Jigar Jayswal

8/8/2019 Jigar Jayswal

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ASummer Internship Project

On

To Check the Awareness Level and Perception of

Investors about Exchange Traded Currency

DerivativeAt

Marwadi Shares & Finance Ltd.

SUBMITTED TO:

S.V. Institute of Management, Kadi.Gujarat Technological University

In Partial Fulfillment of the requirements of Master of Business

Administration (MBA) Program

Batch 2009-11

SUBMITTED BY:JAYSWAL JIGAR I. (M0911-032)

PATEL SANDIP A. (M0911-080)

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S. V. Institute of Management. Kadi


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PREFACE

The liberalization of Indian economy in 1990s, high economic growth rate inthe last decade, increasing exports, imports as well as private equity, FII, FDI

capital flows and NRI remittances have led to increase in volatility in the

USD/INR market. These factors coupled with demand for commodities,

changes in interest rate, inflation, money supply and global developments

have led to increased forex risk.

RBI and SEBI have introduced exchange traded currency derivatives to enable

an efficient and transparent mechanism to hedge against volatility in currency

markets.

Globalization and integration of financial markets, coupled with progressive

increase of cross border flow of capital, have transformed the dynamics Indian

financial markets. This has increased the need for dynamic currency risk

management. The steady rise in Indias foreign trade along with liberalization

in foreign exchange regime has led to large inflow of foreign currency into the

system in the form of FDI and FII investments.

There is providing liquid, transparent and vibrant for foreign exchange rate risk

management. SEBI and RBI have allowed trading in currency futures for the

first time in India, based on USD/INR exchange rate.

The importance of the vibrant, mature and the efficient capital market in the

economic development via capital formation cannot be overstressed. The

stock market and commodity markets in India are on booming stage but

people are less aware and knowledge about the currency derivatives.

This report deals with the part of the availability of Exchange Traded Currency

Market. How it works and how it more comfortable than the Over The Counter

Currency Market.

Currency futures launched at NSE on Aug 29, 2008 and at MCX-SX on

october7, 2008 is seen as a platform that is particularly expected to help

small- and mid-sized companies to hedge their risks while dealing in foreign

exchange.

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ACKNOWLEDGEMENT

Chain of mistakes leads towards failures, chain of failures leads to experience

and chain of experience leads to success

Same is applicable to our research work. We do not claim that we have a

complete knowledge of the subject. There are many persons who directly or

indirectly helped us during our project.

It was a great opportunity for us to get Summer Training with a financial

organization like MARWADI SHARES AND FINANCIAL PVT.LTD.

First we would like to thank to Gujarat Technological University who has

give us the opportunity for getting the practical knowledge of the corporate.

We would also like to thank to head of Department Mr. Bhavin Pandya and

principal of SV Institute of Management Mr Sanjay Shah, kadi and also thanks

to Prof. Kalpesh Prajapati and Prof Nikunj Patel who guide us for our whole

project report. .

We would also like to thanks to the Marwadi shares and Finance limited and its

management who permit us for this great opportunity for the currency market

research and we also would like specially thanks to Mr. D B Prajapati

(branch manager of Mehsana) and Mr Jayendra Taskar (Relationship

manager at Mehsana) who help us and guide us for our our summer

internship training also thanks to the employees at Mehsana branch who help

us by providing us the information related to our summer project.

Sandip Patel

Jigar Jayswal

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Executive summary

The purpose of our project report is To check the awareness level and

perception of Investors about Exchange Traded Currency Future Derivative.

The primary objective of our report is to check the knowledge of the investors

and their thinking about the Exchange Traded currency derivatives.

In India, stock market and commodity market are at very booming sector while

in foreign countries currency market is highly volatile than commodity and

stock market. In India, development of these three markets in the following

sequence. (1) Stock market (2) Commodity market (3) currency market, while

in the foreign countries (1) currency market (2) commodity market (3) stock

market.

In foreign countries, people give more importance and aware about currency

market while in India, people are less aware and give less importance to

currency trading.

A project report provides the information about the general competitive

environment and evolved the recent developments and happening in the

currency market. Report provides the comprehensive analysis of Exchange

Traded Currency Derivatives. Not only this but SWOT analysis explores the

areas of strengths, weakness, opportunity, and threats for the MARWADI

SHARES AND FINANCE LTD.

In our project, we have check the awareness level and perception of investor

about Exchange Traded Currency Derivatives. We have also put the

information regarding the currency, its utility, who can participate in currency

future and cant, who are the players in currency trading, why there is need of

currency future trading for the EXIM firms etc.

We have got the information by questionnaire survey and done the survey of

200 samples and try to know the perception of investors about the ETCD.

We have done the analysis and interpretation of each and every question by

graphical presentation and we also have got some findings and give

suggestions.

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Literature Review

Management Motivations for Use of Foreign Currency Derivatives in India

Manoj AnandIndian Institute of Management Lucknow

K. P. KaushikIndependent

IIMB Management Review, 20(3), July - September, 2008, pp. 324-339

Abstract:

The paper examines management motivations of foreign currency derivatives usage in corporate India andidentifies significant differences, if any, in the motivations of the firms who are either using foreign currencyderivatives or having a documented foreign exchange risk management policy vis--vis the firms who donot. It also captures the management motivations of foreign currency derivatives usage in a factor-analyticframework.

The universe of companies selected for this study consisted of 640 companies, which are common acrosstwo most widely used Indian stock market indices namely S&P CNX 500 and BSE 500 firms as at the endof March 31, 2004 having foreign exchange exposure, which is a fair representation of corporate India. Anationwide questionnaire-based survey was conducted to capture the management motivations of foreigncurrency derivatives usage. 55 responses were received leading to a response rate of 8.59%.

The most of the respondent firms (70.4%) have documented foreign exchange risk managementplan/policy/programme. The transaction exposure as a foreign currency risk is more critical to the firms(74.5%) followed by translation exposure (58.3% responded as moderate degree of risk) and economicexposure (54.3% responded as low degree of risk). To reduce the volatility in profits after tax, cash flows,and to reduce the cost of capital and thus increase the value of the firm on one side of the pole and toreduce the risks faced by the management on the other side of the pole are the major motivations of thefirms using foreign currency derivatives in India. The firms with high debt ratio are more likely to use foreigncurrency derivatives. The major objective of using derivatives is hedging the risk (96.1% responded as rankone objective), for arbitrage purpose (55.3% assigned rank two) and price discovery (36.4% assigned ranktwo and 33.3% assigned rank three). The speculation as objective of using foreign currency derivative isthe least preferred option (62.1% assigned it as rank four).

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http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=372553http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=507163http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=372553http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=507163


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The management motivations for the use of foreign currency derivatives captured in factor-analyticframework are 'hedging to improve value of firm', 'management utility and compensation', 'accounting anddisclosure requirements', 'strengthen control systems', and 'avail tax benefits and reduce cost of capital'.The firm characteristics such as high degree of debt ratio and ESOPs usage influence the use of foreigncurrency derivatives. These seven factors explain 59.28% of the total variance.

Keywords: Risk Management and shareholder value, derivatives use, currency derivatives

JEL Classifications: F30, F31, G32

Working Paper Series

Date posted: June 27, 2007 ; Last revised: September 25, 2008

Suggested Citation

Anand, Manoj and Kaushik, K. P., Management Motivations for Use of Foreign Currency

Derivatives in India. IIMB Management Review, 20(3), July - September, 2008, pp. 324-339.Available at SSRN: http://ssrn.com/abstract=996641

Contact Information

Manoj Anand (Contact Author)

Indian Institute of Management Lucknow ( email )

LUCKNOW 226 013

India

K. P. Kaushik

Independent ( email )

No Address Available

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http://h/jigar/papers.cfm.htm#668770http://h/jigar/papers.cfm.htm#497767http://h/jigar/papers.cfm.htm#668770http://h/jigar/papers.cfm.htm#497767


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Index

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8


SR.NO. PARTICULARS PAGENO.

PREFACE IAcknowledgements II

Executive Summary III

Literature Review

1 Introduction to MARWADI GROUP 1

1.1 Company profile 2

1.2 Mission & Vision 3

1.3 Company Information 4

1.4 Membership 5

1.5 Milestones 6

1.6 Services At MARWADI 71.7 Core Competencies 7

2 Currency market

2.1 Introduction To Currency Market 8

2.2 Currency derivatives 10

2.3 History of Currency Derivatives 11

2.4 Development Of Currency Derivatives InIndia

12

2.5 Growth of derivatives in India 132.6 Types Of Financial Derivatives 142.7 Trading Of Financial Derivatives 15

2.8 Terminology Of Currency Derivative 16

2.9 Utility Of Currency Derivatives 17

2.10 Parties Involved In Currency Derivatives

Trading

20

3 Exchange traded currency future Market 22

3.1 Introduction 22

3.2 Exchange Traded Currency Future 24

3.3 Need For Exchange Traded Currency

Futures

25

3.4 Currency Futures Terminology 263.5 Advantages Of Currency Futures 29

3.6 Disadvantages Of Futures 31

4 Research Methodology 324.1 Objectives Of The Research 32

4.2 Methodology 33

5 Data Analysis & Interpretation 34

6 Hypothesis Testing 53

7 Findings 55

8 Suggestions 56

9 Conclusion 58

10 Bibliography 59


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Chapter-1 INTRODUCTION TO MARWADI GROUP

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1.1 COMPANY PROFILE

Marwadi Shares & Finance Limited is a Gujarat based financial service

group dealing in equities / commodities broking and portfolio management

services. In the last 15 years MSFL has grown into a network of more than70

branches with an 850+ committed professional people and 475+ channel

partners across India. MSFL has kept the faith of over 1.90 lakh investors and

it's growing. After establishing supremacy in Gujarat, now expanding

nationwide and to fuel growth plans they recently raised capital from UK-basedinvestment companies. MSFL got 5th rank in best broking houses also.

Marwadi Group strength lies in its team of confident, young, talented, qualified

and experienced professionals to carry out different functions under the able

leadership of its management.

Marwadi Shares and Finance Limited is a huge and very reputed organizationin the world of securities and finance. The organization enjoys a large market

share with highly loyal customers, who in-turn provides a huge business to

them.

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1.2 MISSION & 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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1.3 COMPANY INFORMATION

Name : Marwadi Shares & Finance Pvt. Ltd.

Head Office : Marwadi Financial Center

Nr. Kathiawad Gymkhana

Dr. Radhakrishnana Road

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Rajkot 360 001

Ph No : 248 13 13

E-Mail : [email protected]

Web Site : www.marwadionline.com

Directors : Mr. Ketan Marwadi

: Mr. Deven Marwadi

: Mr. Sandeep Marwadi

C.E.O. :Mr. Jeyakumar A. S.

General Manager : Mr. Hareshbhai Maniar

Company Secretery : Mr. Tushit Mangukiya

DP Manager : Mr. Arvind Gamot

H R Manager : Mr. Akshay Goswami

Account Manager : Mr. Suresh Vichi

:Mr. Jayant Vithlani

: Mr. Bhargav Pathak

1.4 MEMBERSHIP

Equity & Derivatives:

National Stock Exchange of India Ltd. (NSE)

Bombay Stock Exchange Ltd. (BSE)

Multi Commodity Exchange of India Ltd. (MCX & MCX-SX)

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mailto:[email protected]:[email protected]


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Commodities Derivatives:

National Commodity & Derivatives Exchange Ltd. (NCDEX) Multi Commodity Exchange of India Ltd. (MCX)

Depository Participation:

National Securities Depository Ltd. (NSDL)

Central Depository Services India Ltd. (CDSL)

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1.5 MILESTONES

The company crossed the following milestones to reach its present positionas the leading retail broking house in India:

1992 - Marwadi Shares And Finance Pvt. Ltd. was incorporated.

1996 - Became a corporate member of National Stock Exchange Of India

- (NSE)

1998 - Became a member of Saurashtra Kutch Stock Exchange

(MARWADI SHARES & FINANCE LTD.) 1999 - Launched Depository services of Depository Participant under

National Depository Security Ltd. (NSDL)

2000 - Commenced Derivative trading after obtaining registration as

Clearing and Trading Member in NSE.

2003 - (MCBPL) became a corporate member of the National Commodity

and Derivatives Exchange of India Ltd.

2003 - (MCBPL) became a corporate member of The Multi Commodity

Exchange of India Ltd.

2004 - Became a corporate member of Bombay Stock Exchange Ltd.

(BSE)

2004 - Launched Depository Services of Depository Participant under

Central Depository Services (India) Ltd.

2005 - Launched Portfolio Management Services

2006 - MSFPL converted to Public Limited (Marwadi Shares And Finance

Limited)

2006 - The Company raised private equity from ICGU Limited, a wholly

owned subsidiary of India Capital Growth Fund.

2007 - The Company raised further private equity from Caledonia

Investments.

2008 Adjudged the 5th Largest Broking House by Dun & Bradstreet.

2009 Growing Institutional Business.

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2009 Moves in to 90,000 Square Feet State of Art Infrastructure.

1.6 SERVICES @ MARWADI

Equity & Derivatives

Commodity

Internet Trading

Depository Participant

IPO

Mutual Fund

PMS

Research

Currency trading

1.7 CORE COMPETENCES

Commodities research & broking services

Online or offline trading facility

Depository services through CDSL

Web based 24 x 7 back office software

Good understanding of the sub-broker and retail customer needs

Professional work culture with a personal touch

Cost- effective processes

Streaming quotes & real time charts for BSE /NSE [cash / derivatives]

Single connectivity and speedy execution of trades.

Online technical support & help desk.

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Chapter 2

2.1 INTRODUCTION TO CURRENCY MARKET

Each country has its own currency through which both national and

international transactions are performed. All the international business

transactions involve an exchange of one currency for another.The foreign

exchange markets of a country provide the mechanism of exchanging different

currencies with one and another, and thus, facilitating transfer of purchasing

power from one country to another.

With the multiple growths of international trade and finance all over the world,

trading in foreign currencies has grown tremendously over the past several

decades. Since the exchange rates are continuously changing, so the firms are

exposed to the risk of exchange rate movements. As a result the assets or

liability or cash flows of a firm which are denominated in foreign currencies

undergo a change in value over a period of time due to variation in exchange

rates.

This variability in value of assets or liabilities or cash flows is referred to

exchange rate risk. Since the fixed exchange rate system has been fallen in

the early 1970s, specifically in developed countries, the currency risk has

become substantial for many business firms that was the reason behind

development of currency derivatives.

The financial environment today has more risks than earlier. Successful

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business firms are those that are able to manage these risks effectively. Due to

changes in the macroeconomic structures and increasing internationalization

of businesses, there has been a dramatic increase in the volatility of economic

variables such as interest rates, exchange rates, commodity prices etc. Firms

that monitor their risks carefully and manage their risks with judicious policies

enjoy a more stable business than those who are unable to identify and

manage their risks. There are many risks which are influenced by factors

external to the business and therefore suitable mechanisms to manage and

reduce such risks need to be adopted. One of the modern day solutions to

manage financial risks is hedging.

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2.2 CURRENCY DERIVATIVES

In the Indian context the Securities Contracts (Regulation) Act, 1956 [SC(R)A]

defines "Derivative" to include-

1. A security derived from a debt instrument, share, loan whether secured or

unsecured, risk instrument or contract for differences or any other form of

security.

2. A contract which derives its value from the prices, or index of prices, of

underlying securities.

The Underlying Securities for Derivatives are :

1. Commodities: Castor seed, Grain, Pepper, Potatoes, etc.

2. Precious Metal: Gold, Silver

3. Short Term Debt Securities: Treasury Bills

4. Interest Rates

5. Common shares/stock

6. Currency derivatives

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2.3 HISTORY OF CURRENCY DERIVATIVES

In 1971, the Bretton Woods system of administering fixed foreign exchange

rates was abolished in favour of market-determination of foreign exchange

rates; a system of fluctuating exchange rates was introduced. Besides market-

determined fluctuations, there was a lot of volatility in other markets around

the world due to increased inflation and the oil shock. Corporates struggled to

cope up with the uncertainty in profits. It was then that financial derivatives

foreign currency, interest rate, and commodity derivatives emerged as means

of managing risks facing corporations.

The Chicago Mercantile Exchange (CME) created FX futures, the first ever

financial futures contracts, in 1972. The contracts were created under the

guidance and leadership of Leo Melamed, CME Chairman Emeritus. The FX

contract capitalized on the U.S. abandonment of the Bretton Woodsagreement, which had fixed world exchange rates to a gold standard after

World War II. By creating another type of market in which futures could be

traded, CME currency futures extended the reach of risk management beyond

commodities, which were the main derivative contracts traded at CME until

then. The concept of currency futures at CME was revolutionary, and gained

credibility through endorsement of Nobel-prize-winning economist Milton

Friedman.

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2.4 DEVELOPMENT OF CURRENCY DERIVATIVES IN INDIAIn India, the economic liberalization in the early nineties provided the

economic rationale for the introduction of FX derivatives. Business houses

started actively approaching foreign markets not only with their products but

also as a source of capital and direct investment opportunities. With limited

convertibility on the trade account being introduced in 1993, the environment

became even more favorable for the introduction of these hedge products.

Hence, the development in the Indian forex derivatives market should be seenalong with the steps taken to gradually reform the Indian financial markets.

The first step towards introduction of derivatives trading in India was the

Securities Laws (Amendment) Ordinance, 1995, which withdrew the prohibition

on options securities. SEBI set up a 24 member committee under the

chairmanship of Dr. L. C. Gupta on November 18, 1996 to develop appropriate

regulatory framework for derivatives trading in India. The committee

recommended that the derivatives should be declared as securities so that

regulatory framework applicable to trading of securities could also govern

trading of derivatives.

The trading in index options commenced in June 2001 and the trading in

options on individual securities commenced in July 2001. Futures contracts

on individual stocks were launched in November 2001.

RBI and SEBI jointly constituted a standing technical committee to analyze the

currency market around the world and lay down the guidelines to introduce

Exchange Traded Currency Futures in the Indian market. The committee

submitted its report on May 29, 2008. Further RBI and SEBI issued

circulars in this regard on August 06, 2008.

Currently, Indian Currency market trades with all the major currencies like

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USD, EURO, YEN and POUND are traded.

2.5 Growth of derivatives in India

2.6 TYPES OF FINANCIAL DERIVATIVES

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Date Progress

14 December

1995

NSE asked SEBI for permission to trade index futures.

18 November

1996

SEBI setup L. C. Gupta Committee to draft a policy framework for

index futures11 May 1998 L. C. Gupta Committee submitted report.7 July 1999 RBI permitted OTC forward rate agreements (FRAs) and interest

rate swaps24 May 2000 SIMEX chose Nifty for trading futures and options on an Indian

index.25 May 2000 SEBI gave permission to NSE and BSE to do index futures trading.9 June 2000 Trading of BSE Sensex futures commenced at BSE.12 June 2000 Trading of Nifty futures commenced at NSE.

31 August 2000 Trading of futures and options on Nifty to commence at SIMEXJune 2001 Trading of Equity Index Options at NSEJuly 2001 Trading of Stock Options at NSE

9 November

2002

Trading of Single Stock futures at BSE

June 2003 Trading of Interest Rate Futures at NSE13 September

2004

Weekly Options at BSE

1 January 2008 Trading of Chhota(Mini) Sensex at BSE1 January 2008 Trading of Mini Index Futures & Options at NSE

6 August

2008

Circulars regarding Currency Futures by RBI & SEBI

29 August

2008

Trading of Currency Futures at NSE

2 October

2008

Trading of Currency Futures at BSE

7 October

2008

MCX-SX came into existence with USD/INR pair

16 June 2010 The all new United Stock Exchange started mock trading in

Currency Futures.


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One form of classification of derivative instruments is between commodity

derivatives and financial derivatives. The basic difference between these is the

nature of the underlying instrument assets.

In commodity derivatives the underlying instrument is commodity which may

be wheat, cotton, pepper, sugar, jute, turmeric, corn, crude oil natural gas,

gold, silver, zinc and so on.

In financial derivatives the underlying instrument may be treasury bills, stocks,bonds, foreign exchange, stock index etc. it is to be noted that financial

derivative is fairly standard and there are no quality issues whereas in

commodity derivative, the quality may be the underlying matters.

2.7 TRADING OF FINANCIAL DERIVATIVES

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Derivatives traded at exchanges are standardized contracts having

standard delivery dates and trading units.

OTC derivatives are customized contracts that enable the parties to

select the trading units and delivery dates to suit their requirements.

A major difference between the two is that of counterparty risk the risk of

default by either party. With the exchange traded derivatives, the risk is

controlled by exchanges through clearing house which act as a contractual

intermediary and impose margin requirement. In contrast, OTC derivativessignify greater liability.

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2.8TERMINOLOGY OF CURRENCY DERIVATIVE

Futures:

A futures contract is an agreement between two parties to buy or sell an

asset at a certain time in the future at a certain price. Futures contracts are

special types of forward contracts in the sense that they are standardized and

are generally traded on an exchange. A currency futures contract provides a

simultaneous right and obligation to buy and sell a particular currency at a

specified future date, a specified price and a standard quantity.

Forwards:

A forward contract is a customized contract between two parties, where

settlement takes place on a specific date in the future at today's pre-agreed

price. The exchange rate is fixed at the time the contract is entered into. The

basic objective of a forward market in any underlying asset is to fix a price for

a contract to be carried through on the future agreed date and is intended tofree both the purchaser and the seller from any risk of loss which might incur

due to fluctuations in the price of underlying asset.

In India only currency forwards and currency futures are only

allowed. Currency swaps and currency option is yet not allowed in

India.

Recently MCX-SX has started to offer currency futures contracts in US Dollar-

Indian Rupee (USD-INR,) Euro-Indian Rupee (EUR-INR), Pound

Sterling-Indian Rupee (GBP-INR) and Japanese Yen-Indian Rupee (JPY-

INR). Clearing and Settlement is conducted through the MCX Stock Exchange

Clearing Corporation Ltd (MCX-SX CCL).

This year SEBI is also thinking about launching Currency Options forfacilitating all the investors, exporters, importers and MNCs.

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2.9 UTILITY OF CURRENCY DERIVATIVES

Traders in the foreign exchange market make thousands of trades daily,

buying and selling currencies while exchanging market information may be

used for varied purposes:

For the import and export needs of companies and individuals

For direct foreign investment

To profit from the short-term fluctuations in exchange rates

To manage existing positions

To purchase foreign financial instruments

Exchange rates are an important consideration when making

international investment decisions. The money invested overseas incurs

an exchange rate risk.

When an investor decides to "cash out," or bring his money home, any gains

could be magnified or wiped out depending on the change in the exchange

rates in the interim. Thus, changes in exchange rates can have many effects

on an economy:

Affects the prices of imported goods

Affects the overall level of price and wage inflation

Influences tourism patterns

May influence consumers buying decisions and investors long-term

commitments.

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In the volatile FX market, traders constantly try to predict the behavior of

other market participants. If they correctly anticipate their opponents

strategies, they can act first and beat the competition.

Traders make money by purchasing currency and selling it later at a

higher price, or, anticipating the market is heading down, selling at a

high price and buying back at a lower price later.

To predict the movements of currencies, traders often try to determine

whether the currencys price reflects its fundamental value in terms of

current economic conditions. Examining inflation, interest rates, and the

relative strength of the countrys economy helps them make a

determination.

Currency-based derivatives are used by exporters invoicing

receivables in foreign currency, willing to protect their earnings from the

foreign currency depreciation by locking the currency conversion rate at

a high level.

Their use by importers hedging foreign currency payables is

effective when the payment currency is expected to appreciate and the

importers would like to guarantee a lower conversion rate.

Investors in foreign currency denominated securities would like to

secure strong foreign earnings by obtaining the right to sell foreign

currency at a high conversion rate, thus defending their revenue from

the foreign currency depreciation.

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Multinational companies use currency derivatives being engaged in

direct investment overseas. They want to guarantee the rate of

purchasing foreign currency for various payments related to the

installation of a foreign branch or subsidiary, or to a joint venture with a

foreign partner.

A high degree of volatility of exchange rates creates a fertile

ground for foreign exchange speculators. Their objective is to guarantee

a high selling rate of a foreign currency by obtaining a derivative

contract while hoping to buy the currency at a low rate in the future.

The most commonly used instrument among the currency

derivatives are currency forward contracts(OTC). These are

large notional value selling or buying contracts obtained by

exporters, importers, investors and speculators from banks with

denomination normally exceeding 2 million USD.

Currency futures provide an additional tool for hedging currency risk.

Further development of domestic foreign exchange market.

Permit trades other than hedges with a view to moving graduallytowards fuller capital account convertibility.

Provide a platform to retail segment of the market to ensure broad based

participation based on equal treatment.

Efficient method of credit risk transfer through the Exchange.

Create a market to facilitate large volume transactions to go through on

an anonymous basis without distorting the levels.

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2.10 PARTIES INVOLVED IN CURRENCY DERIVATIVES

TRADING

Exporter:

CDs are used by exporters invoicing the receivables in foreign currency,

willing to protect the earnings foreign currency depreciation by locating the

currency conversion rate at a high level.

Importers:

Importers use CDs for hedging the payables in foreign currency when

the foreign currency is expected to appreciate and they would always like to

guarantee a low conversion rate.

Investors:

Investors in foreign currency denominated securities would like to secure

strong foreign earnings by obtaining the right to sell the foreign currency at a

high conversion rate, thus defending their revenue from foreign currency

derivatives.

MNCs:

MNCs use CDs being engaged in direct investment oversease. They want

to guarantee the rate of purchasing foreign currency for various payments

related to installation of a foreign branch or subsidiary, or to joint venture

payment with foreign partners.

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PARTICIPANTS OF CURRENCY MARKET

Hedgers:

They use derivatives markets to reduce or eliminate the risk associated

with price of an asset. Majority of the participants in derivatives market

belongs to this category.

Speculators:

They transact futures and options contracts to get extra leverage in

betting on future movements in the price of an asset. They can increase both

the potential gains and potential losses by usage of derivatives in a

speculative venture.

Arbitrageurs: Their behavior is guided by the desire to take advantage of a

discrepancy between prices of more or less the same assets or competing

assets in different markets. If, for example, they see the futures price of an

asset getting out of line with the cash price, they will take offsetting positions

in the two markets to lock in a profit.

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Chepter-3 Exchange traded currency future Market

3.1 Introduction

Futures is a standardized forward contract to buy (long) or sell (short) the

underlying asset at a specified price at a specified future date through a

specified exchange. Futures contracts are traded on exchanges that work as a

buyer or seller for the counterparty. Exchange sets the standardized terms in

term of quality, quantity, price quotation, date and delivery place (in case of

commodity).

Features:

The features of a futures contract may be specified as follows:

These are traded on an organized exchange like NSE, BSE, MCX etc.

These involve standardized contract terms viz. the underlying asset, the

time of maturity and the manner of maturity etc.

These are associated with a clearing house to ensure smooth functioning

of the market.

There are margin requirements and daily settlement to act as further

safeguard. These provide for supervision and monitoring of contract by a regulatory

authority.

Almost ninety percent future contracts are settled via cash settlement

instead of actual delivery of underlying asset.

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Futures contracts being traded on organized exchanges impart liquidity

to the transaction. The clearinghouse, being the counter party to both sides of

a transaction, provides a mechanism that guarantees the honoring of the

contract and ensuring very low level of default.

Types:

Following are the important types of financial futures contract:

Stock Future or equity futures,

Stock Index futures,

Currency futures, and

Interest Rate bearing securities like Bonds, T- Bill Futures.

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3.2 EXCHANGE TRADED CURRENCY FUTURES

Future markets were designed to solve the problems that exist in forward

markets. A futures contract is an agreement between two parties to buy or sell

an asset at a certain time in future at a certain price. But unlike forward

contracts, the futures contracts are standardized and exchange traded. To

facilitate liquidity in the futures contracts, the exchange specifies certain

standard features of the contract. A futures contract is standardized contract

with standard underlying instrument, a standard quantity and quality of theunderlying instrument that can be delivered (or which can be used for

reference purposes in settlement) and a standard timing of such settlement. A

futures contract may be offset prior to maturity entering into an equal and

opposite transaction.

3.3 NEED FOR EXCHANGE TRADED CURRENCY FUTURES

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Exchange traded futures as compared to OTC forwards serve the same

economic purpose yet differ in fundamental ways. An individual entering into a

forward contract agrees to transect at a forward price on a future date. On the

maturity date, the obligation of the individual equals to the forward price at

which the contract was executed. Except on the maturity date no money

changes hands.

On the other hand in case of exchange traded currency futures contract mark

to market obligation is settled on a daily basis. Since the profit or loss in a

future market are collected/paid on a daily basis, the scope of building mark to

market loss in the books of various participants gets limited The counter party

risk in future contract is further eliminated by the presence of a clearing

corporation, which by assuming counterparty guarantee eliminates credit risk.

Further in an exchange traded scenario where the market lot is fixed at a much

lesser size than the OTC market, equitable opportunity is provided to all the

classes of investors whether large or small to participate in the future market.

The transaction on an exchange are executed on a price time priority ensuring

that the best price is available to all categories of market participant

irrespective of their size. Other advantages of an exchange traded market

would be greater transparency, efficiency and accessibility.

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3.4 CURRENCY FUTURES TERMINOLOGY

Spot price:

The price at which an asset trades in the spot market. In the case of USD/INR,

spot value is T + 2.

Futures price:

The price at which the futures contract trades in the futures market.

Contract cycle:

The period over which a contract trades. The currency futures contracts on the

SEBI recognized exchanges have one-month, two-month, and three-month up

to twelve-month expiry cycles. Hence, these exchanges will have 12 contracts

outstanding at any given point in time.

Value Date/Final Settlement Date:

The last business day of the month will be termed the Value date/ Final

Settlement date of each contract. The last business day would be taken to the

same as that for Inter-bank Settlements in Mumbai. The rules for Inter-bank

Settlements, including those for known holidays and subsequently declared

holiday would be those as laid down by Foreign Exchange Dealers Association

of India (FEDAI).

Expiry date:

It is the date specified in the futures contract. All contracts expire on the last

working day (excluding Saturdays) of the contract months. The last day for the

trading of the contract shall be two working days prior to the final settlement

date or value date.

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Contract size:

The amount of asset that has to be delivered under one contract which is alsocalled as lot size. In the case of USD/INR it is USD 1000; EUR/INR it is EUR

1000; GBP/INR it is GBP 1000 and in case of JPY/INR it is JPY 100,000.

Basis:

In the context of financial futures, basis can be defined as the futures price

minus the spot price. There will be a different basis for each delivery month for

each contract. In a normal market, basis will be positive. This reflects that

futures prices normally exceed spot prices.

Cost of carry:

The relationship between futures prices and spot prices can be summarized in

terms of what is known as the cost of carry. This measures (in commodity

markets) the storage cost plus the interest that is paid to finance or carry the

asset till delivery less the income earned on the asset. For equity derivatives

carry cost is the rate of interest.

Initial margin:

The amount that must be deposited in the margin account at the time a

futures contract is first entered into is known as initial margin.

Marking-to-market:

In the futures market, at the end of each trading day, the margin account is

adjusted to reflect the investor's gain or loss depending upon the futures

closing price. This is called marking-to-market.

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3.5 ADVANTAGES OF CURRENCY FUTURES

Low Commissions:

A highly competitive market keeps a tab on brokerage, keeping fees to bare

minimum.

No Middlemen:

Futures/Options currency trading allows clients to trade directly on the

exchange platform.

Standardized Lot Size:

Lots or contract sizes are determined and fixed by the exchanges.

Low Transaction Cost:

The retail transaction cost (the bid/ask spread) is typically less than 0.1

percent under normal market conditions.

Almost Instantaneous Transactions:

High liquidity and low bid/ask spreads lead to immediate trades.

Affordability:

Margins are very low and the contract size is very small. As per the

specification of NSE, USD-INR currency future contract, lot size is 1000$.

Margin is 1.75%.

Low Margins, High Leverage:

Margins of 3-5% increase leverage possibilities. These 2 factors increase the

potential for making higher profits (and losses).

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Online Access:The advent of online (Internet) trading platforms helps you to trade at your

convenience from your home, office or on the go.

No one can corner the market:

The Forex market is so vast and has so many participants that no single entity,

not even a central bank, can control the market price for an extended period

of time. Even interventions by mighty central banks are becoming increasingly

ineffectual and short-lived. Thus central banks are becoming less and less

inclined to intervene to manipulate market prices.

Transparency:

It is possible for everyone to verify trade details on NSE if anyone have a doubt

that the broker has tried to cheat.

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3.6 DISADVANTAGES OF FUTURES

Standardization:

It is not possible to obtain a perfect hedge in terms of amount and timing.

Cost:

Forwards have no upfront cost, while margining requirements may effectively

drive the cost of hedging in futures up.

Small lots:

Generally it is not possible to hedge small exposures.

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Chapter-4

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RESEARCH METHODOLOGY

4.1 OBJECTIVES OF THE PROJECT

The basic idea behind undertaking this project is to check the awareness

level and perception about the currency future among investors.

Primary objectives:

To measure the perception of investors about currency future.

To check the awareness level of the investors about the availability of

exchange traded currency future.

Secondary objective:

To make the investors aware about the availability of the currency

trading available in north gujarat.

To study the behavior of investors towards the exchange traded currency

derivatives.

To make the investors aware about the services provided by the ETCD.

To know the investors knowledge about ETCD.

To know the investors preferences regarding the different investment

options.

To know the investors purpose of investing in currency derivatives.

To know the investors satisfaction level of OTC market.

To know reason of not investing through the ETCD.

To know the investors preference of impact of different factors to the

currency derivatives.

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4.2 METHODOLOGY

Research Type: Basic Research

Research Design: Descriptive Research Design

Sampling Techniques: Non probability Convenience Sampling

Type of Data

1. Primary Data

The primary data was collected by filling up the questionnaires through the

different investors of OTC market of North Gujarat specified by the company.

2. Secondary Data

The secondary data was provided to us by the company directly and was

collected from the Internet, magazines and related books.

Research Instrument: Questionnaire

Contact method: Personal interview, Telephonic interview.

Sample Size: 200 sample

Research Areas: Mehsana, Palanpur, Disa, Unjha, Visnagar

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Data Analysis & Interpretation

1. Please rank the following investment avenue as per your

investment preference.

Objective: To know the investors most preferred investment

option.

Particulars R-1 R-2 R-3 R-4 R-5 R-6 TotalWeightage Rank

Equity

Market 95 62 26 14 3 0 1032 24.57 1CommodityMarket 8 26 42 63 39 22 635 15.12 4

Bank Deposit 71 76 22 17 9 5 968 23.05 2CurrencyMarket 5 11 36 41 84 23 543 12.93 5

Mutual Fund 20 23 54 44 38 21 680 16.19 3

Other 1 2 20 21 27 129 342 8.14 6

4200

Interpretation:

From the above question, we come to know about investors

most preferred investment option is equity market because they are more

aware and give high return from equity market while currency, commodity are

least preferred because of they have less awareness, less knowledge of these

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investment avenue.

2. Since how long you are investing in the above investment

option.

Objective: To know the time period of investment experience in the

investment option.

55


ParticularsRespondents

In(%)

Last 1year 6 3

Last 1 to 3 years 10 5

Last 3 to 5 years 44 22Above Last more than 5years 140 70


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Interpretation:

From this question, we come to know about the mostinvestors have experience of investing more than 5 years so that they are

aware that which investment option is good/bad for investment.

3. From whom do you get advice for your investment?

(please tick any one)

Objective: To know about the investors preferred media for the

investment advice so it shows importance of that media

56


Particulars No. of In (%)

Friends 8 4

Self 14 7

Family 8 4Consultant/Broker 110 55

News papers 18 9

News channels 36 18

Business magazine 6 3


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Interpretation:

From the above question, we come to know that 110 investors from

our sample size consider the investment advice from consultant/broker than

any other because they believe that they get best investment advice with their

financial analyst services and secondly people preferred news channels

because they shows the risk and return analysis with the calculation for the

investment. E.g. CNBC TV18 sometimes shows the different mutual funds and

SIP (systematic investment plan) analysis by analyst for the investment.

Do you know about the currency trading?

Objective:To know the awareness about the currency trading

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Interpretation:

We have asked this question to know currency trading awareness level and

whether they are aware or not aware about the currency market but they are

not aware about the availability of exchange traded currency future, services

and advantages of ETCD.

58


Answer

Awareness about currency trading(in %)

No of Respondents

Yes 100%200

No 0%0


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What is your perception about currency market?

Objective: To know the perception of investors about the currency

market

Interpretation:

Objective behind asking this question to know the innvestors

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PerceptionProportion

Respondents

Less risky 32% 64

Risky 47% 94

Very risky 15% 30

Can't say 6% 12

t 100% 200


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perception aboout the currency derivatives.From the survey, we come to know

that 47% investors believe that currency trading is risky and 32% believe that

currency trading is less risky. But there is less return, less investment and less

risk than the other investment option.

6. Are you

aware

about trading in ETCD?

Objective:To know the awareness about the trading in

Exchange traded currency derivative.

Interpretation:

This question shows the investors awareness about the Exchange traded

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Trading in ETCD AnswerRespondents

Yes 9% 18

No 91% 182

Total 100% 200


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currency Derivatives market and to know whether they are trading through

Exchange and if they had done trade through Exchange traded Currency

derivatives then there is no need to make them aware but if they are trading

through Over the Counter then there is need to make them aware about

Exchange Traded Currency Derivative because we are focusing on the ETCD.

Here from the

survey, we

come to know

that 91% are

not aware and

not trading through Exchange Traded Currency Derivative and 9% know and

trading through Exchange Traded Currency Derivatives.

(a) If yes then which type of mechanism you are using for

trading in currency market?

Objective:To know about the purpose/mechanism used for currency

trading by the investors in Exchange Traded Currency Derivative.

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MechanismPercenta

geRespondents

Hedging 72.22% 13

Arbitraging 11.11% 2

Speculation 16.67% 3

Total 100% 18


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Interpretation:

After knowing the awareness about the ETCD, there is a need to know the

purpose of investing in ETCD. From this question, we want to know about

which type of investors they are? Sothat we come to know that 68% use

currency trading for hedging(EXIM firms use) purpose to reduce the future risk

arise because of exchange rate fluctuation,10% use for arbitrage to take the

benefit of difference between two different market and 22% use currency

trading for speculation to fluctuate the exchange rate.

(b) If no then please give the reason(please tick any

one)

Objective: To know the reason why they are not trading

through Exchange Traded Currency Derivative.

ReasonsPercentage

Respondents

Lack of awareness 40.11% 73

Not available 26.92% 49

Lack of knowledge 14.29% 26

Highly Speculative 12.64% 23Others 6.04% 11

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Total 100% 182

Interpretation:

If the investors are not aware and also trading through ETCD, there is need

arise to know the reason of not investing through ETCD. We come to know

from the research that 40% are not aware about ETCD, 27% give response of

not availability of ETCD, 14% have lack of knowledge of ETCD and 13% believe

that it is highly speculative and 6% are not investing for some other reasons.

Investors have wrong belief of currency but there is increase in the volume of

currency and exchanges also focusing on the ETCD and showing the

importance of currency future trading by different expert interviews on news

channels. E.g. on TV channel BLOOMBERG TV on 17 th July, 2010. They are

showing the discussion of different well known firms executives on the

currency future trading at MCX-SX.

7. Type of currency preferred please rank them.

Objective:To know the investors most preferred and most traded

currency contract in the Exchange Traded Currency Derivative.

Particulars R-1 R-2 R-3 R-4 TotalWeightage Rank

USD/INR 147 24 19 10 708 0.35 1

EUR/INR 26 83 54 37 498 0.25 2

GBP/INR 18 63 65 54 445 0.22 3

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JPY/INR 9 30 62 99 349 0.17 4Total 2000

Interpretation:

The objective of this question is to know about the most

traded and most preferred currency which give more return and mostly used

by the currency traders. In India, USD/INR is available for trading in currency

derivative. From the research, we come to know that USD/INR is most traded

and most preferred currency because it gives more return and that currency is

used in most economy for the currency future trading.

8. Scale the following.

Objective:To know the investors viewpoint about the

different sentences related to the ETCD.

(a) Currency fluctuation impacts on equity and commodity market.(5 for strongly agree and 1 for strongly disagree)

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5 4 3 2 1

Strongly

Agree

Agre

e

Indifferen

t

Dis

Agree

Strongly Dis

Agree

Mean

score

22 68 83 18 9 3.38

Interpretation:

Mean score is 3.38 so it show that the perception of the investors show a high

impact of currency fluctuation on equity and commodity market in

comparison with other financial instruments available in the market.

(b) Currency trading through ETCM is easily available. (5 forstrongly agree and 1 for strongly disagree)

Interpretation:

Mean is 1.68. The perception of the investors show a high disagreeness of

easy availability of Exchange Traded Currency Derivative in the north Gujarat

region. Thus they know that Exchange Trading For currency not available in

North Gujarat.

(c) There are more future opportunities in currency marketrather than other investment option.

5 4 3 2 1

65


5 4 3 2 1

Strongly Agree

Agree

Indifferent

Disagree

Strongly

Disagree

MeanScore

3 9 23 51 114 1.68


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Strongly Agree

Agree

Indifferent

Disagree

Strongly

Disagree

MeanScore

21 83 58 29 9 3.39

Interpretation:

Mean score is 3.39 Which falls between indifferent and agree so the

perception of the investors show the positive reply towards the future

opportunities in the currency market rather than other investment option.

(d) OTC currency trading takes more time than ETCD.

5 4 3 2 1

Strongly Agree

Agree

Indifferent

Disagree

Strongly

Disagree

MeanScore

18 12 156 9 5 3.145

Interpretation:

Mean Score is 3.145 which fall between indifferent and agree so the

perception of the investors show that investing in trading in the Over The

Counter market takes more time than the Exchange Traded CurrencyDerivatives. It shows that investors are somewhat agree with the statement.

9. Please show your awareness about services provided

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by the Exchange Traded Currency Derivatives.

Objective:To know the awareness among the investors about theservices provided by the Exchange Traded Currency Derivative.

(a) Lot size 1lot=1000USD

Interpretation:

Mean score is 2.64 so the perception of the investors falls between partially

aware and aware so that it shows the investors are aware about the lot size

available in Exchange Traded Currency Derivatives.

(b) Cost per Rs.100=Rs.0.03

Interpretation:

Mean score is 1.44 which is fall between not aware and partially aware so the

perception of the investors show that they are not or less aware about the costof currency trading through exchange is less than the Over The Counter

market.

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3 2 1

AwarePartiallyaware

Notaware

MeanScore146 36 18 2.64

3 2 1

AwarePartiallyaware

Notaware

MeanScore

22 44 134 1.44


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(c) Profit earned through ETCM consider as business income

Interpretation:

Mean score is 1.25 which shows the response of the investors that they are not

or less aware that the profit earn through Exchange Traded Currency

Derivatives is consider as business income while in Over The Counter, it

consider as taxable income.

(d) Time availability in ETCD is more than OTC market.

3 2 1

AwarePartiallyaware

Notaware

MeanScore

12 74 114 1.49

Interpretation:

Mean score is 1.49 so it shows the investors perception of not aware or

partially aware about the time period available for trading in Exchange is more

than the Over The Counter trading.

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3 2 1

AwarePartiallyaware

Notaware Mean Score

14 22 164 1.25


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(e) ETCD provide live/current currency rate for trading

3 2 1

AwarePartiallyaware

Notaware

MeanScore

26 16 158 1.34

Interpretation:

Mean score is 1.34 which falls between not aware and partially aware which

shows that the investors are less or not aware that Exchange trading currency

market provides market/spot price for currency trading.

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10. Show your satisfaction level from the OTC marketservices.

Objective:To know the satisfaction level of investors from theservices of over the counter market

ParticularsNo. ofRespondent In (%)

Highly satisfied 19 10.44

Moderatelysatisfied 26 14.29

Indifferent 57 31.32Moderatelydissatisfied 67 36.81

Highly dissatisfied 13 7.14

Interpretation:

This question is asked to know whether the investors are satisfied with the

services provided by the OTC market or not. It shows their satisfaction level

from OTC market so that the firm can come to know its opportunities in the

OTS market investors and can make the investors interested for the trading in

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11. Please rank the following factors according to theireffectiveness to the currency exchange rate?

Objective:To know the investors view about the most impactingfactors to the currency exchange rate.

Interpretation:

This question shows the factors effectiveness on exchange rates according to

the investor preference. It shows the most impacting factor on exchange rates

is export-import data because EXIM firms required more currency for their

international trades and least impacting factor on currency rate is natural

calamities because it occurs very less.

12. If currency trading in ETCM will available in northGujarat, are you interested to trade in currency market?

Objective:To know the investors interest to trade in Exchange tradedCurrency Derivative in the North Gujarat Region.

71


Particulars R-1 R-2 R-3 R-4 R-5 R-6 R-7 R-8 TotalWeightage

Rank

Export-importdata 61 48 33 23 16 13 4 2 1600 0.211921 1

Political stability 4 7 10 14 23 47 58 37 597 0.079073 7Interest rate 26 29 31 35 42 26 8 3 1037 0.137351 4

GDP data 40 45 41 32 21 14 5 2 1179 0.156159 2

Inflation data 21 22 26 29 31 36 21 14 911 0.120662 5NaturalCalamities 2 2 4 5 18 29 43 97 421 0.055762 8Fiscal /monetary data 13 14 18 19 23 24 52 37 710 0.09404 6

Tax data 33 33 37 43 26 11 9 8 1095 0.145033 3

7550

Particulars

No. ofRespondents

In(%)

Yes 151 83

No 31 17


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Interpretation:

From the above question, we come to know about the interestedinvestors in exchange traded currency futures are 83% because not availability

of ETCD in north Gujarat and 17% are not interested investors. So from the

above question, the firm can get the pioneer advantage of newly launching

ETCD in north Gujarat and it also required awareness and interest of investors.

13. Currency trading through ETCM is more beneficial andeasy than OTC market. Please give your opinion?Objective:To know the investors viewpoint about the Exchange TradedCurrency Derivative

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Interpretation:

From this question, we want to know about investors perception of benefits

and easiness of currency future trading. In this, 76% investors are agree with

the statement and 24% are disagree with the above statement because of

their lack of knowledge about ETCD.

73


Particulars

No. OfRespondents IN (%)

Agree 152 76

Disagree 48 24


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Chapter-6

Hypothesis Testing

Test-1 Whether 50% of the respondents believes that investment in currency

is risky?

P=0.5Q=0.5n=200 =0.05

H0: Z=0.5(50% of the respondents believes that investment in currency isrisky)

H1: Z


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Here we have taken our null hypothesis that 50% Investors are believe thatExchange Traded Currency Market is risky. Here our 47% findings are

believed that ETCM is risky. After used z test we found that z value comes-0.85 with 0.05 significant level z value placed at expected zone whichshow that our null hypothecation 50% of the respondents believesinvesting in currency is risky is accepted. Means 50% Investors believedthat ETCM is risky.

Test-2 whether 25% of the respondents are trading in exchange tradedcurrency market?

P=0.25Q=0.75n=200

=0.05

H0: Z=0.25 (25% of the respondents are trading in exchange tradingcurrency market)

H1: Z


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Here we have taken our null hypothesis that 25% Investors are trading

through Exchange Traded Currency Market. Here our 9% findings areinvested through ETCM. After used z test we found that z value comes-5.22. with 0.05 significa=nt level z value placed at unexpected zone whichshow that our null hypothecation 25% of the respondents are trading inexchange treading currency market is reject. Means less than 25%Investor trading in ETCM.

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Chapter-7

FINDINGS

We have found that

Market for currency trading is potential but very few investors are aware

about ETCD.

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Exporters and importers are agree that research based investing in ETCD

is beneficial for hedging idea.

Most investors are using OTC for hedging.

Investors are use banks more for the currency trading.

Investors are more concern with rate fluctuation in prices.

Major investor in currency derivatives are Export-Import Companys than

speculators and arbitragers.

Investors believe that currency trading give good return with lower risk

because of easily available contracts.

Investors face problems while invest in currency through OTC then ETCD.

USD/INR is mostly traded currency due to high liquidity in it.

Investors believe that ETCD are more beneficial than OTC in differentways.

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Chapter-8

SUGGESTIONS

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The firm can make the large investors aware about the Exchange Traded

Currency derivatives by arranging the personal meeting or by

advertisement of the availability of the Exchange Traded Currency

Derivatives at MARWADI in North Gujarat.

The firm can arrange the seminars of Exchange Traded currency

Derivatives for the awareness by the expert people.

The firm can motivate the speculators for invest in currency trading by

showing its impact on equity and commodity and also showing them

earning from it.

Export import firms more concerns for exchange rate changes because

slight change in it make them high lose so Exchange traded currency

derivatives provides currency at market price.

The firm can also get the customers of its other products by these

seminars and personal meets.

They can marketing of its new product by providing the research based

call of currency trading to active client base

SWOT analysis

Strength:

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Good presence and strong network into the north Gujarat with 22 sub-

brokers in MEHSANA, 18 in PALANPUR etc and 8 branches in North

Gujarat.

Well skilled and experience employees having more than 3 years of

experience and employees co-relation is good.

The firm has good risk management service in all segments.

The firm has very good investment advice in commodity as well as

currency market with 80% successful ratio.

Low cost for online trading in every products of firm.

Weakness: Centralized decision making.

Less focus on marketing activity.

Lack of professional management.

Opportunities: The firm has the opportunity of pioneer advantage of new product

development and advertisement of currency trading availability.

The firm have the opportunity in to reach to the untapped market.

Threats:

Highly competitive market.

Uncertainty of the market.

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Chapter-9

CONCLUSION

Currency market is 10 times more than equity market. After completion of our project, we

conclude that mostly hedgers are done their hedging through banks (Over the counter market)

where they use their bank facilities. From OTC, they face many problem like transparency of price,

settlement time, contract size etc

They are not aware regarding Exchange Traded Currency Trading which will help them for better

exchange risk minimization.

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Chapter-10

BIBLIOGRAPHY

Websites

www.mcx-sx.com

www.nseindia.com

www.commodityonline.co m

www.marwadionline.com

www.rbi.gov.in

www.netdania.com www.bseindia.com www.financeindia.com

www.forexmarket.com

Books

Naresh k Malhotra & Satyabhushandash, Marketing Research, FifthEdition, Publish by Dorling Kinersley(India) Pvt.Ltd.

Panneerselvam R. Research Methodology, Eastern Economy Edition, ByPrentice-Hall of India Private Limited.

Richard I. Levin, David S Rubin, Statistics for Management, PearsonEducation, 7th Edition.

NCFM: Currency Future Module

Euan and Rasnik, International Financial Market

Magazines

Portfolio organizer

Capital market

Dalaal Street

Other sources

Report of the RBI-SEBI standing technical committee on exchange traded

currency futures, 2008

86

http://www.nseindia.com/http://www.commodityonline.com/http://www.marwadionline.com/http://www.rbi.gov.in/http://www.netdania.com/http://www.bseindia.com/http://www.financeindia.com/http://www.nseindia.com/http://www.commodityonline.com/http://www.marwadionline.com/http://www.rbi.gov.in/http://www.netdania.com/http://www.bseindia.com/http://www.financeindia.com/


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Chapter-11

Annexure

DETAILS OF CONTRACT SPECIFICATION OF USD/INR

FUTURES

USDINR

Instrument Type FUTCUR1 (1 unit denotes 1000 USD)

The exchange rate in Indian Rupees

for a US Dollar

Tick size Rs.0.25 paise or INR 0.0025Trading hours Monday to Friday

9:00 a.m. to 5:00 p.mContract trading cycle 12 month trading cycle.Last trading day Two working days prior to the last

business day of the expiry month at

12 noon.

Final settlement day Last working day (excluding

Saturdays) of the expiry month. The

last working day will be the same as

that for Interbank Settlements in

Mumbai.Quantity Freeze Above 10,000Base price Theoretical price on the 1st day of the

contract. On all other days, DSP of the

contractPrice operating range Tenure up to 6 months Tenure

88


Symbol

Unit of

trading

Underlying


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USDINR

more than 6 months

+\- 3% of base price +\- 5% of base

pricePosition limits Clients Trading members Banks

Higher of 6% of Higher of 15% Higher

of total open interest of the total open

15% of total

or USD 10 million interest or open

interest USD 50 million or USD 100

MillionMinimum initial margin 1.75% on day 1, 1% thereafterExtreme loss margin 1% of MTM value of open position.Calendar spreads Minimum Rs. 250/- per contract for all

months of spreadSettlement Daily settlement : T + 1

Final settlement : T + 2Mode of settlement Cash settled in Indian RupeesDaily settlement price (DSP) Calculated on the basis of the last half

an hour weighted average priceFinal settlement price (FSP) RBI reference rate

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Questionnaire

We are the students of S.V. Institute of Management, Kadi. We arepreparing project report on To check the awareness level and perceptionabout Exchange Traded currency derivatives so we want yourperception and some information about currency derivatives. Be sure that thisinformation is use only for our academic purpose.

1. Please rank the following investment avenue as per your investmentpreference.

Equity Market Currency Market

Commodity Market Mutual Fund

Bank Deposit Other

2. Since how long you are investing in above investment option?

Last 1year Last 1 to 3 yearsLast 3 to 5 years Above Last more than 5 years

3. From whom do you get advice for your investment? (Please tick any one)

Friends Self

Family Consultant/Broker

News papers News channels

Business magazine

4. Do you know about the Currency Trading?

Yes No

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5. What is your perception about Currency market? (Please tick any one)Less Risky Very Risky

Risky Cant say

6. Are you aware about trading in exchange traded Currency market?

Yes No

If Yes, Than

Which type of mechanism you are using for trading in Currency Market?

Hedging Arbitraging

Speculation

If No then please give reason(please tick any one)

Lack of awareness Not available

Lack of knowledge Highly speculative

Others

7. Type of currency preferred please rank them.

USD/INR GBP/INR

EUR/INR JPY/INR

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8. Scale the following.

9. Please show your awareness level about the services provided by the

Exchange Traded Currency Market.

No. Particular Aware PartiallyAware

NotAware

1. In ETCM, 1lot=1000USD2. Cost Rs.100= Rs.0.033. Profit earned through ETCM consider as

business income.4. Time availability in ETCM is more than

OTC market.

5. ETCM provide live/current currency ratefor trading.

10. Show your satisfaction level from the OTC market services?

Highly satisfied moderately satisfied

Indifferent Moderately dissatisfied

Highly dissatisfied

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Particular StronglyAgree

Agree

Indifference

Disagree

StronglyDisagree

Currency fluctuationimpacts on equity andcommodity market.Currency trading throughETCM is easily available.

There are more futureopportunities in currencymarket rather than otherinvestment option.

OTC currency trading takesmore time than ETCM


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11. Please rank the following factors according to their effectiveness tothe currency market?

Export-import data Political stability

Interest rate GDP data

Inflation data Natural Calamities

Fiscal / monetary data Tax data

12. If currency trading in ETCM will available in north Gujarat, are youinterested to trade in currency market?

Yes No

13. Currency trading through ETCM is more beneficial and easy than OTCmarket. Please give your opinion?

Agree Disagree

NAME:-

AGE: -

21-25 year 26-30 years

31-35 years 36-40 years

41-45 years 46-50 years

above 50 years

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Thanks for spending your precious time

Article of Business Standard

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Contract Specifications for Euro-INR

Symbol EURINR

Instrument Type FUTCUR

Unit of trading 1 (1 unit denotes 1000 EURO)

Underlying EURO

Quotation/Price

Quote Rs. per EUR

Tick size 0.25 paise or INR 0.0025

Trading hoursMonday to Friday

9:00 a.m. to 5:00 p.m.

Contract trading

cycle12 month trading cycle.

Settlement price RBI Reference Rate on the date of expiry

Last trading day

Two working days prior to the last business day of the

expiry month at 12 noon.

Final settlement

day

Last working day (excluding Saturdays) of the expiry

month.

The last working day will be the same as that for Interbank

Settlements in Mumbai.

Base priceTheoretical price on the 1st day of the contract. On all

other days, DSP of the contract

Price operating

range

Tenure upto 6 monthsTenure greater than 6

months+/-3 % of base price +/- 5% of base price

Position limits

Clients Trading Members Banks

Higher of 6% of

total open

interest or EUR 5

million

Higher of 15% of

the total open

interest or EUR 25

million

Higher of 15% of

the total open

interest or EUR 50

million

Minimum initial

margin2.8% on First day & 2% thereafter

Extreme loss 0.3% of MTM value of gross open positions.

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margin

Calendar spreadsRs.700/- for a spread of 1 month, 1000/- for a spread of 2

months, Rs.1500/- for a spread of 3 months or more

SettlementDaily settlement : T + 1

Final settlement : T + 2

Mode of

settlementCash settled in Indian Rupees

Daily settlement

price (DSP)

DSP shall be calculated on the basis of the last half an

hour weighted average price of such contract or such

other price as may be decided by the relevant authority

from time to time.

Final settlement

price (FSP)RBI reference rate

Contract Specifications for Japanese Yen-INR

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Symbol JPYINR


Unit of trading 1 (1 unit denotes 100000 YEN)

Underlying JPY

Quotation/Price

QuoteRs per 100 YEN



9:00 a.m. to 5:00 p.m.

Contract trading

cycle 12 month trading cycle.

Settlement priceExchange rate published by the Reserve Bank in its Press

Release captioned RBI Reference Rate for US$ and Euro.

Last trading dayTwo working days prior to the last business day of the


Final settlement

day


month.

The last working day will be the same as that for Interbank

Settlements in Mumbai.

Base priceTheoretical price on the 1st day of the contract. On all

other days, DSP of the contract

Price operating

range

Tenure upto 6 monthsTenure greater than 6

months

+/-3 % of base price +/- 5% of base price

Position limits

Clients Trading Members Banks

Higher of 6% of

total open

interest or JPY

200 million

Higher of 15% of

the total open

interest or JPY 1000

million

Higher of 15% of

the total open

interest or JPY

2000 million

Minimum initial

margin4.50% on first day & 2.30% thereafter

Extreme loss

margin0.7% of MTM value of gross open positions.

Calendar spreads

Rs. 600 for a spread of 1 month; Rs 1000 for a spread of 2

months and Rs 1500 for a spread of 3 months or more

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SettlementDaily settlement : T + 1

Final settlement : T + 2

Mode of

settlementCash settled in Indian Rupees

Daily settlement

price (DSP)

DSP shall be calculated on the basis of the last half an

hour weighted average price of such contract or such

other price as may be decided by the relevant authority

from time to time.

Final settlement

price (FSP)

Exchange rate published by the Reserve Bank in its Press


Hedging scenarios

Hedging against Indian Rupee appreciation

Suppose a mango pulp exporter receives an export order worth, say,

10,000,000 from a Japanese food company with the delivery date being in 3

months time. At the time when contract is placed, the Japanese Yen (JPY) isworth say Rs.51.05 per 100 JPY in the spot market, while on MCX-SX a futures

contract for an expiry date that matches with order payment date is trading,

say, at Rs.51. This puts the value of the order, when placed, at Rs.5,105,000.

However, if the domestic exchange rate appreciates significantly (to

Rs.50.20/100 JPY) when the order is paid for (which is one month after the

delivery date), the firm would receive only Rs.5,020,000 rather than

Rs.5,105,000.

To insure against such losses, the firm can, at the time it receives the order,

can enter into 100 JPY futures contract of 100,000 each to sell at Rs.51 per

100 JPY, which involves contracting to sell a foreign currency on expiry date at

the agreed exchange rate. Suppose on payment date the exchange rate is,

say, Rs.50.20, the exporter would receives only Rs.5,020,000 on selling the

Japanese Yen in the spot market, but gains Rs. 80,000 (i.e. 51 - 50.20 * 100 *

100,000/100 ) in the futures market. Thus, overall the firm receives

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Rs.5,100,000 and protects itself from the sharp appreciation of domestic

currency against Japanese Yen.

In the short term, firms can make gains or losses from hedging. But the basic

purpose of hedging is to protect against excessive losses and to benefit from

knowing exactly how much it was going to get from its export deal to avoid the

uncertainty associated with future exchange rate movements.

Hedging against Indian Rupee depreciation

An automobile manufacturer in India placed an import order worth, say,

10,000,000 with a Japanese auto parts manufacturer. The current spot rate of

Japanese Yen is, say, Rs.51.05 per 100 Japanese Yen and at this rate the value

of the order is Rs.5,105,000. The importer is worried about sharp depreciation

of Indian Rupee against Japanese Yen in coming months when the payment is

due and brought 100 Japanese Yen futures contract ( 100,000 each) on MCX-

SX, say, at Rs.51.10/100 JPY. Suppose, at expiry date, Rupee depreciated to

Rs.51.50 the importer would have to pay Rs.5,150,000, but he would gainRs.40,000 (i.e. Rs.51.50 - 51.10 * 100 * 100,000/100) from the futures market

and the net outflow would be only Rs.5,110,000.

In the short term, firms can make gains or losses from hedging. But the basic

purpose of hedging is to protect against excessive losses and to benefit from

knowing exactly how much it was going to pay for the import order to avoid

the uncertainty associated with future exchange rate movements.

Contract Specifications for Pound Sterling-INR

Symbol GBPINR


Unit of trading 1 (1 unit denotes 1000 POUND STERLING)

Underlying POUND STERLING

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Quotation/Price

QuoteRs. per GBP



9:00 a.m. to 5:00 p.m.

Contract trading

cycle12 month trading cycle.

Settlement priceExchange rate published by the Reserve Bank in its Press


Last trading day

Two working days prior to the last business day of the


Final settlement

day


month.

The last working day wi

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