency futures

%==;

.eport of the &nternal !or'ing Group on (urrency 6utures .eserve Ban' of &ndia* April

%==;

Date post:	05-Jul-2018
Category:	Documents
Upload:	pmcmbharat264
View:	237 times
Download:	1 times

Final Currency Derivatives

Documents