Currency futuers in india

A

Project report

On

Currency futures market in India

Undertaken

At Anagram capital

In Partial Fulfillment of the Project Study in

Masters of Business Administration Programme

of Gujarat Technological University

Submitted by: Submitted to:

Milan Adodariya [09001] Dr. Sneha Shukla

Khima Goraniya [09024]

Batch: 09-11

N. R. Institute of business management, Ahmedabad

PREFACE

1

As a part of M.B.A. curriculum we have to do summer training in the corporate world for

7 weeks as partial fulfillment of degree and based on that we have to prepare project

report on it. So there is great importance for us of this valuable training as we have to get

real world learning experience.

Fortunately, we got opportunities to have our training at Anagram Securities ltd. And we

came into touch with corporate world and learnt basic concepts of currency futures

market. Whatever we learnt we have also tried to apply it in our project report and for

that we selected topic “currency futures market in India” and we have tried to understand

it properly with practical examples. With this we have also included topics about

organization and its activities, products, market analysis etc. where we have done our

training so our objectives of this report and training are as followings.

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ACKNOWLEDGEMENT

An acknowledgement is something which is overlooked by many, but it forms integral

part of our project and is only means through which we could communicate our thanks to

all those who have extended their help with selflessness in an untiring manner.

We are thankful to our Institute (NRIBM-GLS) for giving us an opportunity of doing our

summer project at Anagram. We heartly thankful to our Director Dr.Hitesh Ruparel and

Prof. Dr. Sneha Shukla for providing us guidance in this project.

We would like to express our gratitude to our company guide Miss. Namrata Agarwal

and HR Manager to giving us opportunity to have our summer project in this well-known

company. We are also very thankful to Mr. Kashyap Darji, without his guidance this

project would have not been possible. It was nice learning experience to have with him.

Last but not least we are thankful to all of those who have directly or indirectly helped us

to make this project a great journey in the ocean of knowledge. We are again very much

thankful to all these persons.

Thank you,

Milan Adodariya

Khima Goraniya

M.B.A-NRIBM

(BATCH 2009-11)

3

EXECUTIVE SUMMARY

The project aims to get an overview about currency futures market and to achieve this we

have decided to go step by step under the guidance of our internal guide as well as

external guide at Anagram Capital which is as under.

Research methodology gives a proper direction to go through out the project. It includes

our objective to get basic understanding about the currency market as well as to know

about the awareness level of people who are active in the stock market towards currency

futures.

A brief introduction has been given about history of various means of exchange and need

of determining a particular currency for a country and major currencies of the world.

India has a strong presence in the world’s economic activities so a strong need felt by

RBI and SEBI to do something in this area. Hence a working committee has been formed

and according to their suggestions trading in currency futures started in India.

Indian broking industry is always an attractive destination for FII’s and FDI’s to invest

and trade but major portion of that constitutes from equity shares. After the permission of

SEBI and RBI this industry has also focused on trading in currency futures and today

industry has gained a lot from this area also.

Anagram capital is a big player in retail broking and having its root in western India

particularly in Gujarat. The company has a strong research base and providing sound tips

to its varied client base. Anagram also has a special team managing its currency futures

clients.

Primary data has been collected from the survey and Data analysis has been done with

the help of various statistical tools. The market of currency future is still not penetrated

and future of currency futures is very good as the size of Indian economy is increasing

day by day.

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Table of Contents

Chapter No.

Topic Page No.

PrefaceAcknowledgementExecutive Summary

1

Research Methodology1.1 Introduction1.2 Research Objectives1.3 Research Design1.4 Literature reviewed1.5 Data collection1.6 Sample size1.7 Data analysis1.8 Limitations

2

Introduction to the Foreign Exchange market2.1 Foreign Exchange2.2 Overview of the international currency markets2.3 Major currency of the world2.4 Exchange rate mechanism2.5 Economic variables impacting exchange rate

movement

3

Currency futures in Indian Context

3.1 Introduction of currency futures on indian exchange

3.2 Need for Exchange Traded Currency Futures3.3 Over-the-counter v/s Exchange traded3.4 Formation of committee3.5 Contract Specification of currency futures3.6 Strategies used in currency futures3.7 Hedging used in currency futures

Industry profile

5

5.9 SWOT analysis of anagram6 Data Analysis & Interpretation7 Key Findings8 Conclusion9 Bibliography

Annexure [Questionnaire]

Chapter-1

Research Methodology:

1.1 Introduction

This study aims to delineate the methodology, employed to undertaken this study.

Research is a common parlance, which refers to a search for knowledge.one can

define research as scientific and systematic search for pertinent.

Research is of a great importance to find out the nature, extent and cause of the

research issue under study. Research methodology is the processes in which various

steps are generally adopted by a research are outlined.

1.2 Objective:

1. To know about the currency market in India with the understanding of currency

futures.

2. To know the awareness & penetration level of respondent about currency futures.

3. To know about the various usage of currency futures.

4. To determine the purpose of trading in currency futures.

5. To know the awareness level about hedging in currency futures.

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6. To identify the most preferred currency pair for trading in currency futures.

1.3 Research design:

A research design is the arrangement of condition for collection and analysis of data.

Actually it is the blue print of research project. The research design as follow:

1. Descriptive research

1.4 Literature reviewed:

1. Various articles published in Indian journals of finance. e.g. currency futures

trading in India by Dr. K.S. Jaiswal and Dipti Saha

2. Projects prepared by our college students in the past.

1.5 Data collection:

1. Primary data sources:

Questionnaire survey of various respondents in Ahmadabad.

2. Secondary data sources:

Data collected from various past surveys, internet, and magazines.

1.6 Sample size:

120 respondents have been selected across Ahmedabad city.

1.7 Data analysis:

Data analysis will be done with the help of statistical tools….like pie chart, bar

chart, etc.

1.8 limitations:

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Area of survey was limited to the city of Ahmadabad only.

Respondent may have given biased answers for the required data.

Some of respondent did not like to respond.

Chapter-2

Introduction to the Foreign Exchange market

2.1 Foreign Exchange:

The foreign exchange (currency or forex or FX) market exists wherever one currency

is traded for another. It is by far the largest market in the world, in terms of cash value

traded, and includes trading between large banks, central banks, currency speculators,

multinational corporations, governments, and other financial markets and institutions.

The trade happening in the forex markets across the globe exceeds $3.2 trillion/day

(on an average) presently. Retail traders (small speculators) are a small part of this

market. A foreign exchange transaction is still a shift of funds or short-term financial

claims from one country and currency to another.

2.1.1 History:

The history and evolution of the Foreign Exchange may be traced back to the early

stages of human history. In the early days the goods were exchanged between

individuals and the value of one good was expressed in terms of other goods. The

limitations of this barter system encouraged traders to use other mediums such as

stones, teeth etc. to determine the value of goods. These mediums soon to be replaced

by precious metals in particular silver and gold thus providing an accepted way of

payment in exchange of goods. It also had the many advantages such as storage and

8

durability. The introduction of Roman gold coin followed by the silver one played a

key role in the development of the trade and foreign exchange during the biblical

times. Both coins gained a wide acceptance in Middle East and other parts of the

world forming an elementary international monetary system. By the middle Ages,

increased usage of bills encouraged the foreign exchange to become a function of

international banking.

However with the attempts of governments to create a more stable economic

environment for global trading and exchange, the last century witnessed some

measures and events that shaped the current foreign exchange markets.

The Gold Standard, 1816-1933 :-

The 'gold standard' used the physical weight of gold as the standard value for the

money and making it directly exchangeable in the form of the precious metal. In 1816

for instance, the pound sterling was defined as 123.27 grains of gold on its way to

becoming the foremost reserve currency and was the principal component of the

international capital market. This led to the expression 'as good as gold' when applied

to the Sterling, as the Bank of England at the time gained stability and prestige as the

premier monetary authority. Before the First World War, most Central banks

supported their currencies with convertibility to gold. Paper money could always be

exchanged for gold. For this type of gold exchange, a central bank coverage backing

up the government’s currency reserves was not necessarily needed. When a group

mindset fostered a disastrous notion of converting back to gold in mass, panic

resulted in so-called "Run on banks”.

The US dollar adopted the gold standard late in 1879 and became the standard-bearer

replacing the British Pound when Britain and the other European countries came off

the system with the outbreak of World War I in 1914. Eventually, though, the

worsening international depression lead even the dollar off the gold standard by 1933

9

marking the period of collapse in international trade and financial flows prior to

World War II.

The Bretton Woods System, 1944-73:-

The Gold Standard partly, fixing the USD at $35.00 per ounce of Gold and fixing the

other main currencies to the dollar, initially intended to be on a permanent basis. The

Bretton Woods system formalized the role of the US dollar as the new 'global' reserve

currency with its value fixed into gold and the US assuming the responsibility of

ensuring convertibility while other currencies were pegged to the dollar.

In Asia, the lack of sustainability of fixed foreign exchange rates has gained new

relevance with the events in the latter part of 1997, where currencies were forced to

float. Currency after currency was devalued against the US dollar. The devaluation of

currencies continued to plague the currency trading markets, and confidence in the

open market of forex trading was not sustained. Leaving other fixed exchange rates in

particular in South America also looking very vulnerable. While commercial

companies have had to face a much more volatile currency environment in recent

years, investors and financial institutions have discovered a new playground. The size

of the FOREX market now dwarfs any other investment market.

The last few decades have seen foreign exchange trading develop into the world’s

largest global market. Restrictions on capital flows have been removed in most

countries, leaving the market forces free to adjust foreign exchange rates according to

their perceived values. In the 1980s, cross-border capital movements accelerated with

the advent of computers and technology, extending market continuum through Asian,

European and American time zones. Transactions in foreign exchange rocketed from

about $70 billion a day in the 1980s, to more than $1.5 trillion a day two decades

later.

2.2 OVERVIEW OF INTERNATIONAL CURRENCY MARKETS

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During the past quarter century, the concept of a 24-hour market has become a reality.

Somewhere on the planet, financial centers are open for business; banks and other

institutions are trading the US Dollar and other currencies every hour of the day and

night, except on weekends. In financial centers around the world, business hours

overlap; as some centers close, others open and begin to trade. The foreign exchange

market follows the sun around the earth.

Business is heavy when both the US markets and the major European markets are

open -that is, when it is morning in New York and afternoon in London. In the New

York market, nearly two-thirds of the day’s activity typically takes place in the

morning hours. Activity normally becomes very slow in New York in the mid-to late

afternoon, after European markets have closed and before the Tokyo, Hong Kong,

and Singapore markets have opened.

Given this uneven flow of business around the clock, market participants often will

respond less aggressively to an exchange rate development that occurs at a relatively

inactive time of day, and will wait to see whether the development is confirmed when

the major markets open. Some institutions pay little attention to developments in less

active markets. Nonetheless, the 24-hour market does provide a continuous “real-

time” market assessment of the ebb and flow of influences and attitudes with respect

to the traded currencies, and an opportunity for a quick judgment of unexpected

events. With many traders carrying pocket monitors, it has become relatively easy to

stay in touch with market developments at all times.

The market consists of a limited number of major dealer institutions that are

particularly active in foreign exchange, trading with customers and (more often) with

each other. Most of these institutions, but not all, are commercial banks and

investment banks. These institutions are geographically dispersed, located in

numerous financial centers around the world. Wherever they are located, these

institutions are in close communication with each other; linked to each other through

telephones, computers, and other electronic means.

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Each nation’s market has its own infrastructure. For foreign exchange market

operations as well as for other connected matters, each country enforces its own laws,

banking regulations, accounting rules, taxation and operates its own payment and

settlement systems. Thus, even in a global foreign exchange market with currencies

traded on essentially the same terms simultaneously in many financial centers, there

are different national financial systems and infrastructures through which transactions

are executed, and within which currencies are held. With access to all of the foreign

exchange markets generally open to participants from all countries, and with vast

amounts of market information transmitted simultaneously and almost instantly to

dealers throughout the world, there is an enormous amount of cross-border foreign

exchange trading among dealers as well as between dealers and their customers.

At any moment, the exchange rates of major currencies tend to be virtually identical

in all the financial centers where there is active trading. Rarely are there such

substantial price differences among major centers as to provide major opportunities

for arbitrage. In pricing, the various financial centers that are open for business and

active at any one time are effectively integrated into a single market.

2.3 MAJOR CURRENCIES OF THE WORLD

US Dollar

Us dollar is by far the most widely traded currency. In part, the widespread use of the

US Dollar reflects its substantial international role as “investment” currency in many

capital markets, “reserve” currency held by many central banks, “transaction”

currency in many international commodity markets, “invoice” currency in many

contracts, and “intervention” currency employed by monetary authorities in market

operations to influence their own exchange rates.

In addition, the widespread trading of the US Dollar reflects its use as a “vehicle”

currency in foreign exchange transactions, a use that reinforces its international role

in trade and finance. For most pairs of currencies, the market practice is to trade each

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of the two currencies against a common third currency as a vehicle, rather than to

trade the two currencies directly against each other. The vehicle currency used most

often is the US Dollar, although very recently euro also has become an important

vehicle currency.

Thus, a trader who wants to shift funds from one currency to another, say from Indian

Rupees to Philippine Pesos, will probably sell INR for US Dollars and then sell the

US Dollars for Pesos. Although this approach results in two transactions rather than

one, it may be the preferred way, since the US Dollar/INR market and the US

Dollar/Philippines Peso market are much more active and liquid and have much better

information than a bilateral market for the two currencies directly against each other.

By using the US Dollar or some other currency as a vehicle, banks and other foreign

exchange market participants can limit more of their working Balances to the vehicle

currency, rather than holding and managing many currencies, and can concentrate

their research and information sources on the vehicle currency.

Use of a vehicle currency greatly reduces the number of exchange rates that must be

dealt with in a multilateral system. In a system of 10 currencies, if one currency is

selected as the vehicle currency and used for all transactions, there would be a total of

nine currency pairs or exchange rates to be dealt with (i.e. one exchange rate for the

vehicle currency against each of the others), whereas if no vehicle currency were

used, there would be 45 exchange rates to be dealt with. In a system of 100 currencies

with no vehicle currencies, potentially there would be 4,950 currency pairs or

exchange rates [the formula is: n(n-1)/2]. Thus, using a vehicle currency can yield the

advantages of fewer, larger, and more liquid markets with fewer currencies Balances

reduced informational needs, and simpler operations.

The US Dollar took on a major vehicle currency role with the introduction of the

Breton Woods par value system, in which most nations met their IMF exchange rate

obligations by buying and selling US Dollars to maintain a par value relationship for

their own currency against the US Dollar. The US Dollar was a convenient vehicle

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because of its central role in the exchange rate system and its widespread use as a

reserve currency.

The US Dollar’s vehicle currency role was also due to the presence of large and

liquid US Dollar money and other financial markets, and, in time, the Euro-US Dollar

markets, where the US Dollars needed for (or resulting from) foreign exchange

transactions could conveniently be borrowed (or placed).

The Euro

Like the US Dollar, the Euro has a strong international presence and over the years

has emerged as a premier currency, second only to the US Dollar.

The Japanese Yen

The Japanese Yen is the third most traded currency in the world. It has a much

smaller international presence than the US Dollar or the Euro. The Yen is very liquid

around the world, practically around the clock

The British Pound

Until the end of World War II, the Pound was the currency of reference. The

nickname Cable is derived from the telegrams used to update the GBP/USD rates

across the Atlantic. The currency is heavily traded against the Euro and the US

Dollar, but it has a spotty presence against other currencies. The two-year bout with

the Exchange Rate Mechanism, between 1990 and 1992, had a soothing effect on the

British Pound, as it generally had to follow the Deutsche Mark's fluctuations, but the

crisis conditions that precipitated the pound's withdrawal from the Exchange Rate

Mechanism had a psychological effect on the currency. .

2.4 EXCHANGE RATE MECHANISM

“Foreign Exchange” refers to money denominated in the currency of another nation

or a group of nations. Any person who exchanges money denominated in his own

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nation’s currency for money denominated in another nation’s currency acquires

foreign exchange. This holds true whether the amount of the transaction is equal to a

few rupees or to billions of rupees; whether the person involved is a tourist cashing a

travellers’ cheque or an investor exchanging hundreds of millions of rupees for the

acquisition of a foreign company; and whether the form of money being acquired is

foreign currency notes, foreign currency-denominated bank deposits, or other short-

term claims denominated in foreign currency.

A foreign exchange transaction is still a shift of funds or short-term financial claims

from one country and currency to another. Thus, within India, any money

denominated in any currency other than the Indian Rupees (INR) is, broadly

speaking, “foreign exchange.” Foreign Exchange can be cash, funds available on

credit cards and debit cards, travellers’ cheques, bank deposits, or other short-term

claims. It is still “foreign exchange” if it is a short-term negotiable financial claim

denominated in a currency other than INR. Almost every nation has its own national

currency or monetary unit - Rupee, US Dollar, Peso etc.- used for making and

receiving payments within its own borders. But foreign currencies are usually needed

for payments across national borders. Thus, in any nation whose residents conduct

business abroad or engage in financial transactions with persons in other countries,

there must be a mechanism for providing access to foreign currencies, so that

payments can be made in a form acceptable to foreigners. In other words, there is

need for “foreign exchange” transactions—exchange of one currency for another.

The exchange rate is a price - the number of units of one nation’s currency that must

be surrendered in order to acquire one unit of another nation’s currency. There are

scores of “exchange rates” for INR and other currencies, say US Dollar. In the spot

market, there is an exchange rate for every other national currency traded in that

market, as well as for various composite currencies or constructed monetary units

such as the Euro or the International Monetary Fund’s “SDR”. There are also various

“trade-weighted” or “effective” rates designed to show a currency’s movements

15

against an average of various other currencies (for eg US Dollar index, which is a

weighted index against world major currencies like Euro, Pound Sterling, Yen, and

Canadian Dollar). Apart from the spot rates, there are additional exchange rates for

other delivery dates in the forward markets.

The market price is determined by the interaction of buyers and sellers in that market,

and a market exchange rate between two currencies is determined by the interaction

of the official and private participants in the foreign exchange rate market. For a

currency with an exchange rate that is fixed, or set by the monetary authorities, the

central bank or another official body is a participant in the market, standing ready to

buy or sell the currency as necessary to maintain the authorized pegged rate or range.

But in countries like the United States, which follows a complete free floating regime,

the authorities are not known to intervene in the foreign exchange market on a

continuous basis to influence the exchange rate. The market participation is made up

of individuals, non-financial firms, banks, official bodies, and other private

institutions from all over the world that are buying and selling US Dollars at that

particular time.

The participants in the foreign exchange market are thus a heterogeneous group. The

various investors, hedgers, and speculators may be focused on any time period, from

a few minutes to several years. But, whatever is the constitution of participants, and

whether their motive is investing, hedging, speculating, arbitraging, paying for

imports, or seeking to influence the rate, they are all part of the aggregate demand for

and supply of the currencies involved, and they all play a role in determining the

market price at that instant. Given the diverse views, interests, and time frames of the

participants, predicting the future course of exchange rates is a particularly complex

and uncertain exercise. At the same time, since the exchange rate influences such a

vast array of participants and business decisions, it is a pervasive and singularly

important price in an open economy, influencing consumer prices, investment

decisions, interest rates, economic growth, the location of industry, and much more.

16

The role of the foreign exchange market in the determination of that price is critically

important.

2.5 ECONOMIC VARIABLES IMPACTING EXCHANGE RATE MOVEMENTS

Various economic variables impact the movement in exchange rates. Interest rates,

inflation figures, GDP are the main variables; however other economic indicators that

provide direction regarding the state of the economy also have a significant impact on

the movement of a currency. These would include employment reports, balance of

payment figures, manufacturing indices, consumer prices and retail sales amongst

others. Indicators which suggest that the economy is strengthening are positively

correlated with a strong currency and would result in the currency strengthening and

vice versa.

Currency trader should be aware of government policies and the central bank stance

as indicated by them from time to time, either by policy action or market intervention.

Government structures its policies in a manner such that its long term objectives on

employment and growth are met. In trying to achieve these objectives, it sometimes

has to work around the economic variables and hence policy directives and the

economic variables are entwined and have an impact on exchange rate movements.

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Chapter-3

Currency futures in Indian Context

3.1 Introduction Of currency Futures on Indian exchange

The foreign exchange market in India started in earnest less than three decades ago

when in 1978 the government allowed banks to trade foreign exchange with one

another. Today over 70% of the trading in foreign exchange continues to take place in

the inter-bank market. The market consists of over 90 Authorized Dealers (mostly

banks) who transact currency among themselves and come out “square” or without

exposure at the end of the trading day. Trading is regulated by the Foreign Exchange

Dealers Association of India (FEDAI), a self-regulatory association of dealers. Since

2001, clearing and settlement functions in the foreign exchange market are largely

carried out by the Clearing Corporation of India Limited (CCIL) that handles

transactions of approximately 3.5 billion US dollars a day, about 80% of the total

transactions.

The liberalization process has significantly boosted the foreign exchange market in

the country by allowing both banks and corporations greater flexibility in holding and

trading foreign currencies. The Sodhani Committee set up in 1994 recommended

greater freedom to participating banks, allowing them to fix their own trading limits,

interest rates on FCNR deposits and the use of derivative products.

The growth of the foreign exchange market in the last few years has been nothing less

than momentous. In the last 5 years, from 2000-01 to 2005-06, trading volume in the

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foreign exchange market (including swaps, forwards and forward cancellations) has

more than tripled, growing at a compounded annual rate exceeding 25%. Figure 1

shows the growth of foreign exchange trading in India between 1999 and 2006. The

inter-bank forex trading volume has continued to account for the dominant share

(over 77%) of total trading over this period, though there is an unmistakable

downward trend in that proportion. This is in keeping with global patterns.

In March 2006, about half (48%) of the transactions were spot trades, while swap

transactions (essentially repurchase agreements with a one-way transaction – spot or

forward – combined with a longer- horizon forward transaction in the reverse

direction) accounted for 34% and forwards and forward cancellations made up 11%

and 7% respectively. About two-thirds of all transactions had the rupee on one side.

In 2004, according to the triennial central bank survey of foreign exchange and

derivative markets conducted by the Bank for International Settlements (BIS (2005a))

the Indian Rupee featured in the 20th position among all currencies in terms of being

on one side of all foreign transactions around the globe and its share had tripled since

1998. As a host of foreign exchange trading activity, India ranked 23rd among all

countries covered by the BIS survey in 2004 accounting for 0.3% of the world

turnover. Trading is relatively moderately concentrated in India with 11 banks

accounting for over 75% of the trades covered by the BIS 2004 survey.

The foreign exchange market has acquired a distinct vibrancy as evident from the

range of products, participation, liquidity and turnover. The average daily turnover in

the foreign exchange market increased from US $ 23.7 billion in March 2006 to US $

33.0 billion in March 2007 in consonance with the increase in foreign exchange

transactions. Although liberalization helped Indian forex market in various ways,

extensive fluctuations of exchange rate also took place in Indian forex market. These

issues have attracted a great deal of interest from policy-makers and investors. While

some flexibility in foreign exchange markets and exchange rate determination is

desirable, excessive volatility can have adverse impact on price discovery, export

19

performance, sustainability of current account balance, and balance sheets. In the

context of upgrading Indian foreign exchange market to international standards, a

well- developed foreign exchange derivative market (both OTC as well as Exchange

traded) is required.

3. 2 Need for Exchange Traded Currency Futures

With a view to enable entities to manage volatility in the currency market, RBI on

April 20, 2007 issued comprehensive guidelines on the usage of foreign currency

forwards, swaps and options in the OTC market. At the same time, RBI also set up an

Internal Working Group to explore the advantages of introducing currency futures.

The Report of the Internal Working Group of RBI submitted in April 2008,

recommended the introduction of exchange traded currency futures.

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 transact at a forward price on a future date. On the maturity date,

the obligation of the individual equals the forward price at which the contract was

executed. Except on the maturity date, no money changes hands. On the other hand,

in the case of an exchange traded futures contract, marks to market obligations are

settled on a daily basis.

Since the profits or losses in the futures market are collected / paid on a daily basis,

the scope for building up of mark to market losses in the books of various participants

gets limited. The counterparty risk in a futures 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 classes of investors whether large or small to participate in the futures market. The

transactions on an Exchange are executed on a price time priority ensuring that the

best price is available to all categories of market participants irrespective of their size.

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Other advantages of an Exchange traded market would be greater transparency,

efficiency and accessibility.

3.3 Over-the-counter v/s Exchange traded

A. Over-the-counter trading:

1. Over-The-Counter:

Over-the-counter (OTC) or off-exchange trading is to trade financial instruments such

as stocks, bonds, commodities or derivatives directly between two parties. It is

contrasted with exchange trading, which occurs via facilities constructed for the

purpose of trading (i.e., exchanges), such as futures exchanges or stock exchanges.

2. OTC Contract:

An over-the-counter contract is a bilateral contract in which two parties agree on how

a particular trade or agreement is to be settled in the future. It is usually from an

investment bank to its clients directly. Forwards and swaps are prime examples of

such contracts. It is mostly done via the computer or the telephone. For derivatives,

these agreements are usually governed by an International Swaps and Derivatives

Association agreement

3. The OTC markets have the following features:

a) The management of counter-party (credit) risk is decentralized and located within

individual institutions,

b) There are no formal centralized limits on individual positions, leverage, or

margining; limits are determined as credit lines by each of the counterparties entering

into these contracts

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c) There are no formal rules for risk and burden-sharing,

d) There are no formal rules or mechanisms for ensuring market stability and

integrity, and for safeguarding the collective interests of market participants, and

e) Although OTC contracts are affected indirectly by national legal systems, banking

supervision and market surveillance, they are generally not regulated by a regulatory

authority.

B. Exchange trading:

1. Exchange

A futures exchange or derivatives exchange is a central financial exchange where

people can trade standardized futures contracts; that is, a contract to buy specific

quantities of a commodity or financial instrument at a specified price with delivery

set at a specified time in the future.

2. Nature of contracts

a) Exchange-traded contracts are standardized by the exchanges where they trade.

b) The contract details what asset is to be bought or sold, and how, when, where and

in what quantity it is to be delivered.

c) The terms also specify the currency in which the contract will trade, minimum tick

value, and the last trading day and expiry or delivery month.

d) The contracts ultimately are not between the original buyer and the original seller,

but between the holders at expiry and the exchange.

e) The contracts traded on futures exchanges are always standardized. To make sure

liquidity is high, there is only a limited number of standardized contracts.

3.4 Formation of committee

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With the expected benefits of exchange traded currency futures, it was decided in a

joint meeting of RBI and SEBI on February 28, 2008, that an RBI-SEBI Standing

Technical Committee on Exchange Traded Currency and Interest Rate Derivatives

would be constituted. To begin with, the Committee would evolve norms and oversee

the implementation of Exchange traded currency futures.

The Committee is constituted with the officials from RBI and SEBI.

The Committee was given the following terms of reference:

i. To coordinate the regulatory roles of RBI and SEBI in regard to trading of

Currency and Interest Rate Futures on the Exchanges.

ii. To suggest the eligibility norms for existing and new Exchanges for Currency

and Interest Rate Futures trading.

iii. To suggest eligibility criteria for the members of such exchanges.

Iv. To review product design, margin requirements and other risk mitigation

measures on an ongoing basis

v. To suggest surveillance mechanism and dissemination of market information

vi. To consider microstructure issues, in the overall interest of financial stability.

3.5 Contract Specification of currency futures

A. USD/INR Contract

1. Underlying

Initially, currency futures contracts on US Dollar – Indian Rupee (US$-INR) would

be permitted.

2. Trading Hours

23

The trading on currency futures would be available from 9 a.m. to 5 p.m.

3. Size of the contract

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

would be US$ 1000. The contract size would be periodically aligned to ensure that

the size of the contract remains close to the minimum size.

4. Quotation

The currency futures contract would be quoted in rupee terms. However, the

outstanding positions would be in dollar terms.

5. Tenor of the contract

The currency futures contract shall have a maximum maturity of 12 months.

6. Available contracts

All monthly maturities from 1 to 12 months would be made available.

7. Settlement mechanism

The currency futures contract shall be settled in cash in Indian Rupee.

8. Settlement price

The settlement price would be the Reserve Bank Reference Rate on the date of

expiry. The methodology of computation and dissemination of the Reference Rate

may be publicly disclosed by RBI.

9. Final settlement day

The currency futures contract would expire on the last working day (excluding

Saturdays) of the month. The last working day would be taken to be the same as that

for Interbank Settlements in Mumbai. The rules for Interbank Settlements, including

24

those for ‘known holidays’ and ‘subsequently declared holiday’ would be those as

laid down by FEDAI.

B. EURO-INR CONTRACT (EUR-INR)

1. Underlying

Euro-Indian Rupee (EUR-INR)

2. Trading Hours

9 a.m. to 5 p.m.


The contract size would be Euro 1000.

4. Quotation

The contract would be quoted in rupee terms. However, the outstanding positions

would be in Euro terms.


The maximum maturity of the contract would be 12 months.




The contract would be settled in cash in Indian Rupee.

25

8. Settlement price

The settlement price would be the Reserve Bank Reference Rate on the date of

expiry.


The contract would expire on the last working day (excluding Saturdays) of the

month. The last working day would be taken to be the same as that for Interbank

Settlements in Mumbai. The rules for Interbank Settlements, including those for

‘known holidays’ and ‘subsequently declare holiday’ would be those as laid down by

FEDAI

10. Initial Margin

The Initial Margin requirement would be based on a worst case loss of a portfolio of

an individual client across various scenarios of price changes. The various scenarios

of price changes would be so computed so as to cover a 99% VaR over a one day

horizon. In order to achieve this, the price scan range shall be fixed at 3.5 standard

deviation. The initial margin so computed would be subject to a minimum of 2.80%

on the first day of trading and 2% thereafter. The initial margin shall be deducted

from the liquid net worth of the clearing member on an online, real time basis.

11. Calendar spread margin

A currency futures position at one maturity which is hedged by an offsetting position

at a different maturity would be treated as a calendar spread. The calendar spread

margin shall be at a value of Rs. 700 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. The benefit for a calendar

spread would continue till expiry of the near month contract.

12. Extreme Loss margin

26

Extreme loss margin of 0.3% on the mark to market value of the gross open positions

shall be deducted from the liquid assets of the clearing member on an on line, real

time basis.

13. Position Limits

a) Client Level:

The gross open positions of the client across all contracts shall not exceed 6% of

the total open interest or EUR 5 million whichever is higher. The Exchange will

disseminate alerts whenever the gross open position of the client exceeds 3% of

the total open interest at the end of the previous day’s trade.

b) Trading Member Level:

The gross open positions of the trading member across all contracts shall not

exceed 15% of the total open interest or EUR 25 million whichever is higher.

c) Bank:

The gross open positions of the bank across all contracts shall not exceed 15% of

the total open interest or EUR 50 million whichever is higher

d) Clearing Member Level:

No separate position limit is prescribed at the level of clearing member. However,

the clearing member shall ensure that his own trading position and the positions

of each trading member clearing through him is within the limits specified above.

C. POUND STERLINGINR CONTRACT (GBP-INR)

1. Underlying

Pound Sterling Indian Rupee (GBP-INR)

27

2. Trading Hours

9 a.m. to 5 p.m.


The contract size would be Pound Sterling 1000.

4. Quotation


would be in Pound Sterling terms.







8. Settlement price

Exchange rate published by the Reserve Bank in its Press Release captioned RBI

Reference Rate for US$ and Euro.





28

‘known holidays’ and ‘subsequently declared holiday’ would be those as laid down

by FEDAI.

10. Initial Margin






on the first day of trading and 2% thereafter. The initial margin shall be deducted





margin shall be at a value of Rs. 1500 for a spread of 1 month; Rs 1800 for a spread

of 2 months and Rs 2000 for a spread of 3 months or more. The benefit for a calendar





time basis.

13. Position Limits

a) Client Level:

29


the total open interest or GBP 5 million whichever is higher. The Exchange will





exceed 15% of the total open interest or GBP 25 million whichever is higher.

c) Bank:

The gross open positions of the bank across all contracts shall not exceed 15% of

the total open interest or GBP 50 million whichever is higher.





D. JAPANESE YEN-INR CONTRACT (JPY-INR)

1. Underlying

Japanese Yen – Indian Rupee (JPY-INR)

2. Trading Hours

9 a.m. to 5 p.m


The contract size would be Japanese Yen 1,00,000

30

4. Quotation


would be in Japanese Yen terms.







8. Settlement price

Exchange rate published by the Reserve Bank in its Press Release captioned RBI

Reference Rate for US$ and Euro.





‘known holidays’ and ‘subsequently declared holiday’ would be those as laid down

by FEDAI.

10. Initial Margin





31


on the first day of trading and 2.30% thereafter. The initial margin shall be deducted





margin shall be at a value of 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. The benefit for a calendar





time basis.

13. Position Limits

a) Client Level:


the total open interest or JPY 200 million whichever is higher. The Exchange will




32


exceed 15% of the total open interest or JPY 1000 million whichever is higher.

c) Bank:


exceed 15% of the total open interest or JPY 2000 million whichever is higher.





3.6 Strategies used in currency futures

1. SPECULATION IN FUTURES MARKETS

Speculators play a vital role in the futures markets. Futures are designed primarily to

assist hedgers in managing their exposure to price risk; however, this would not be

possible without the participation of speculators. Speculators, or traders, assume the

price risk that hedgers attempt to lay off in the markets. In other words, hedgers often

depend on speculators to take the other side of their trades (i.e. act as counter party)

and to add depth and liquidity to the markets that are vital for the functioning of a

futures market. The speculators therefore have a big hand in making the market.

Speculation is not similar to manipulation. A manipulator tries to push prices in the

reverse direction of the market equilibrium while the speculator forecasts the

movement in prices and this effort eventually brings the prices closer to the market

33

equilibrium. If the speculators do not adhere to the relevant fundamental factors of the

spot market, they would not survive since their correlation with the underlying spot

market would be nonexistent.

2. LONG POSITION IN FUTURES

Long position in a currency futures contract without any exposure in the cash market

is called a speculative position. Long position in futures for speculative purpose

means buying futures contract in anticipation of strengthening of the exchange rate

(which actually means buy the base currency (USD) and sell the terms currency

(INR) and you want the base currency to rise in value and then you would sell it back

at a higher price). If the exchange rate strengthens before the expiry of the contract

then the trader makes a profit on squaring off the position, and if the exchange rate

weakens then the trader makes a loss.

The graph above depicts the pay-off of a long position in a future contract, which

does demonstrate that the pay-off of a trader is a linear derivative, that is, he makes

unlimited profit if the market moves as per his directional view, and if the market

goes against, he has equal risk of making unlimited losses if he doesn’t choose to exit

out his position.

Hypothetical Example – Long positions in futures

On May 1, 2008, an active trader in the currency futures market expects INR will

depreciate against USD caused by India’s sharply rising import bill and poor FII

equity flows. On the basis of his view about the USD/INR movement, he buys 1

USD/INR August contract at the prevailing rate of Rs. 40.5800. He decides to hold

the contract till expiry and during the holding period USD/INR futures actually

moves as per his anticipation and the RBI Reference rate increases to USD/INR 42.46

on May 30, 2008. He squares off his position and books a profit of Rs. 1880

(42.4600x1000 - 40.5800x1000) on 1 contract of USD/INR futures contract.

3. SHORT POSITION IN FUTURES

34

Short position in a currency futures contract without any exposure in the cash market

is called a speculative transaction. Short position in futures for speculative purposes

means selling a futures contract in anticipation of decline in the exchange rate (which

actually means sell the base currency (USD) and buy the terms currency (INR) and

you want the base currency to fall in value and then you would buy it back at a lower

price). If the exchange rate weakens before the expiry of the contract, then the trader

makes a profit on squaring off the position, and if the exchange rate strengthens then

the trader makes loss.

Example – Short positions in futures

On August 1, 2008, an active trader in the currency futures market expects INR will

appreciate against USD, caused by softening of crude oil prices in the international

market and hence improving India’s trade balance.

On the basis of his view about the USD/INR movement, he sells 1 USD/INR August

contract at the prevailing rate of Rs. 42.3600.

On August 6, 2008, USD/INR August futures contract actually moves as per his

anticipation and declines to 41.9975. He decides to square off his position and earns a

profit of Rs. 362.50 (42.3600x1000 – 41.9975x1000) on squaring off the short

position of 1 USD/INR August futures contract.

Observation:

The trader has effectively analysed the market conditions and has taken a right call by

going short on futures and thus has made a gain of Rs. 362.50 per contract with small

investment (a margin of 3%, which comes to Rs. 1270.80) in a span of 6 days.

3.7 HEDGING USED IN CURRENCY FUTURES

Hedging:

35

Hedging means taking a position in the future market that is opposite to a position in

the physical market with a view to reduce or limit risk associated with unpredictable

changes in exchange rate.

A hedger has an Overall Portfolio (OP) composed of (at least) 2 positions:

1. Underlying position

2. Hedging position with negative correlation with underlying position

Value of OP = Underlying position + Hedging position; and in case of a Perfect

hedge, the Value of the OP is insensitive to exchange rate (FX) changes.

Types of FX Hedgers using Futures

Long hedge:

· Underlying position: short in the foreign currency

· Hedging position: long in currency futures

Short hedge:

· Underlying position: long in the foreign currency

· Hedging position: short in currency futures

The proper size of the Hedging position

· Basic Approach: Equal hedge

· Modern Approach: Optimal hedge

Equal hedge:

In an Equal Hedge, the total value of the futures contracts involved is the same as the

value of the spot market position. As an example, a US importer who has an exposure

of £ 1 million will go long on 16 contracts assuming a face value of £62,500 per

36

contract. Therefore in an equal hedge: Size of Underlying position = Size of Hedging

position.

Optimal Hedge:

An optimal hedge is one where the changes in the spot prices are negatively

correlated with the changes in the futures prices and perfectly offset each other. This

can generally be described as an equal hedge, except when the spot-future basis

relationship changes. An Optimal Hedge is a hedging strategy which yields the

highest level of utility to the hedger.

Corporate Hedging

Before the introduction of currency futures, a corporate hedger had only Over-the-

Counter (OTC) market as a platform to hedge his currency exposure; however now he

has an additional platform where he can compare between the two platforms and

accordingly decide whether he will hedge his exposure in the OTC market or on an

exchange or he will like to hedge his exposures partially on both the platforms.

Example 1: Long Futures Hedge Exposed to the Risk of Strengthening USD

Unhedged Exposure: Let’s say on January 1, 2008, an Indian importer enters into a

contract to import 1,000 barrels of oil with payment to be made in US Dollar (USD)

on July 1, 2008. The price of each barrel of oil has been fixed at USD 110/barrel at

the prevailing exchange rate of 1 USD = INR 39.41; the cost of one barrel of oil in

INR works out to be Rs. 4335.10 (110 x 39.41). The importer has a risk that the USD

may strengthen over the next six months causing the oil to cost more in INR;

however, he decides not to hedge his position.

On July 1, 2008, the INR actually depreciates and now the exchange rate stands at 1

USD = INR 43.23. In dollar terms he has fixed his price, that is USD 110/barrel,

37

however, to make payment in USD he has to convert the INR into USD on the given

date and now the exchange rate stands at 1USD = INR43.23.

Therefore, to make payment for one dollar, he has to shell out Rs. 43.23. Hence the

same barrel of oil which was costing Rs. 4335.10 on January 1, 2008 will now cost

him Rs. 4755.30, which means 1 barrel of oil ended up costing Rs. 4755.30 - Rs.

4335.10 = Rs. 420.20 more and hence the 1000 barrels of oil has become dearer by

INR 4,20,200.

When INR weakens, he makes a loss, and when INR strengthens, he makes a profit.

As the importer cannot be sure of future exchange rate developments, he has an

entirely speculative position in the cash market, which can affect the value of his

operating cash flows, income statement, and competitive position, hence market share

and stock price.

Hedged:

Let’s presume the same Indian Importer pre-empted that there is good probability that

INR will weaken against the USD given the current macro-economic fundamentals of

increasing Current Account deficit and FII outflows and decides to hedge his

exposure on an exchange platform using currency futures.

Since he is concerned that the value of USD will rise he decides go long on currency

futures, it means he purchases a USD/INR futures contract. This protects the importer

because strengthening of USD would lead to profit in the long futures position, which

would effectively ensure that his loss in the physical market would be mitigated.

The following figure and Exhibit explain the mechanics of hedging using currency

futures.

Observation:

38

Following a 9.7% rise in the spot price for USD, the US dollars are purchased at the

new, higher spot price, but profits on the hedge foster an effective exchange rate

equal to the original hedge price.

Example 2: Short Futures Hedge Exposed to the Risk of Weakening USD

Unhedged Exposure: Let’s say on March 1, 2008, an Indian refiner enters into a

contract to export 1000 barrels of oil with payment to be received in US Dollar

(USD) on June 1, 2008. The price of each barrel of oil has been fixed at USD

80/barrel at the prevailing exchange rate of 1 USD = INR 44.05; the price of one

barrel of oil in INR works out to be is Rs. 3524 (80 x 44.05). The refiner has a risk

that the INR may strengthen over the next three months causing the oil to cost less in

INR; however he decides not to hedge his position.

On June 1, 2008, the INR actually appreciates against the USD and now the exchange

rate stands at 1 USD = INR 40.30. In dollar terms he has fixed his price, that is USD

80/barrel; however, the dollar that he receives has to be converted in INR on the

given date and the exchange rate stands at 1USD = INR40.30. Therefore, every dollar

that he receives is worth Rs. 40.30 as against Rs. 44.05. Hence the same barrel of oil

that initially would have garnered him Rs. 3524 (80 x 44.05) will now realize Rs.

3224, which means 1 barrel of oil ended up selling Rs. 3524 – Rs. 3224 = Rs. 300

less and hence the 1000 barrels of oil has become cheaper by INR 3,00,000.

When INR strengthens, he makes a loss and when INR weakens, he makes a profit.

As the refiner cannot be sure of future exchange rate developments, he has an entirely

speculative position in the cash market, which can affect the value of his operating

cash flows, income statement, and competitive position, hence market share and stock

price. Hedged: Let’s presume the same Indian refiner pre-empted that there is good

probability that INR will strengthen against the USD given the current

macroeconomic fundamentals of reducing fiscal deficit, stable current account deficit

39

and strong FII inflows and decides to hedge his exposure on an exchange platform

using currency futures.

Since he is concerned that the value of USD will fall he decides go short on currency

futures, it means he sells a USD/INR future contract. This protects the importer

because weakening of USD would lead to profit in the short futures position, which

would effectively ensure that his loss in the physical market would be mitigated.

The following figure and exhibit explain the mechanics of hedging using currency

futures.

Observation:

Following an 8.51% fall in the spot price for USD, the US dollars are sold at the new,

lower spot price; but profits on the hedge foster an effective exchange rate equal to

the original hedge price.

Example 3 (Variation of Example 1): Long Futures Hedge Exposed to the Risk

of Contract Expiry and Liquidation on the Same Day.

Observation: The size of the exposure is USD 110000 and the desired value date is

precisely the same as the futures delivery date (June 30). Following a 9.5% rise in the

spot price for USD against INR, the US dollars are purchased at the new, higher spot

price; but profits on the hedge foster an effective exchange rate equal to the original

futures price because on the date of expiry the spot price and the future price tend to

converge.

40

Chapter-4

INDUSTRY PROFILE:

4.1 Broking Insights

The Indian broking industry is one of the oldest trading industries that have been

around even before the establishment of the BSE in 1875. Despite passing through a

number of changes in the post liberalization period, the industry has found its way

towards sustainable growth. With the purpose of gaining a deeper understanding

about the role of the Indian stock broking industry in the country’s economy, we

present in this section some of the industry insights gleaned from analysis of data

received through primary research.

For the broking industry, we started with an initial database of over 1,800 broking

firms that were contacted, from which 464 responses were received. The list was

41

further short listed based on the number of terminals and the top 210 were selected

for profiling. 394 responses, that provided more than 85% of the information sought

have been included for this analysis presented here as insights. All the data for the

study was collected through responses received directly from the broking firms. The

insights have been arrived at through an analysis on various parameters, pertinent to

the equity broking industry, such as region, terminal, market, branches, sub brokers,

products and growth areas.

Some key characteristics of the sample 394 firms are:

On the basis of geographical concentration, the West region has the maximum

representation of 52%. Around 24% firms are located in the North, 13% in the

South and 10% in the East

3% firms started broking operations before 1950, 65% between 1950-1995 and

32% post 1995.

On the basis of terminals, 40% are located at Mumbai, 12% in Delhi, 8% in

Ahmedabad, 7% in Kolkata, 4% in Chennai and 29% are from other cities

From this study, we find that almost 36% firms trade in cash and derivatives and

27% are into cash markets alone. Around 20% trade in cash, derivatives and

commodities

In the cash market, around 34% firms trade at NSE, 14% at BSE and 52% trade at

both exchanges. In the derivative segment, 48% trade at NSE, 7% at BSE and

45% at both, whereas in the debt market, 31% trade at NSE, 26% at BSE and 43%

at both exchanges

Majority of branches are located in the North, i.e. around 40%. West has 31%,

24% are located in South and 5% in East

In terms of sub-brokers, around 55% are located in the South, 29% in West, 11%

in North and 4% in East

Trading, IPOs and Mututal Funds are the top three products offered with 90%

firms offering trading, 67% IPOs and 53% firms offering mutual fund transactions

42

In terms of various areas of growth, 84% firms have expressed interest in

expanding their institutional clients, 66% firms intend to increase FII clients and

43% are interested in setting up JV in India and abroad

In terms of IT penetration, 62% firms have provided their website and around

94% firms have email facility

4.2 Terminals

Almost 52% of the terminals in the sample are based in the Western region of India,

followed by 25% in the North, 13% in the South and 10% in the East. Mumbai has

got the maximum representation from the West, Chennai from the South, New Delhi

from the North and Kolkata from the East. Mumbai also has got the maximum

representation in having the highest number of terminals. 40% terminals are located

in Mumbai while 12% are from Delhi, 8% from Ahmedabad, 7% from Kolkata, 4%

from Chennai and 29% are from other cities in India.

4.3 Branches & Sub-Brokers

The maximum concentration of branches is in the North, with as many as 40% of all

branches located there, followed by the Western region, with 31% branches. Around

24% branches are located in the South and East constitutes for 5% of the total

branches of the total sample.

In case of sub-brokers, almost 55% of them are based in the South. West and North

follow, with 30% and 11% sub-brokers respectively, whereas East has around 4% of

total sub-brokers.

4.4 Financial Markets

The financial markets have been classified as cash market, derivatives market, debt

market and commodities market. Cash market, also known as spot market, is the most

sought after amongst investors. Majority of the sample broking firms are dealing in

43

the cash market, followed by derivative and commodities. 27% firms are dealing only

in the cash market, whereas 35% are into cash and derivatives. Almost 20% firms

trade in cash, derivatives and commodities market. Firms that are into cash,

derivatives and debt are 7%. On the other hand, firms into cash and commodities are

3%, cash & debt market and commodities alone are 2%. 4% firms trade in all the

markets.

In the cash market, around 34% firms trade at NSE, 14% at BSE and 52% trade at

both exchanges. In the equity derivative market, 48% of the sampled broking houses

are members of NSE and 7% trade at BSE, while 45% of the sample operate in both

stock exchanges. Around 43% of the broking houses operating in the debt market,

trade at both exchanges with 31% and 26% firms uniquely at NSE and BSE

respectively. Of the brokers operating in the commodities market, 57% firms operate

at NCDEX and MCX. Around 20% and 21% firms are solely in NCDEX and MCX

respectively, whereas 2% firms trade in NCDEX, MCX and NMCE.

4.5 Products

The survey also revealed that in the past couple of years, apart from trading, the firms

have started offering various investment related value added services. The sustained

growth of the economy in the past couple of years has resulted in broking firms

offering many diversified services related to IPOs, mutual funds, company research

etc. However, the core trading activity is still the predominant form of business,

forming 90% of the firms in the sample. 67% firms are engaged in offering IPO

related services. The broking industry seems to have capitalised on the growth of the

mutual fund industry, which was pegged at 40% in 2006. More than 50% of the

sample broking houses deal in mutual fund investment services. The average growth

in assets under management in the last two years is almost 48%. Company research is

another lucrative area where the broking firms offer their services; more than 33% of

the firms are engaged in providing company research services. Additionally, a host of

44

other value added services such as fundamental and technical analysis, investment

banking, arbitrage etc. are offered by the firms at different levels. Of the total sample

of broking houses providing trading services, 52% are based in the West, followed by

25% from North, 13% from South and 10% from the East. Around 50% of the firms

offering IPO related services are based in the West as compared to 27% in North,

13% in South and 10% in East. In providing mutual funds services, the Western

region was dominant amounting to 49% followed by 27% from North; The South and

the East are almost at par with 13% and 11% respectively.

4.6 Future Plans

68% of the firms from the sample have envisaged strategies for future growth. With

the middle class Indian investor as well as foreign investor willing to invest in the

stock market, majority of the firms preferred expansion of institutional and the

Foreign Institutional Investor clients in their areas of growth. Around 84% have

shown interest in expanding their institutional client base. Nearly 51% of such firms

are located in the West, 25% in North, 15% are from South and 9% from East. Since

the past couple of years, India, along with Korea and Taiwan, has been one of the

preferred destinations for the FIIs. With corporate restructuring, rising market

capitalization and sectoral friendly policies helping the FIIs, more than two thirds of

the firms are interested in increasing their FII client base. Amongst these firms, West

again has maximum representation of 53%, followed by North with 22%. South has

15% firms and East makes up for 9%.

45

Chapter-5

Company profile:

5.1 Introduction

Anagram Stock Broking is a member of the National Stock Exchange (registration

number INB--230597630). Ever since its foundation in 1993, Anagram Securities has

always focused on the needs of the retail client. Last year, billings crossed Rs.17000

crore with around 5,000 people making their trades through Anagram. The firm has

its roots in Western India especially Gujarat where it is the biggest player. But it has

expanded considerably.

Anagram Stock Broking Ltd, Anagram Securities limited, Anagram Com trade

Limited and Anagram Online Limited (Collectively referred as “Anagram”).

Anagram Stock broking Limited is a member of The Bombay Stock Exchange

46

Limited and a Depository Participant of the NSDL and Anagram Securities limited is

a member of National Stock Exchange Limited and Anagram Comtrade Limited is a

member of India's 3 premier commodities Exchanges namely MCX, NCDEX, and

NMCE) (TCM – Trading cum Clearing Member).

Anagram -: “Vision”

To be in the distribution business across whole range of financial products and be

preferred destination for Retail, MNI’s , HNI’s, Portfolio Investors & financial

institutions investing in Indian stock & Commodities markets by :

Providing more focused and client specific products

Creating customer centric distribution business ensuring complete customer focus

Giving personalized services in terms of quality investment advice and real time

review thereof.

Anagram -: “Mission”

“To educate and empower the individual investor to make better investment decisions

through quality advice and superior service.”

Bank affiliation:

Anagram has affiliation with 2 banks, which allows its customers to enjoy the facility

of instant credit and transfer of funds from his savings bank account to his anagram

account. The affiliated banks are as follows:

HDFC BANK

UTI BANK

47

Anagram is a complete service brokerage house offering the entire spectrum of

services that an equity investor would need and offer real time offline and online

trading platform on the BSE & NSE both in cash and F & O segment. It also offers its

clients online access to their account and information. Anagram does no proprietarily

trading and manages no mutual funds, nor is it interested in corporate finance. It

believes in offering advice that is completely untainted with ulterior motives.

5.2 Investment Philosophy

The investment philosophy of Anagram focuses primarily on recommending

purchases in financially sound companies at reasonable market prices. We would also

recommend sales of companies which are above the sales price targets or whose

business prospects are poor.

48

Anagram recognizes that every individual is unique in terms of his investment time

horizon, investment objectives, personal financial situations, level of interest and

inclination in the investment decision making process and last but not the least, his

risk taking ability. Whilst it is hard to beat the level of absolute customization and

hand holding that a qualified personal financial planner would provide, we have

attempted to individualize, as much as possible, model portfolios that we believe

reflect the individual’s unique investment profile.

Today, Anagram is one of India's leading corporate broking houses with a very strong

network of its own Branches and Franchisees across India. The following areas give it

a unique identity:

Service: beyond broking

The differentiator: Research and risk management

Technology: the byte that works

Personnel: Intangible asset

5.3 Beyond Broking

1. Retail

With a network of more than 181 odd branches and a clientele of more than 150,000

Retail investors, Anagram is counted among the top 5 brokerages in the retail area. If

the first priority in business is reaching customers, the second is keeping him

satisfied. Anagram, believe in building relationship with its customers and provide

them with a whole palate of services. The relationship management encompasses

from providing the right investment strategies based on needs and risk stances to

ensuring timely payouts.

49

It proud for the fact that they've maintained a record of prompt payouts to their

customers, winning a reputation for reliability and transparency that is not too

common a currency in this business. And they've done this despite the alarming- and–

sudden-slumps that the stock market and the economy have gone through over the

last decade.

As far as product range goes, Anagram is steadily building up a comprehensive

portfolio of products and services apart from conventional broking. High speed

anywhere trading through the net, Online depository services, Commodities Trading

and retail debt products are increasingly areas of special emphasis for us.

2. Institutional business

While Anagram also has its hand on the pulse of the retail client, it also understands

the needs of the demanding institutional clients. A separate institutional sales desk

services the needs of the select institutions. Anagrams is empanelled with leading

Indian institutions and keeps expanding the list.

5.4 Research and Risk Management

A. Research:

Information and research is a vital ingredient for success in an industry that relies on

information flows and where the ability of its people to understand the markets and

foresee trends is what sets a good firm apart.

Research is very important part of Anagram’s business. Its research team is spread

over two locations i.e. Ahmedabad and Mumbai. We contribute regularly to the

various TV channels, newspapers and other media.

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Anagram’s research reports for the institutional clients are exhaustive and in detail,

whereas for the retail segment the stress is on timeliness. It has a battery of products

that cater to the retail investor. Chinta's Call is its morning newsletter that takes a

trading call on the market and gives you a ringside view of the overnight national and

international events and how they would shape the day's trading. The ‘Famous Five'

on Monday picks 5 investment picks for a medium term horizon.

Anagram’s Research Products:

Daily market views and stock picks

Sector Update Report

Company Research Report

Weekly Sector Outlook and

International Market Wrap Up.

B. Risk Management:

Risk management is at the core of our very existence. There is no margin for any

error. With the help of modern technology and some hard nuts in the risk

management room it has been able to keep the risks of its business to the bare

minimum. Its comfort to expand geographically comes from the fact that its risk

management is clinical. Anagram’s strict adherence to systems ensures that its clients

and stakeholders can have their quota of the much-needed peaceful sleep. Anagram

has also invested in the state-of-the-art VPN (Virtual Private Network) infrastructure

that gives a robust system to ease geographical expansion and build terminal network

across the country. It also enables the entire business applications available cutting

across geographical boundaries.

Whether it is the trading engine for our website or the VSATs based VPN we use for

our connectivity or the applications that make our front office, back office and

Depository service completely seamless, we have always settled for the best. We have

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the best of the breed technology partners complemented by some of best brains in IT

and connectivity working for us.

5.5 Infrastructure:

1. Office Network across India:

Anagram has at present more than 138 offices across India. The addresses of the

various offices are given in the enclosed annexure. Besides this branch network

Anagram has network of Sub-brokers and Franchisees. Anagram has connectivity

provided through installed Vsats, lease lines and Bharti VPN (Virtual Private

Network) through Vsats. The other CTCL installations are over 100 at various

locations

2. Back Office Support:

Anagram has centralized Back Office, which is based at Ahmedabad. It’s other Back

Office at Mumbai out of Bandra Kurla Complex and supports the Back Office

operation to Institutions and others from this place.

5.6 Distribution Business:

The Distribution Business offers advisory Services of Investments into Mutual Funds,

Primary Market, Life Insurance and other small saving products. The distribution

service adds up to its broking business and is serviced by experts at each location. Pan

India network of 14+own branches 175+ franchisees 1837 sub-brokers network of

3000+terminals in over 128 cities in India. And catering to more than 75000 clientele

bases.

Anagram was the first among one to launch online trading and website in India.

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Aggregates volumes of over 98,000 crore across BSE/NSE/DRIVATIVES with

market share of 1.2%.

At Anagram on an average 1,25,000+ trades are executed daily in all over

5.7 Business Segments:

1. Equity and F&O Segment

Retail

Institutional - Empanelled with UTI, GIC, SBI, LIC, Principal MF,

Mutual Funds, Bonds, Insurance co.’s.

2. Commodities Segment

Retail

3. Depository Participant

For Equity / Commodities

4. Distribution

Asset Products –Mutual Funds

Liability Products – Loans

IPO / Insurance

5. Other major functions:

Dealing operation – terminal of NSE and BSE

Settlement – after-market process

Depository participants (DP) – demat services

Risk management system – margin, exposure, and limit of clients

Accounts and finance –pay-in , pay-out, petty-cash, Bank liasioning

Information technology –servers administration, software, network administration

Human resource management

Compliance – SEBI and exchange related documentation and compliance

Research – advises based on fundamental and technical analysis

Administration – Local administration

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5.8 Products of Anagram:

Currently, Anagram Securities and Stock broking is offering following product

bouquet to people who wish to deal in stock market.

1. Offline:

Anagram offer a complete range of pre-trade, trade and post-trade services on the

BSE and the NSE. Whether you approach(go to) conveniently located offices and

trade in a dedicated environment, or issue instructions over the phone , their highly

trained team and sophisticated equipment ensure smooth transactions and prompt

service.

Demat Account : Rs. 600

Rs 100 : Stamp duty

Rs. 200 : Advance Delivery

Rs. 300 : AMC

Trading Account : Rs. 200

Rs. 100 : Stamp duty NSE

Rs. 100 : Stamp duty BSE

2.Online (E – broking and web- based services):

Anagram was one of the FRIST to offer online trading. At site,

www.moneypore.com, high bandwidth leased lines, secure servers and a custom-

built user interface gives customer an international standard trading experience.

Moneypore also gives them regular updates during trading hours, and access to

information, analysis and research, and a range of monitoring tools.

Online trading account : Rs. 850

Online trading account

Online Software Moneypore Express

Online package : Rs. 599 (+ Rs 5000 margin)

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Demat Account

Online trading account

Online Software Moneypore Express

5.9 SWOT ANALYSIS OF ANAGRAM.

STRENGTHS:

Anagram has the “Long term Customer Relationship by providing prompt

service”.

No needs to have any DEMAT account in Anagram itself.

Research Department located in Ahmedabad itself and now at Bombay also.

Excellent tips for all types of investors.

User friendly website for the ONLINE users( i.e. ODIN software).

Efficient and skilled manpower in research as well as in administration.

Strong Risk Management System.

Baskets of Products so enough to satisfy customer’s demand easily.

Brand name of Anagram.

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Transparent System for the investors

WEAKNESSES:

Brand name is present of the company but many people are not properly aware of

it so, unawareness among investors.

Anagram’s “Sales Promotion” is not effective compare to competitors.

Less flexible in brokerage compare to other players in industry.

Less publicity.

No mass marketing program so accessibility to the public is null.

OPPORTUNITIES:

Growing investment in capital market from retail investors.

Development of online trading as the speed of communication has increased.

Tapping young investors and making them their loyal client.

To tap the untapped market makes company and its products more accessible to

customers.

To focus on developing a superior and powerful portal.

To spread awareness of its Brand Name.

To increase its Market Share.

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THREATS:

Competitor develops a superior portal.

Prolonged depression and high volatility in the market so prove to be a company

which can maximize return of the customers in high risky and volatile market.

New player are entering in stock broking industry with strong marketing

campaign and products and services so threat of new entrants.

Bigger players like Reliance entering market.

Reducing brand loyalty among clients.

Security threat in online trading.

Chapter-6

Data analysis and interpretation

1. People involved with share market.

TRADE/INVEST IN SHARE MARKET

YES NO

93 27

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78%

23%

Trade in share marketYES NO

Analysis:

According to the survey, 77% people of total respondents are involved with share

market. They are active in the share market either for doing any trading or long term

investment purpose. The rest of 23% are not active in share market.

2. Awareness about currency futures among respondents.

AWARENSS OF CURRENCY FUTURES AMONG RESPONDENTS.

58

YES NO

91 29

76%

24%

RESPONDENT'S AWARENESS

YES NO

Analysis:

76% among all respondent are aware about the currency futures and they know that

the currency is used as an instrument to trade. But 24% respondents are not having

any knowledge about currency futures.

This 76% (i.e. 91) people also include 12 people who are not active in stock market

but still aware about the currency market.

3. Traders in currency futures market.

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TRADING IN CURRENCY FUTURES

YES NO

22 98

18%

82%

CURRENCY TRADING

YES NO

Analysis:

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According to the survey 18% people among the respondent are trading in currency

market and they are having sound knowledge about the currency market. The rest of

82% are do not trade in currency market and they are not much familiar with currency

market.

4. Reasons for not trading in currency futures.

REASONS NO. PERCENTAGE

Lack of knowledge 44 44.90

Less interest 23 23.47

Past losses 10 10.20

Other 21 21.43

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Lack of knowledge Less interest Past losses Other

44

23

10

21

REASONSREASONS

Analysis:

There are different reasons of not trading in currency futures market by the

respondents. Main reason for not trading is lack of knowledge about the mechanism

of currency futures.

From survey we can find that 46% respondents are not trading in currency futures

because of insufficient knowledge about working of currency futures. About 23%

respondents are not trading in currency futures because of their less interest toward

currency futures.

About 10% respondents are not trading in currency futures because of losses occurred

in past. 23% respondents are not trading because of many other reasons like….

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Investing in stock market, investing in real-estate and insufficient fund with

respondents.

5. Ready to trade in currency futures if appropriate knowledge and

advisory services are provided.

READY TO TRADE PERCENTAGE

YES 31 70.45%

NO 13 29.55%

YES NO0

5

10

15

20

25

30

35

31

13

READY TO TRADE

READY TO TRADE

Analysis:

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There are total 98 respondents who are not trading in currency futures. Out of them 44

respondents are not trading because of lack of knowledge about mechanism of currency

futures which consists 44.90% of total respondents.

Out of this, 31 respondents are ready to trade in currency futures if they would be

provided with knowledge of currency futures mechanism and this comes to 70.45%.

This shows that if appropriate knowledge and advisory services are provided then people

are ready to get involved with this area also.

6. Sources of information for awareness about currency futures.

SOURCE NO. PERCENTAGE

Seminar 3 3.29

Leaflet 4 4.40

Newspaper/magazines 27 29.67

Friends/relatives 14 15.38

Brokers 26 28.57

Other 17 18.68

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Seminar

Leaflet

Newsp

aper/

magazi

nes

Frien

ds/rela

tives

Broke

rsOther

3 4

27

1426 17

SOURCES OF INFORMATION

SOURCES OF INFORMATION

Analysis:

People use different source of information to acquire knowledge about currency

futures. Here we used 5 major sources of information point which may be used by

them through which they get information about the currency futures.

29.67% respondents got the information from newspaper, 28.57% persons get the

information from brokers, 15.38% respondents got it from friends and relatives, 4.40

got it from leaflets, 3.29% got it from the seminar on currency futures and rest

18.68% respondents got the information from other sources.

7. Purpose of trading in currency futures.

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PURPOSE NO. PERCENTAGE

Hedging 15 68.19

Speculation 4 18.19

Arbitrage 2 9.09

Other 1 4.55

Hedging Speculation Arbitrage Other

15

42 1

purposepurpose

Analysis:

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People who are trading in currency market have different purposes. Main purpose of

trading is hedging in currency futures. There are also other purposes like speculation,

arbitrage and different other purposes like swapping, warrants etc.

68.19% traders use hedging strategy for foreign exposure and through this they can

minimize their risk and maximize the loss.

18.19% Trader use speculation strategy and it includes the maximum risk maximum

profit.

9.09% respondent use arbitrage for their forex exposure and they minimize their risk

and try to maximize its profit. In that case the trader take two different positions at the

same time. The trader takes position of selling and buying both. And then by closing

both the positions they may make overall profit.

4.55% Use swap, warrants and other techniques for foreign exposure and try to

maximize its profit. But at the same time the loss and risk is also at the maximum

point.

8. Preference of respondent for exchange.

1ST RANK 2ND RANK 3RD RANK Wi/w

MCX’SX 13*3

= 39

7*2

= 14

2*1

= 2

55/6

=9.16

NSE 6*3

=18

11*2

=22

5*1

=5

45/6

=7.5

BSE 3*3

=9

4*2

=8

15*1

=15

32/6

=5.33

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WEIGHTED AVG. NO RANK

MCX’SX 9.16 1

NSE 7.5 2

BSE 5.33 3

MCX'SX NSE BSE

9.16

7.5

5.34

PREFERENCE FOR EXCHANGE

WEIGHTED AVG.RANK

Analysis:

MCX’SX is the most preferred exchange by people

2nd most preferred exchange is NSE.

And 3rd preference goes to BSE.

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9. Preferred currency pair for trading in currency market.

1st RANK 2nd RANK 3rd RANK 4th RANK Wi/w

USD/INR 10*4

=40

6*3

=18

3*2

=6

3*1

=3

67/10

=6.7

EUR/INR 3*4

=12

4*3

=12

5*2

=10

10*1

=10

44/10

=4.4

JPY/INR 2*4

=8

3*3

=9

10*2

=20

7*1

=7

44/10

=4.4

GBP/INR 7*4

=28

9*3

=27

4*2

=8

2*1

=2

65/10

=6.5

WEIGHTED AVG. NO. RANK

USD/INR 6.7 1

EUR/INR 4.4 3.5

JPY/INR 4.4 3.5

GBP/INR 6.5 2

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USD/INR EUR/INR JPY/INR GBP/INR

6.7

4.4 4.4

6.5

PREFERED CURRENCY PAIRWEIGHTED AVG. NO

Analysis:

There are 4 currencies permissible in India to trade upon and the rank in which they

are preferred is like this..

Dollar is the most preferred currency to trade.

2nd rank has been given to British Pound.

And in the survey we found that Yen and Euro is used in equality.

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10. Preferred brokerage house.

1ST RANK 2ND RANK 3RD RANK 4TH RANK 5TH RANK Wi/w

Anagram 15*5

=75

18*4

=72

32*3

=96

34*2

=68

21*1

=21

332/15

=22.13

Sharekhan 27*5

=135

23*4

=96

15*3

=45

20*2

=40

35*1

=35

351/15

=23.4

Religare 21*5

=105

22*4

=88

37*3

=111

19*2

=38

11*1

=11

353/15

=23.53

Motilal

oswal

31*5

=155

30*4

=120

12*3

=36

24*2

=48

33*1

=33

392/15

=26.13

Others 26*5

=130

27*4

=108

24*3

=72

23*2

=46

20*1

=20

376/15

=25.06

WEIGHTED AVG. NO. RENK

Anagram 22.13 5

Sharekhan 23.4 4

Religare 23.53 3

Motilal oswal 26.13 1

Others 25.06 2

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ANAGRAM SHAREKHAN RELIGARE MOTILAL OSWAL OTHER

22.13

23.4 23.53

26.13

25.06

PREFERED BROKERAGE HOUSEWEIGHTED AVG.NO.

Analysis:

There is a large number of Broking firms involved in this industry so people have lot

of options to choose among them.

In the survey we have found that Motilal Oswal is the most favoured broking house.

At the 2nd position a list of broking house whose name is not included in the

questionnaire can be selected.

Religare has secured 3rd position, Sharekhan stands at 4th position and Anagram at the

5th position.

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11. Criteria for selecting brokerage house.

1ST RANK 2ND RANK 3RD RANK 4TH RANK 5TH RANK Wi/w

BROKERAGE 50*5

=250

34*4

=136

20*3

=60

12*2

=24

4*1

=4

474/15

=31.6

ONLINE/OFF

LINE

12*5

=60

17*4

=68

24*3

=72

30*2

=60

37*1

=37

297/15

=19.8

REASERCH 35*5

=175

27*4

=108

28*3

=84

20*2

=40

10*1

=10

417/15

=27.8

SERVICES 12*5

=60

20*4

=80

23*3

=69

30*2

=60

35*1

=35

304/15

=20.26

OTHER 9*5

=45

22*4

=88

25*3

=75

28*2

=56

34*1

=34

298/15

=19.87

WEIGHTED AVG.NO. RANK

BROKERAGE 31.6 1

ONLINE/OFF LINE 19.8 5

REASERCH 27.8 2

SERVICES 20.26 3

OTHER 19.87 4

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BROKERAGE ONLINE/OFFLINE RESEARCH SERVICES OTHER

31.6

19.8

27.8

20.26

9

WEIGHTED AVG.NO.

Analysis:

There are various reasons for selecting a particular Broking firm. We have noted few of those reasons and asked respondents to rank them.

Brokerage became the prime most reason for selecting a particular broking firm.

Research facility and the tips which came out from that research became the 2nd reason.

Services are the 3rd reason. Online/offline trading facility is the 4th reason.

Few other reasons are also accountable for selecting a broking firm such as personal relation with the company etc.

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Chapter-7

Key Findings

1. USA and Briton are among the top Exporter and importer. And one Asian country Japan is considered as a top place for trading.

2. Exporter and importers use Dollar as main currency in Payment and Remittance. From our analysis it is shown that 30.55% traders use Dollar in their payment and remittance system. And pound is used by 29.45% of traders.

3.Most of the Traders use the strategy of hedging. Hedging provides security and sharing of risk between exporter and importers. Most traders are risk averse and try to avoid it through the Hedging.

4. Speculation, swap and Arbitrage are less consider by the traders because it includes more risk as compare to hedging techniques.

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Chapter-8

CONCLUSION With above analysis and finding we would like to conclude that

1. Dollar is easily acceptable currency in all over the world, so most of the traders use Dollar as a major currency in making payment and in receiving the remittances.

2. USA and Briton is major business stations of our traders because large numbers of export and import is related to these countries. So, Brokerage house should draft its policy of hedging according to these country’s legal policy and business environment.

3. Most of the traders use hedging strategy to expose their foreign exposure. Hedging is most risk sharing strategy and widely used by the exporter and importer to minimize their risk.

4. Speculation is consider as most risky technique and it is least considered by the respondents. Arbitrage is another strategy of foreign currency exposure and it is also used but not as much as hedging strategy.

5. Many people are actively involved in stock market but not doing anything in currency futures. Some of them are willing to trade in currency futures if appropriate knowledge is provided to them.

.

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Chapter-9

BIBLIOGRAPHY

International Business: Theory and practice

Newspapers

NISM Currency Derivative Module

Richard I. Levin and David S. Rubin (2004). Statistics for Management, 7th Edition.

Donald R Cooper and Pamela S Schindler, Business Research Methods 9th Edition.

Websites

www.rbi.org

www.nseindia.com

www.bseindia.com

www.babypips.com

www.fxcm.com

www.dailyfx.com

www.wikipedia.com

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http://www.wikipedia.com/

http://www.dailyfx.com/

http://www.fxcm.com/

http://www.babypips.com/

http://www.bseindia.com/

http://www.nseindia.com/

http://www.rbi.org/

ANNEXURE

1. Questionnaire

1. Do you Invest/Trade in share market?

Yes

No2. Have you heard about currency futures?

Yes

No

3. Do you invest in currency futures?

Yes

NoIf yes, then go to Q-6.

4. If no, what are the reasons for not investing in currency futures?

[Please give the rank accordingly]

Lack of knowledge about mechanism of currency futures.

Less interest in currency market.

Due to past losses.

Any other please specify.

______________________________________________________

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5. Would you like to trade in currency futures if appropriate knowledge and advisory

services are provided?

Yes

No

6. Through which marketing channel did you get the information?

Seminar

Leaflet

Newspaper/magazines

Friends/relatives

Brokers

Any other please specify__________________

7. What is the purpose of trading in currency futures?

Hedging

Speculation

Arbitrage

Any other please specify__________________

8. Which stock exchange do you prefer to do the transactions in currency futures?


BSE.

NSE.

MCX’SX.

9. Which is the most preferred currency pair for trading in currency market?

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Dollar (USD)/INR

Euro (EURO)/INR

Japanese yen (JPY)/INR

British Pound (GBP)/INR

10. Which is your preferred brokerage house?


Anagram

Sharekhan

Motilal oswal

Religare

Any other please specify___________________

11. According to you which of the following is the most important criteria for

selecting the brokerage house?


Brokerage

Online/Offline facility

Research

Service.

Any other please specify___________________

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Currency futuers in india

Business

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