Prepared By:- Dharmesh Patel

Organization Introductiony Bonanza is a leading Financial Services Provider &

Brokerage House working since 1994. y Bonanza has spread its trustworthy all over the country with more than 1025 outlets spread across 340 cities. y It provides an extensive services in equity, commodities, currency derivatives, wealth management, distribution of third party products etc. y One core Mission is clients' wealth generation through professional advice backed by research and in-depth analysis.

Membershipsy National Stock Exchange of India(NSEIL) y The Bombay Stock Exchange(BSE) y Multi Commodity Exchange(MCX) y National Commodity & Derivatives Exchange Ltd(NCDEX) y National multi commodity exchange(NMCE) y Depository Participant for Equity(NSDL/CDSL) y Depository participant for commodity y Dubai Gold & Commodity Exchange(DGCX) y SEBI Authorized PMS

Core Value Of Bonanza Portfolio Ltdy Customer satisfaction

y Maximization of Stakeholder value

y Success through Team Work Integrity and people

PART:- A

Objectives

y To get the basic knowledge about Foreign Exchange Market. y To know the different parties involved in the FORX market. y To learn about the currency derivatives and its different instruments. y To learn about the different regulations for the derivative trading in India.

Overview about the FORX markety During the early 1990s, India embarked on a series of structural y y

y

y y

reforms in the foreign exchange market Liberalization led to extensive fluctuations of exchange rate. Excessive volatility can have an 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 introduced. RBI on April 20, 2007 issued comprehensive guidelines on the usage of foreign currency forwards, swaps and options in the OTC market. Currently, India is a USD 34 billion OTC market, where all the major currencies like USD, EURO, YEN, Pound, Swiss Franc etc. are traded.

Purposey The foreign exchange market is the mechanism by which currencies are

valued relative to one another, and exchanged.y An individual or institution buys one currency and sells another in a

simultaneous transaction.y Currency trading always occurs in pairs like EUR/USD or CHF/YEN. y Foreign Exchange Traders generate profits, or losses, by speculating

whether a currency will rise or fall in value in comparison to another currency.

Foreign Exchange Spot (Cash) Markety The foreign exchange spot market trades in different currencies for

both spot and forward delivery.

y It consists of a network of foreign dealers which are mainly banks,

financial institutions, importers and exporters.

y In the spot exchange market, the business is transacted throughout the

world on a continual basis.

y The standard settlement period in this market is 48 hours, i.e., 2 days

after the execution of the transaction.

y Exchange rates are generally determined by demand and supply force in

this market.

Foreign Exchange Quotationsy For example,If one US dollar is worth of Rs. 45 in Indian rupees then it implies that 45 Indian rupees will buy one dollar of USA, or that one rupee is worth of 0.022 US dollar, which is simply reciprocal of the former dollar exchange rate.

y EXCHANGE RATE

1) Direct :- $1 = Rs. 45.7250 2) Indirect :- Re 1 = $ 0.02187

Introduction about Currency Derivativesy A derivative security is a financial contract whose value is derived

from the value of underlying assets, such as a stock price, a commodity price, an exchange rate, an interest rate, or even an index of prices.y Derivatives are often highly leveraged, such that a small movement

in the underlying value can cause a large difference in the value of the derivative.y Derivatives may be traded for a variety of reasons.

-Hedging -Speculation -Arbitrage

Concept of Currency Derivativesy A currency derivative is a contract between the seller

and the buyer, whose value is to be derived from the underlying asset, the currency amount.y A derivative based on currency exchange rates is a

future contract which stipulates the rate at which a given currency can be exchanged for another currency as at a future date.

Benefits of Currency Derivativey Arbitrage opportunity for entities, who can access onshore and non-deliverable forward markets y Volatility and multiplier make it a significant trading option for traders y Hedging current exposure:y Importers and exporters can hedge future payables and

receivables y Borrowers can hedge Foreign Currency loans for interest or principal payments

Types of Currency Derivatives Instrumentsy Forwards:-A forward is a made-to-measure agreement between two parties to buy/sell a specified amount of a currency at a specified rate on a particular date in the future. y Future:-A futures contract is similar to the forward contract but is more liquid because it is traded in an organized exchange i.e. the futures market. y Options:-A currency Option is a contract giving the right, not the obligation, to buy or sell a specific quantity of one foreign currency in exchange for another at a fixed price. y Swaps:-A swap is a foreign currency contract whereby the buyer and seller exchange equal initial principal amounts of two different currencies at the spot rate.

RBI Regulations1) RBI Regulation for Rupee Forward

The forward contracts are allowed to be booked for foreign currencies (other than Dollar) and Rupee.

The banks are also allowed to enter into forward contracts to

manage their assets - liability portfolio. The cancellation and re-booking of the forward contracts is

permitted only for genuine exposures out of trade/business upto 1 year for both exporters and importers.

2) RBI Regulations in Cross currency options Such contracts are allowed to be freely re-booked and cancelled.

Any premium payable on account of such transactions does not require RBI approval. These currency options can be used as a hedge for foreign currency

loans provided that the option does not involve rupee and the face value does not exceed the outstanding amount of the loan. Banks can also purchase call or put options to hedge their cross

currency.

3) RBI Regulations in Foreign currency rupee swapsy The authorized dealers offering swaps to corporates should try and

match demand between the corporates.y The open position on the swap book and the access to the interbank

spot market because of swap transaction was restricted to US$ 10 million.y The contract if cancelled is not allowed to be re-booked or re-entered

for the same underlying.

Foreign Exchange Risk Managementy Firms dealing in multiple currencies face a risk (an

unanticipated gain/loss) on account of sudden/unanticipated changes in exchange rates .y The process of identifying risks faced by the firm and

implementing the process of protection from these risks by financial or operational hedging is defined as foreign exchange risk management.

Foreign Exchange Risk Management Frameworky Forecasts y Risk Estimation y Benchmarking y Hedging y Stop Loss y Reporting and Review

Objectives Of the Research Worky To analyse the scope of currency derivative in India. y To study the factors that helped in development of currency derivative in foreign country. y To study the legal regulation in Indian FOREX market. y To suggest suitable solution (like future, forward or option) to the customers according to their risk taking ability. y To provide different hedging strategies.

Research Methodologyy Most of the data required for this study is collected from primary and

secondary methods.

y Primary Data

- Survey -Sample of 60 Respondent y The questionnaire of the survey will be design by keeping all this point in to mind:y Classification of the respondent (i.e. Importer, Exporter, Professional, y y y y

or any other person having any exposure in foreign currency) Total foreign currency exposure in one year Awareness about product on Currency Derivative How keen people are interested in adopting Currency Derivative What type of the product can be provided to reduce their risk

Primary Data AnalysisCategory of RespondentValid Percent 10.0 40.0 18.3 15.0 16.7 100.0 Cumulative Percent 10.0 50.0 68.3 83.3 100.0

Valid

financial Institute Exporter Importer Both Exporter and Import Professionals Total

Frequency Percent 6 10.0 24 11 9 10 60 40.0 18.3 15.0 16.7 100.0

Name the CurrencyCumul ative Valid Percen t Percent 46.7 46.7 20.0 66.7 6.7 73.3 25.0 98.3 1.7 100.0 100.0

Valid USD Pound Euro Yen Any Other Total

y

Frequency 28 12 4 15 1 60

Percent 46.7 20.0 6.7 25.0 1.7 100.0

Nature of the Transactor

Valid

Arbitrator Speculator Hedger None Of the Above

Frequency 3 5 9 43

Percent 5.0 8.3 15.0 71.7

Valid Percent 5.0 8.3 15.0 71.7

Cumulative Percent 5.0 13.3 28.3 100.0

Total

60

100.0

100.0

Cross TabulationAmount for Derivatives * Total Amount Count Total Amount Rs 500000 Rs 1000000 Rs 2500000 Above Less than to Rs to Rs to Rs Rs Rs 500000 1000000 2500000 5000000 5000000 Total 1 1 0 0 0 2 Amount for Rs 5000 to Rs 10000 Derivatives 0 1 4 0 0 5 Rs 10000 to Rs 25000 Rs 25000 to Rs 50000 Above Rs 50000 Total 0 0 0 2 1 24

0 1

0 2

0 4

0 2

29 0

29 60

Category of Respondent * Nature Of the Transaction Count Nature Of the Transaction None Of the Above 0 23 11 9 0 9 43

Category of Respondent

financial Institute Exporter Importer Both Exporter and Import rofessionals

Arbitrator Speculator 2 4 0 0 0 1 3 0 0 0 1 5

Hedger 0 1 0 0

Total 6 24 11 9 10 60

Total

KCount

wlCat

ab ut iff rr f t*K

tiw f rwar

trum

t

Know forwards No Little High Very High Knowledge Knowledge Knowledge Knowledge 0 0 0 6 23 11 1 1 0 8 0 0 0 0 0 0

Total 6 24 11 9

Category of Respondent

financial Institute Exporter Importer Both Exporter and Import Professionals

0 35

0 9

9 9

1 7

10 60

Total

Category of Respondent * Count

no

futures

Know futures No Little High Very high Knowledge Knowledge knowledge Knowledge Total 0 0 2 4 6 11 11 0 13 0 9 0 0 0 0 0 0 24 11 9

Category of Respondent

financial Institute Exporter Importer Both Exporter and Import rofessionals

0 22

0 22 9

3

10 60

Total

Category of Respondent * Count

no

options

Know options Little Moderate High very High Knowledge Knowledge Knowledge Knowledge Total 0 1 3 2 6 1 11 9 23 0 0 0 0 0 0 0 0 24 11 9

Category of Respondent

financial Institute Exporter Importer Both Exporter and Import Professionals

0 21

0 24

4 7

6 8

10 60

Total

Category of Respondent * Count

no

s aps

Know swaps No Little Moderate High Very high Knowledge Knowledge Knowledge Knowledge Knowledge Total 0 0 1 4 1 6 24 0 8 0 11 1 0 0 0 0 0 0 0 0 0 24 11 9

Category of Respondent

financial Institute Exporter Importer Both Exporter and Import Professionals

0 32

0 12

1 2

1 5

8 9

10 60

Total

Use of derivative instrumentCategory of Respondent * Usage for ards Count Usage forwards Very Less Most Of time Not at all sometimes the time Always Total 0 0 5 1 0 6 10 11 9 0 30 14 0 0 1 15 0 0 0 8 13 0 0 0 0 1 0 0 0 1 1 24 11 9 10 60

Category of Respondent

financial Institute Exporter Importer Both Exporter and Import Professionals

Total

Category of Respondent * Usage futures Count Usage futures Very less time 0 Most of the time Sometimes Total 0 1 5 6 1 0 1 11 8 0 0 0 0 0 0 11 9

Not at all Category of Respondent financial Institute porter Importer Both porter and Import Professionals Total

0

8 9

0 5

10 60

Category of Respondent * Usage options Count Usage options very less Most of the time time Not at all sometimes always Total 0 0 1 4 1 6 1 0 0 13 11 1 10 0 8 0 0 0 0 0 0 24 11 9

Category of Respondent

financial Institute Exporter Importer Both Exporter and Import Professionals

0 1

0 25

1 20

9 13

0 1

10 60

Total

Category of Respondent * Usage s aps Count Usage swaps Very less Most of the time time Not at alll Sometimes Total 0 0 5 1 6 23 0 8 1 11 0 0 0 1 0 0 0 24 11 9

Category of Respondent

financial Institute Exporter Importer Both Exporter and Import Professionals

9 40

0 12

0 6

1 2

10 60

Total

Findingsy New concept of Exchange traded currency future trading is regulated by higher authority and regulatory. y Larger exporter and importer has continued to deal in the OTC counter even exchange traded currency future is available in markets. y In India RBI and SEBI has restricted other currency derivatives except Currency future, at this time if any person wants to use other instrument of currency derivatives in this case he has to use OTC.

Suggestionsy Managing Currency risks efficientlyy

Select your currency Seek more quotations Knowing the Spread Shift Exchange rate predictions Try to minimize dependence on one currency hedge

y

y

y

y

y

More Suggestionsy Currently in exchange traded currency future segment only one pair

USD-INR is available to trade so there is also one more demand by the exporters and importers to introduce another pair in currency trading. Like POUND-INR, CAD-INR etc.y In OTC there is no limit for trader to buy or short Currency futures so

there demand arises that in Exchange traded currency future should have increase limit for Trading Members and also at client level, in result OTC users will divert to Exchange traded currency Futures.y Should Introduced other currency derivatives in Exchange traded

currency derivative segment.

Conclusiony In terms of the growth of derivatives markets, and the variety of y

y y y

y

derivatives users, the Indian market has equalled or exceeded many other regional markets. By far the most significant event in finance during the past decade has been the extraordinary development and expansion of financial derivatives. There remain major areas of concern for Indian derivatives users. Large gaps exist in the range of derivatives products that are traded actively. The currency future gives the safe and standardized contract to its investors and individuals who are aware about the FOREX market . Exchange between USD-INR markets in India is very big and these exchange traded contract will give more awareness in market and attract the investors. As Indian derivatives markets grow more sophisticated, greater investor awareness will become essential

Bibliographyy Financial Derivatives (theory, concepts and problems)

By: S.L. Gupta.y y y y

NCFM: Currency future Module. BCFM: Currency Future Module. NISM: Currency Module. Report of the RBI-SEBI standing technical committee on exchange traded currency futures) 2008

y Websites:y y y y y y y

www.bonanzaonline.com www.nseindia.com www.bseindia.com www.mcxindia.com www.forextrading.com www.sebi.gov.in www.rbi.gov