Currency Derivative Anup

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CURRENCY DERIVATIVE

A PROJECT REPORT

Submitted by

ANUP PATIDAR

In partial fulfillment for the award of the degree

Of

MASTER OF BUSINESS ADMINISTRATION

IN

FINANCE

APEX INSTITUTE OF MANAGEMENT AND SCIENCE

JAIPUR

AUGEST 2010

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APEX INSTITUTE OF MANAGEMENT AND SCIENCE

JAIPUR

BONAFIDE CERTIFICATE

Certified that this project report .CURRENCY DERIVATIVE ..

Is the bonafide work of ANUP PATIDAR. who carried out the project work

under my supervision.

SIGNATURE

MR. VIKAS RANKABRANCH HEAD

ARIHANT CAPITAL MARKETS

JAIPUR

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DECLARATION

I, ANUP PATIDAR, a student of APEXINSTITUTE OF MANAGEMENT AND SCIENCE,JAIPUR. hereby declare that this project is therecord of authentic work carried out by meduring the academic year 2010-2011 and hasnot been submitted to any other university orInstitute towards the award of any degree

.

Date:Place: Anup patidar

TABLE OF CONTENTS

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TITLE PAGE NO.

Acknowlegment 6Organization overview 7Company introduction 8

Philosphy 9Arihant culture and people 9Business principal 11

Overview 13Broking 14Distribution 15Depository 16Wealth management 16

Arihant displine investment process 17Research 17Merchant banking 18

Research methodology 21Currency derivative introdution 22Diff between future and currency derivative 23History of currency derivative 24Foreign exchange market 25Product 27Foreign exchange spot market 29Uses of currency future 30Foreign exchange quotation 33Trading process of currency derivative 34Utility of currency derivative 35Product defination of currency future on nse/bse 36Regulatory framework 38Finding 39

Suggestion 40Conclusion 41Biblography 42

ACKNOWLEGEMENT

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Sometimes words fall short to show gratitude, the same

happened with me during this project. The immensehelp and support received from Arihant capital marketsoverwhelmed me during this project.

My sincere gratitude to MR VIKAS RANKA SIR(Head JaipurBranch) for providing me with an opportunity to work withArihant capital markets.

I am highly indebted to vikas and company project guide whohas provided me with the necessary information and his valuablesuggestion and comments on bringing out this report in the bestpossible way.

I am grateful to the entire member of jaipur branch who helpedme in the successful completion of this project.

Last but not least, my heartfelt love for my parents, whoseconstant support and blessings helped me throughout thisproject.

ORGANIZATION OVERVIEW

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Arihant Capital Markets Limited, an ISO 9001:2008 CertifiedCompany, is one of the leading financial services companiesin India. We provide a gamut of products and services

including securities and commodities broking, investmentplanning, financial planning, wealth management andmerchant banking to a substantial and diversified clientelethat includes individuals, corporations and financialinstitutions.

We are committed to giving our customers the best services andholding to our core values which always place our client'sinterests first. These values are reflected in ourbusiness

principal, which emphasize integrity, commitment toexcellence, innovation and teamwork.

We have presence in 110 cities with over 620 offices across thenation. Clients turn to Arihant for its complete platform offinancial services combined with excellent execution.

We have a dedicated institutional team, which caters to mutualfund houses, insurance companies and almost all the banks

active in the capital market segment.Our goal is to create wealth for our retail and corporate

customers through sound financial advice and appropriateinvestment strategies.

PHILOSPHY

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Integrity and transparency in all transactions. Providing investment solutions based on quality and

unbiased Research.

Providing personalized services to all investors,institutions, business associates. Achieving success through client's growth. Making financial services more affordable, understandable

and available to all.

WHAT ARIHANT ASPIRETo be the pre-eminent and most trusted provider of financialservices.The values to which we aspire can be summarized in 5principles:

Integrity

Client commitment Strive for profitability Excellence Innovation

ARIHANTS CULTURE AND PEOPLE

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Arihant's culture is characterized by five key qualities:commitment to clients, integrity, excellence, strive forprofitability and innovation. Integral to our corporate culture is

our total dedication to superior client service, reliability andtransparency in all our transactions. At Arihant we believe ourclient's success is our success.Independence and ownership of work is blended in our culturewhich helps in creating entrepreneurs within the organizationand gives a feeling of ownership to our employees. Our peoplefeel a close relationship to Arihant. They associate their successwith the company's growth and this strong sense of belonging

has helped us grow over the years.We believe that our commitment to the interests of our clientsproves our value to them. We have a strong corporate culturethat is based on firmly held beliefs.We offer equal opportunity and tremendous growth potential toindividuals who have the right talent and a commitment toexcellence. Along with our reputation and clients, our people are

our most valuable asset.To maintain our competitive edge and meet the highexpectations of our clients, our culture continues to evolve.We aspire to be the best financial services company in India. Toachieve this goal, we focus relentlessly on carrying outourbusiness principles, which are fundamental to everything wedo.

BUSINESS PRINCIPAL

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Our clients' growth is our primary objective. We believethat our clients growth is strongly correlated to our growth.

We believe that our clients deserve the best. Our idea is notsimply offering a product or service, but it is building arelationship with clients based on trust, reliability,understanding and respect.

We believe that righteousness is very important in everysphere of life, including business. We therefore strive to beopen and honest with ourselves, our colleagues and ourshareholders.

The core assets of our business are our people, customers,

capital and reputation. We are dedicated to complying fullywith the bye- laws, rules and ethical principles that governus. Our continued success depends upon constantadherence to this standard.

Our goal is to provide greater returns to our shareholders.

We believe our potential to earn profits, re-invest ourcapital, invest in growth avenues and keep ourselvesabreast with the latest technology and systems would leadto prosperity in this highly competitive market. Profitability

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is critical to achieving superior returns, building our capital,and attracting and retaining our best people.

We offer our people the opportunity to move ahead. Wefoster an environment of respect and inclusiveness amongstour people.

We work as a family which is responsible for the growth of

our client. Our people put in their best to their jobs and thededication they put in to their work is greater than one findsin most other organizations.

We realize the need to constantly change and updateourselves to meet our clients' upcoming needs in this

burgeoning world of finance. We constantly Endeavour toanticipate the rapidly changing needs of our customers anddevelop services to meet those needs.

Integrity and honesty are at the heart of our business. Weseek to achieve the highest standards of professional

conduct and ethics, to prevent and detect wrongdoing, andto govern ourselves in accordance with relevant rules,regulations, and bye-laws. While we try to be perfect, wemight make mistakes occasionally, and when it comes

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under our observation, we take immediate steps to rectifythose errors and set things right.

OVERVIEW

Our success is defined by the success of our clients

Arihant has developed a diverse and robust portfolio of financialservices to help our customers manage their money in the waythat benefits those most.

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With more than 500 professionals and staff working in 90 pluscities, Arihant has the resources and nationwide reach to ensurethe highest level of personalized service.Our fundamental mission is to provide our clients everythingthey need to do better as realizing their strategic visions isour shared objective. Our service achieves these goals by puttingclients at the center of everything we do. Our client-centricapproach, ethical and transparent business practices, research-

based advice, implementation of cutting-edge technology andkeeping up-to-date to the ever changing world of finance hashelped our clients grow with the surging Indian economy overthe years.

BROKINGArihant is one of the leading providers of broking services toindividuals and institutions in the equity, derivatives andcommodities segment in India.We proactively deliver the full depth and breadth of our brokingservices to clients through a network of more than 300 branchesand franchises across India.Excellent research support, state-of-the-art tools, smart risk

management, capital requirements, excellent order routing andefficient operational practices are key components of ourofferings. We provide superior pre- and post-trading services toclients through robust technical architecture.

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DISTRIBUTION

With the objective of meeting all the investment needs of ourclients, we provide distribution services of mutual funds andIPOs. We are an AMFI registered mutual fund distributor andare also registered with all the AMCs in India to sell theschemes offered by them. Our distribution network is backed byin-depth & comprehensive research and a strong team formarketing and sales support.We have a dedicated team exclusively for research on mutual

funds and IPO. We provide monthly publications on mutualfund activity and fund recommendations and also furnish reportson New Fund Offers (NFO) and forthcoming IPOsrecommendations. Our recommendations are objective andunbiased. For us, the clients growth is the top priority.Consistent delivery of high quality advice on mutual funds andIPO investment has established us as a competent and reliable

distributor across the country. We are also amongst the fewinvestment firms that offer the facility to invest in mutual fundsand IPO online, giving our clients freedom from paperwork andmaking investing convenient for them.

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DEPOSITORYOur Depository business helps us in providing integrated

financial solutions to our clients. It is led by a team ofprofessionals and the latest technological expertise, dedicatedexclusively for the depository services.This creates a seamless transaction platform for clients toexecute trades through Arihant Broking Business and settle themthrough Arihant Depository Services.

WEALTH MANAGEMENTOur wealth management business provides tailored, impartialand regulated financial planning advice on life, retirement andinvestment products.Our services to high net worth individuals and corporate

clients include:

Asset management

Stock broking

Wealth structuring

Financial planning

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ARIHANT DISPLINED INVESTMENT

PROCESS

Arihant has a philosophy of investing in quality businesses witha strong management at reasonable prices. We follow both a

bottom-up approach and top-down approach to investing with anintensive research process for screening potential investments.

RESEARCHOur research team supplements our broking, wealthmanagement and distribution business. Our research team

comprises expert investment professionals for fundamental andtechnical research covering equity, derivatives, mutual funds andIPOs. We draw upon our experience and depth of resources, toprovide the financial and strategic advice necessary forsuccessful asset management.

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From day one, our focus has been to offer investors a platform tomake informed investment decisions based on thorough researchand discipline. We have therefore established a research team to

offer complete support and the right guidance to our clients. Ourresearch is used only for our personal and institutional clients.Our research extends into every corner of our equities business,supplying invaluable analysis, information, and advice to ourclients. We employ a disciplined and rigorous research process.Starting with a top down analysis, we look closely at themegatrends and industry drivers that create opportunities forinnovative companies. We identify and affiliate ourselves with

the fastest growing and fundamentally strong companies andprovide our investors with the best investment opportunities.

MERCHANT BANKING AND INVESTMENT

BANKINGWe deliver high-quality strategic advice and creative financing

solutions to corporates with the help of qualified professionalswho have a combined experience of over 50 years in investmentbanking, corporate advisory and corporate finance.The primary activities of Merchant Banking Business are:

Corporate Finance

Strategic Services

The comprehensive experience and knowledge of our teamenables us to offer a host of financial services covering capitalraising, mergers and acquisitions, advisory, debt syndication,

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qualified institutional placements, private placements, financialrestructuring among others.

Arihants Quality Policy Statement

ISO 9001:2008At Arihant Capital Markets Ltd. our aim is to continue toachieve high levels of satisfaction for our clients and help themachieve their financial goals through right investment advice and

excellent service.

We aim to make financial products easily accessible andunderstandable to all. We are committed to delivering thehighest quality solutions to meet our clients investment needs.

To realize this, it is the policy of the Company to continually

review and update our processes, improve the competence ofhuman resources and effectiveness of quality managementsystems, ensure compliance with all regulatory requirements,optimize technology and infrastructure, thereby enhancingcustomer satisfaction.

The Quality Policy has full support of the Senior Management,and as such it is their responsibility to maintain and implement

our Quality Policy and ensure that the staff adheres to theprocedures.

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COMPANY HISTORY

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RESEARCH METHODOLOGY

TYPE OF RESEARCH

In this project Descriptive research methodologies wereuse.The research methodology adopted for carrying out thestudy at the first stage theoretical study is attempted and atthe second stage observed online trading on NSE/BSE.

SOURCE OF DATA COLLECTIONSecondary data were used such as various books, reportsubmitted by RBI/SEBI committee and NCFM/BCFMmodules.

OBJECTIVES OF THE STUDYThe basic idea behind undertaking Currency Derivativesproject to gain Knowledge about currency future market.

To study the basic concept of Currency future

To study the exchange traded currency future

To understand the practical considerations and ways ofconsidering currency future price.

To analyze different currency derivatives products.

LIMITATION OF THE STUDYThe limitations of the study that analysis was purely based

on the secondary data. So, any error in the Secondary data mightalso affect the study undertaken.

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What is Currency Derivatives?

Currency derivatives are a contract between the seller and thebuyer, whose value is to be derived from the underlying asset,the currency amount. A derivative based on currency exchangerates is a future contract which stipulates the rate at which agiven currency can be exchanged for another currency as at afuture date.

INTRODUCTION

OF

CURRENCY DERIVATIVESEach country has its own currency through which both nationaland international transactions are performed. All theinternational business transactions involve an exchange of onecurrency for another.For example,

If any Indian firm borrows funds from internationalfinancial market in US dollars for short or long term then atmaturity the same would be refunded in particular agreedcurrency along with accrued interest on borrowed money. Itmeans that the borrowed foreign currency brought in the country

will be converted into Indian currency, and when borrowed fundare paid to the lender then the home currency will be convertedinto foreign lenders currency.Thus, the currency units of a country involve an exchange of one

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Currency for another. The price of one currency in terms ofother currency is known as exchange rate.The foreign exchange markets of a country provide the

mechanism of exchanging different currencies with one andanother, and thus, facilitating transfer of purchasing power fromone country to another.With the multiple growths of international trade and finance allover the world, trading in foreign currencies has growntremendously over the past several decades. Since the exchangerates are continuously changing, so the firms are exposed to therisk of exchange rate movements. As a result the assets or

liability or cash flows of a firm which are denominated inforeign currencies undergo a change in value over a period oftime due to variation in exchange rates.This variability in the value of assets or liabilities or cash flowsis referred to exchange rate risk. Since the fixed exchange ratesystem has been fallen in the early 1970s, specifically indeveloped countries, the currency risk has become substantial

for many business firms. As a result, these firms are increasinglyturning to various risk hedging products like foreign currencyfutures, foreign currency option, foreign currency swaps.

What is the difference between forex

derivatives and currency derivatives?There is a thin line dividing the two. Derivatives based oncurrency exchange rates are forward contracts (or forward rateagreements); options and swaps and are popularly known asforex derivatives. Those are meant to hedge interest rate risks

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and cash mismatches in different currencies such as currencyswaps and options are known as currency derivatives. There areinterest rate forward rate agreements and swaps for managing

the interest rate movements risk within same currency. On thelines of commodity futures, there are currency and interest ratefutures, which are nothing but standardized forward contracts. Acommittee appointed by the RBI (Reserve Bank of India) hasrecommended making available the currency futures atauthorized dealers.

History of currency derivative:-

Currency derivative are created in the Chicago MercantileExchange (CME) in the year of1972. The contracts are createdunder the guidance & leadership of Leo me lamed,CMEchairman Emeritus. The FX contract capitalized on the

U.S. abandonment of the brettonwoods agreement, which hadfixed world exchange rates to a gold standard after World WarII. The abandonment of the Bretton woods agreement resulted incurrency values being allowed to float increases the risk ofdoing a business, by creating another market in which futurescould be treaded, CME currency futures extended the reach ofrisk management beyond commodities which were mainderivative contracts traded at CMEunit then. The concept ofcurrency futures at CME was revolutionary, & gained credibilitythrough endorsement of Nobel-prize-winning economist MiltonFriedman.Today, CME offers 41 individual FX futures & 31, optionscontracts on 19 currencies, allof which trade electronically on

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the exchanges CME Globex platform. It is a largest regulatedmarketplace for FX trading. Traders of CME FX futures are adiverse group that includes multinational corporations, hedge

funds, commercial banks, investment banks, financial managers,commodity trading advisors, proprietary trading firms. Currencyoverlay managers & individual investors. They trade in order totransact business hedge against unfavorable changes in currencyrates or to speculate on rate fluctuations.

Brief history or overview of foreign

exchangemarket

During early 1990s.india embarked on a series of structuralreforms in the foreign market. The exchange rate regime, thatwas earlier pegged, was partially floated inMarch, 1992 andfully floated in March, 1993. The unification of the exchangerate was instrumental developing a market determined exchangerate of the rupee and was important steps in the progress towards

total current account convertibility, which was achieved in 1994.Although liberalization helped the Indian forex market in

various ways, it led to extensive fluctuations of exchange rate.this issue has attracted a great deal of concen from policymakers and investors. While some flexibility in foreignexchange markets and exchange rate determination is desirable,excessive volatility can have an adverse effect on price

discovery, export performance, sustainability of current accountbalance &balance sheet.

In the content of upgrading Indian foreign market exchange tointernational standards a well developed foreign exchange

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market (both PTC as well as exchange traded) is imperative.With a view to entities to manage volatilities in the currencymarket, RBI on April 207, issued comprehensive guidelines on

the wage of foreign currency forwards, swaps, & options in theOTCmarket. At the same time, RBIalso setup an internalworking group to explore the advantage of introducing currencyfutures.The report of the internal working group of RBIsubmitted in April 2008 recommended the introduction ofexchange traded currency derivative.

Subsequently, RBI & SEBI jointly constituted thestanding technical committee to analyze the currency forward

and future market around the world and lay down the guide linesto introduce traded currency futures in the Indian market. Thecommittee submitted its report on May 29, 2008, further RBI&SEBI also issued circular on this regard, on August 06, 2008.Currently, India is a US D 34 billion OTC market, where altheamajor currencies like USD, EURO, YEN, Pound, Swiss andFrance are trade. With the help of electronic trading and efficient

risk management systems .exchange traded currency futures willbring in more transparency and efficiency in price discovery,eliminate counter party credit risk, provide access to all types ofmarket participants, offer standard products and providetransparent trading platform, marks are allowed to become ofthis segment on the exchange, thereby providing them with anew opportunity

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CURRENCY DERIVATIVE PRODUCTS

Derivative contracts have several variants. The

most common variants are forwards, futures,options and swaps. We take a brief look at variousderivatives contracts that have come to be used.

FORWARD :The basic objective of a forward market in anyunderlying asset is to fix a price for a contract

to be carried through on the future agreed dateand is intended to free bot.The purchaser and the seller from any risk ofloss which might incur due to fluctuations inthe price of underlying asset.A forward contract is customized contractbetween two entities, where settlement takesplace on a specific date in the future at todays

pre-agreed price. The exchange rate is fixed atthe time the contract is entered into. This isknown as forward exchange rate or simplyforward rate.

FUTURE :A currency futures contract provides a

simultaneous right and obligation to buy andsell a particular currency at a specified futuredate, a specified price and a standard quantity.In another word, a future contract is anagreement between two parties to buy or sell

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an asset at a certain time in the future at acertain price. Future contracts are specialtypes of forward contracts in the sense that

they are standardized exchange-tradedcontracts.

SWAP :Swap is private agreements between twoparties to exchange cash flows in the futureaccording to a prearranged formula. They canbe regarded as portfolio of forward contracts. The currency swap entails swapping bothprincipal and interest between the parties, withthe cash flows in one direction being in adifferent currency than those in the oppositedirection. There are a various types of currencyswaps like as fixed-to-fixed currency swap,floating to floating swap, fixed to floating

currency swap.

In a swap normally three basic steps areinvolve___

(1)Initial exchange of principal amount.(2) Ongoing exchange of interest(3) Re - exchange of principal amount on

maturity.

OPTIONS :Currency option is a financial instrument thatgive the option holder a right and not the

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obligation, to buy or sell a given amount offoreign exchange at a fixed price per unit for aspecified time period ( until the expiration date

).In other words, a foreign currency option is acontract for future delivery of a specifiedcurrency in exchange for another in whichbuyer of the option has to right to buy (call) orsell (put) a particular currency at an agreedprice for or within specified period. The seller ofthe option gets the premium from the buyer ofthe option for the obligation undertaken in thecontract. Options generally have lives of up toone year, the majority of options traded onoptions exchanges having a maximum maturityof nine months. Longer dated options arecalled warrants and are generally traded OTC.

FOREIGN EXCHANGE SPOT (CASH)MARKET

The foreign exchange spot market trades indifferent currencies for both spot and forwarddelivery. Generally they do not have specificlocation, and mostly take place primarily by meansof telecommunications both within and betweencountries.It consists of a network of foreign dealers which areoften banks, financial institutions, large concerns,

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etc. The large banks usually make markets indifferent currencies.

In the spot exchange market, the business istransacted through out the world on a continualbasis. So it is possible to transaction in foreignexchange markets 24 hours a day. The standardsettlement period in this market is 48 hours, i.e., 2days after the execution of the transaction.The spot foreign exchange market is similar to theOTC market for securities. There is no centralizedmeeting place and no fixed opening and closingtime. Since most of the business in this market isdone by banks, hence, transaction usually do notinvolve a physical transfer of currency, rathersimply book keeping transfer entry among banks.Exchange rates are generally determinedby demand and supply force in this market. The

purchase and sale of currencies stem partly fromthe need to finance trade in goods and services.Another important source of demand and supplyarises from the participation of the central bankswhich would emanate from a desire to influencethe direction speed.

USES OF CURRENCY FUTURES Hedging:

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Presume Entity A is expecting a remittance for USD 1000on 27 August 08. Wants to lock in the foreign exchangerate today so that the value of inflow in Indian rupee

terms is safe guarded. The entity can do so by selling onecontract of USDINR futures since one contract is forUSD 1000.Presume that the current spot rate is Rs.43 andUSD INR27 Aug 08 contract is trading at Rs.44.2500. Entity Ashall do the following: Sell one August contract today.The value of the contract is Rs.44, 250.Let us assume the RBI reference rate on August 27, 2008

is Rs.44.0000. The entity shall sell on August 27, 2008,USD 1000 in the spot market and get Rs. 44,000. Thefutures contract will settle at Rs.44.0000 (finalsettlement price = RBI reference rate).The return from the futures transaction would be Rs. 250,i.e. (Rs. 44,250 Rs.44, 000). As may be observed, theeffective rate for the remittance received by the entity A

is Rs.44. 2500 (Rs.44, 000 + Rs.250)/1000, while spotrate on that date wasRs.44.0000. The entity was able tohedge its exposure.

Speculation: Bullish, buy futures

Take the case of a speculator who has a view on thedirection of the market. He would like to trade based onthis view. He expects that the USD-INR rate presentlyatRs.42, is to go up in the next two-three months. How canhe trade based on this belief? In case he can buy dollars andhold it, by investing the necessary capital, he can profit if

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say the Rupee depreciates to Rs.42.50. Assuming he buysUSD 10000, it would require an investment of Rs.4,20,000. If the exchange rate moves as he Expected in the

next three months, then he shall make a profit of aroundRs.10000.This works out to an annual return of around4.76%. It may please be noted that the cost of fundsinvested is not considered in computing this return.

A speculator can take exactly the same position on theexchange rate by using futures contracts. Let us see howthis works. If the INR- USD is Rs.42 and the three-monthfutures trade at Rs.42.40. The minimum contract size isUSD 1000. Therefore the speculator may buy 10 contracts.The exposure shall be the same as above USD10000.Presumably, the margin may be around Rs.21, 000. Threemonths later if the Rupee depreciates to Rs. 42.50 againstUSD, (on the day of expiration of the contract), the futuresprice shall converge to the spot price (Rs. 42.50) and he

makes a profit ofRs.1000 on an investment of Rs.21, 000.This works out to an annual return of 19percent. Because ofthe leverage they provide, futures form an attractive optionfor speculators.

Speculation: Bearish, sell futures

Futures can be used by a speculator who believes that an

underlying is over-valued and is likely to see a fall in price.How can he trade based on his opinion? In the absence of adeferral product, there wasn't much he could do to profitfrom his opinion. Today all he needs to do is sell thefutures.

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Let us understand how this works. Typically futures movecorrespondingly with the underlying, as long as there issufficient liquidity in the market. If the underlying price

rises, so will the futures price. If the underlying price falls,so will the futures price. Now take the case of the traderwho expects to see a fall in the price of USD-Inarched sellsone two-month contract of futures on USD say at Rs. 42.20(each contactor USD 1000). He pays a small margin on thesame. Two months later, when the futures contract expires,USD-INR rate let us say is Rs.42. On the day of expirationthe spot and the futures price converges. He has made aclean profit of 20 paisa per dollar. For the one contract thathe sold, this works out to be Rs.2000.

ARBITRAGE

Arbitrage is the strategy of taking advantage of differencein price of the same or similar product between two ormore markets. That is, arbitrage is striking a combination

of matching deals that capitalize upon the imbalance, theprofit being the difference between the market prices. Ifthe same or similar product is traded in say two differentmarkets, any entity which has access to both the marketswill be able to identify price differentials, if any. If in oneof the markets the product is trading at higher price, thenthe entity shall buy the product in the cheaper market and

sell in the costlier market and thus benefit from the pricedifferential without any additional risk.

FOREIGN EXCHANGE QUOTATION

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Foreign exchange quotations may be confusing becausecurrencies are quoted in terms of another currency.

Mainly there are two methods of quoting:1. Direct method and

2. Indirect method

Direct method is followed by most of the countries in which thenumbers of domestic currency is stated against one unit offoreign currency. For example: in we have to spend Rs.45 topurchase one unit dollar than quotation can be written as:Rs. /$ = 45 or $1 = Rs. 45

In case of indirect method of quoting value of one unit ofdomestic currency is stated against foreign currency. If wecontinue with the previous example then it can be quoted as:Rs. 1 = 1/45 or 0.02222

In the global foreign exchange market two rates are quoted bydealers one rate is buying rate which is also called the BIDRATE and another is selling rate which is also known as ASKRATE. To separate the buying and selling rate a small desh oroblique line is drawn.For example:Rs. = 45.6600/6650

Here the bid price is Rs.45.6600 and ask price is Rs. 45.6650and the difference between these two rates is known asSPREAD.SPREAD = 45.6650 45. 6600 = .0050

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TRADING PROCESS OF CURRENCY

DERIVATIVE

Like other future trading the future currency is also traded inorganized exchange. Above flow diagram of trading is shown.

When the market opens transaction takes place at the floor of theexchange when the trader wants to sell or purchase he/she has toplace the sale or purchase order to the broker who are issued anunique identification number by the exchange. Traders directlycannot make any transaction directly in the exchange, they haveto trade through brokers after placing the sales or purchase orderall the transactions are done by broker in exchange and

exchange informs it to the clearing house. In any transactionseller and buyer does not know each other.Also beyond the trading hours transactions may take placethrough an electronic system, called GLOBEX. It connects themarket of Chicago, Paris, London and others from 2.30 pm to

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7.05 am the following morning. GLOBEX system also matchesthe purchase and selling order for each type of currency futurecontracts.

Utility of Currency Derivative

Exporter: - CDs are used by exporters invoicing the receivablesin foreign currency, willing to protect the earnings foreigncurrency depreciation by locating the currency Conversion rateat a high level.

Importers: - Importers use CDs for hedging the payables inforeign currency when the foreign currency is expected toappreciate and they would always like to guarantee a lowConversion rate.

Investors: - Investors in foreign currency denominatedsecurities would like to secure strong foreign earnings byobtaining the right to sell the foreign currency at a highconversion rate, thus defending their revenue from foreigncurrency derivatives.

MNCs: - MNCs use CDs being engaged in direct investment

overseas. They want to guarantee the rate of purchasing foreigncurrency for various payments related to installation of a foreignbranch or subsidiary, or to joint venture payment with foreignpartners.A high degree of volatility creates a fertile ground for foreignexchange speculators. Their objective is to guarantee a high

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The currency contract shall have maximum maturity of 12months.

AVAILABLE CONTRACT:All monthly maturities from 1to 12months would be madeavailable.

SETTLEMENT MECHANISM:

The currency futures contract shall be settled in cash inIndian rupee.

SETTLEMENT PRICE:The settlement price would the reserve bank reference rateon the date of expiry. The methodology of computation anddissemination of reference rate may be publicly disclosedby RBI.

FINAL SETTLEMENT DAY:

The currency futures date would expire on the last workingday (excluding Saturdays) of the month. The last workingday would be taken to be the same as that of interbanksettlement in Mumbai. The rules for interbank settlement,including those for known holidays and subsequentlydeclared holiday would be those as laid down by FEDAI.

REGULATORY FRAMEWORK FOREXCHANGE TRADED CURRENCY FUTURES

With a view to enable entities to manage volatility in thecurrency market, RBI on Feb. 20 2007 Issued comprehensive

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guidelines on the usage of currency forward, swaps, and optionin the OTC market. At the same time RBI also set up an InternalWorking Group to explore the advantage of introducing the

currency futures. The report of the Internal Working Group ofRBI submitted in April 2008, recommended the introduction ofexchange traded currency futures. With the expected benefit ofexchange traded currency futures it was decided in a jointmeeting of RBI and SEBI on Feb. 2008 that the RBI-SEBIstanding technical committee on exchange traded currency andinterest rate derivative would be constituted. To begin with thecommittee would evolve norms and oversee the implementation

of exchange traded currency future. The terms of reference tothe committee were as under.

To co-ordinate the regulatory roles of RBI and SEBI in regard tocurrency and interest rate futures on the exchanges.

To suggests the eligibility norms for existing and new exchanges

for currency and interest rate futures trading.

To suggest the eligibility criteria for member of such exchanges.

To review the product design, margin requirement and other riskmitigation measures on an ongoing basis

To suggest surveillance mechanism and dissemination of marketinformation

To consider microstructure issues in the overall interest of thefinancial stability

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FINDINGS:

Exchange traded currency future trading is regulated by higherauthority and regulator .The whole function of Exchange tradedcurrency future is regulated by SEBI/RBI,they establishes rulesand regulations so that trading is done safely and counter partyrisk is minimized.

Larger exporter and importer has continued to deal in the OTC.

In India RBI and SEBI has restricted other currency derivativesexcept Currency Future, at this time if any person wants to useother instrument of currency derivatives in this case he has touse OTC.

SUGGESTIONS

Currency Future need to change some restriction it imposedsuch as cut off limit of 5 million USD, Ban on NRIs and FIIsand Mutual Funds from Participating.

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Now in exchange traded currency future segment only onepair USD-INRis available to trade so there is also one more demand by the

exporters and importers to introduce another pair in currencytrading. Like POUND-INR, CAD-INR etc.

In OTC there is no limit for trader to buy or short Currencyfutures so there demand arises that in Exchange traded currencyfuture should have increase limit for Trading Members and alsoat client level, in result OTC users will divert to Exchange

traded currency Futures.

In India the regulatory of Financial and Securities market(SEBI) has Ban on other Currency Derivatives except CurrencyFutures, so this restriction seem unreasonable to exporters andimporters. And according to Indian financial growth now its

become necessary to introducing other currency derivatives inExchange traded currency derivative segment.

CONCLUSIONS

By far the most significant event in finance during the pastdecade has been the extra ordinary development and expansionof financial derivatives. These instruments enhances the abilityto differentiate risk and allocate it to those investors most ableand willing to take it- a process that has undoubtedly improvednational productivity growth and standards of livings.

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The currency future gives the safe and standardized contract toits investors and individuals who are aware about the forex

market or predict the movement of exchange rate so they willget the right platform for the trading in currency future. Becauseof exchange traded future contract and its standardized naturegives counter party risk minimized.

Initially only NSE had the permission but now BSE and MCXhas also started currency future. It is shows that how currencyfuture covers ground in the compare of other availablederivatives instruments. Not only big businessmen and exporterand importers use this but individual who are interested andhaving knowledge about forex market they can also invest incurrency future.

Exchange between USD-INR markets in India is very big andthese exchange traded Contract will give more awareness in

market and attract the investors.

BIBLOGRAPHY

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Financial Derivatives (theory, concepts and problems) By: S.L.Gupta.

NCFM: Currency future Module.

BCFM: Currency Future Module.

Report of the RBI-SEBI standing technical committee onexchange traded currency futures 2008

Report of the Internal Working Group on Currency Futures

(Reserve Bank of India, April 2008)

Websites:www.sebi.gov.in

www.rbi.org.in

www.frost.com

www.wikipedia.com

www.economywatch.com

www.bseindia.com

www.nseindia.com

Currency Derivative Anup

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