Final Currancy Market

8/6/2019 Final Currancy Market

1/46

1

A

Project report

On

Currency futures market in India

In Partial Fulfillment of the Project Study in

Masters of Business Administration Programme

Submitted by: Submitted to:

AMOL TAMBE

Batch: 09-11

ITM


2/46

2

PREFACE

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

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


3/46

3

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.HiteshRuparel and

Prof. Dr. SnehaShukla for providing us guidance in this project.

We would like to express our gratitude to our company guide Miss. NamrataAgarwal and

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

company. We are also very thankful to Mr. KashyapDarji, 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

KhimaGoraniya

M.B.A-NRIBM

(BATCH 2009-11)


4/46

4

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 worlds 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 FIIs and FDIs 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 withthe 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.


5/46

5

Table of Contents

Chapter

No.

Topic Page No.

Preface

Acknowledgement

Executive Summary

1

Research Methodology

1.1 Introduction

1.2 Research Objectives

1.3 Research Design

1.4 Literature reviewed

1.5 Data collection1.6 Sample size

1.7 Data analysis

1.8 Limitations

2

Introduction to the Foreign Exchange market

2.1 Foreign Exchange

2.2 Overview of the international currency markets

2.3 Major currency of the world

2.4 Exchange rate mechanism

2.5 Economic variables impacting exchange ratemovement

3

Currency futures in Indian Context

3.1 Introduction of currency futures on indianexchange

3.2 Need for Exchange Traded Currency Futures

3.3 Over-the-counter v/s Exchange traded

3.4 Formation of committee

3.5 Contract Specification of currency futures

3.6 Strategies used in currency futures3.7 Hedging used in currency futures


6/46

6

4

Industry profile

4.1 Broking Insights

4.2 Terminals

4.3 Branches and sub-Brokers4.4 Financial markets

4.5 Products

4.6 Future plans

5

Company profile

5.1 Introduction

5.2 Investment Philosophy

5.3 Beyond Broking

5.4 Research and Risk Management

5.5 Infrastructure

5.6 Distribution Business

5.7 Business Segments

5.8 Products of Anagram

5.9 SWOT analysis of anagram

6 Data Analysis & Interpretation

7 Key Findings

8 Conclusion

9 Bibliography

Annexure [Questionnaire]


7/46

7

Chapter-1

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 thismarket. 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

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.


8/46


9/46

9

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 newrelevance 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 worlds

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

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.


10/46

10

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 days 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.

Each nations 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


11/46

11

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 t ime are effectively integrated into a single market.

2.3 MAJOR CURRENCIES OF THE WORLD

y US DollarUs 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

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

trade the two currencies directly against each other.T

he vehicle currency used mostoften is the US Dollar, although very recently euro also has become an important

vehicle currency.


12/46

12

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

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

reserve currency.

The US Dollars 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


13/46

13

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

transactions could conveniently be borrowed (or placed).

y The EuroLike 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.

y The Japanese YenThe 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

y The British PoundUntil 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

nations currency for money denominated in another nations 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


14/46

14

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 transactionsexchange of one currency for another.

The exchange rate is a price - the number of units of one nations currency that must

be surrendered in order to acquire one unit of another nations 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 Funds SDR. There are also various

trade-weighted or effective rates designed to show a currencys movements

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.


15/46


16/46

16

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 thatprovide 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 stanceas 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.


17/46

17

Chapter-2

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 ExchangeDealers 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

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


18/46

18

(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 swaptransactions (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

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.


19/46

19

3. 2Need 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.

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

efficiency and accessibility.


20/46

20

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

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


21/46

21

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. ExchangeA 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

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


22/46

22

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

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

3. Size of the contract


23/46

23

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

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

laid down by FEDAI.


24/46

24

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.

8. Settlement price

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

expiry.


25/46

25


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

month.T

he last working day would be taken to be the same as that for InterbankSettlements 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

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.


26/46

26

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 days 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)

2. Trading Hours

9 a.m. to 5 p.m.


27/46

27


The contract size would be Pound Sterling 1000.

4. Quotation

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

would be in Pound Sterling terms.







8. Settlement price

Exchange rate published by the Reserve Bank in its Press Release captioned RBIReference Rate for US$ and Euro.



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 declared holiday would be those as laid down

by FEDAI.


28/46

28

10. Initial Margin


an individual client across various scenarios of price changes.T

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



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




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

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

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




29/46

29

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 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) Clearing Member Level:No separate position limit is prescribed at the level of clearing member. However,



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

4. Quotation

The contract would be quoted in rupee terms. However, the outstanding positionswould be in Japanese Yen terms.




30/46

30





8. Settlement price

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

Reference Rate for US$ and Euro.



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 declared holiday would be those as laid down

by FEDAI.

10. Initial Margin


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



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



31/46

31



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

he calendar spreadmargin 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 gross open positions of the client across all contracts shall not exceed 6% of

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



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 JPY 1000 million whichever is higher.

c) Bank:

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

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


32/46

32

d) Clearing Member Level:

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



3.6Strategies 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

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 marketis 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


33/46

33

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 doesnt choose to exit

out his position.

Hypothetical ExampleLong positions in futures

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

depreciate against USD caused by Indias 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

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.


34/46

34

ExampleShort 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 internationalmarket and hence improving Indias 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.

3.7HEDGING USED IN CURRENCY FUTURES

Hedging:

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.


35/46

35

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

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.


36/46

36

Corporate Hedging

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

Counter (OT

C) market as a platform to hedge his currency exposure; however now hehas 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: Lets 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,

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


37/46

37

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

and stock price.

Hedged:

Lets 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:

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: Lets 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.


38/46

38

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: Lets 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

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.


39/46

39

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

of Contract Expiry and Liquidation on the Same Day.

Observation:T

he size of the exposure is USD 110000 and the desired value date isprecisely 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.


40/46

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 countrys 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

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:

y On the basis of geographical concentration, the West region has the maximumrepresentation of 52%. Around 24% firms are located in the North, 13% in the

South and 10% in the East

y 3% firms started broking operations before 1950, 65% between 1950-1995 and32% post 1995.


41/46

41

y On the basis of terminals, 40% are located at Mumbai, 12% in Delhi, 8% inAhmedabad, 7% in Kolkata, 4% in Chennai and 29% are from other cities

y From this study, we find that almost 36% firms trade in cash and derivatives and27% are into cash markets alone. Around 20% trade in cash, derivatives and

commodities

y 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

y Majority of branches are located in the North, i.e. around 40%. West has 31%,24% are located in South and 5% in East

y In terms of sub-brokers, around 55% are located in the South, 29% in West, 11%in North and 4% in East

y 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

y In terms of various areas of growth, 84% firms have expressed interest inexpanding their institutional clients, 66% firms intend to increase FII clients and

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

y In terms of IT penetration, 62% firms have provided their website and around94% 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.


42/46

42

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

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.


43/46

43

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.T

he average growthin 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

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.


44/46

44

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 ofthe 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%.


45/46

45

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 useDollar 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 ofexport and import is related to these countries. So, Brokerage house should draft itspolicy of hedging according to these countrys legal policy and business environment.

3. Most of the traders use hedging strategy to expose their foreign exposure. Hedging ismost risk sharing strategy and widely used by the exporter and importer to minimizetheir risk.

4. Speculation is consider as most risky technique and it is least considered by therespondents. Arbitrage is another strategy of foreign currency exposure and it is alsoused but not as much as hedging strategy.

5. Many people are actively involved in stock market but not doing anything in currencyfutures. Some of them are willing to trade in currency futures if appropriate

knowledge is provided to them.

.


46/46

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

Final Currancy Market

Documents

Transcript of Final Currancy Market