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Group members:KinjalPranav
ManojSrikantMahesh
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Introduction to Currency Derivatives
Global Scenario
Indian Scenario
Regulations
Euro & its effect on India
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UnderlyingCommodities
Metals
DebtSecurities
InterestRates
Shares
Index
Currency
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BOP
Interest rates
Speculation
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Buy or sell currencies at a future date
Rates of exchange agreed on the very day ofdeal
Type of contract Settlement
Cash Same working day
Tom Next working day
Spot Second working day
Forward Beyond spot date
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Determination
Spot USD/INR 40.0250- 40.0300 Spot USD/CHF 1.3685-1.3695
+ 1 month 400- 450 - 1 month 35- 30
1 moth fwd USD/INR 40.0650-40.0750 1 month fwd USD/CHF 1.3650- 1.3665
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Example:
Bank A: Rs 46.7510- 46.7630 Bank B: Rs 46.7680- 46.7770
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Choice 1:
Deposit Rs10,00,000 `
Rate=6%
1 year:
`. 10,60,000
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Choice 2:
Invest @ 4%;
Amountgrows
Convert to Rsagain
Convert Rs
10,00,000 toBritish
pounds; rate=72.50
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Contract to exchange 1 currency with another
at specified date & rate in future
Features:
1. Standardized & exchange traded2. Contract size
3. Initial margin4. Maintenance margin
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Buy base currency (USD)
Expecting base currency to rise in value
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On 1 May, 2008 expects INR will depreciate
against USD
Buys 1USD/INR contract
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New rate 42.4600 x 000 42460
Previous rate 40.5800 x 000 40580
Profit Rs. 880
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Long ositionin f t res Short ositionin f t res
Buying Selling
Buy base currency Sell base currency
Want base currency to rise Want base currency to fall
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Take a position in futures market opposite to
position in physical market
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1 Jan,2008- import 1000 barrels-payment in USD on 1 July
Price= USD 110/barrel ; Rate= 1USD= ` 39.41
Cost of 1 barrel= `4335.10
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New rateon J ly 43.2300 x 0 4755.30
Previous rate 39.4100 x 110 4335.10
Increasedcost Rs. 420.20
Total increasedcost 420.20 x 1000 barrels Rs. 420200
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S ot market Futures market
Jan 1 1 USD= ` 39.41
Current Cost= 39.41*110*1000=4335100
July USD contract at IN` 39.90
Price per contract = 39.90*1000= I`NR
39900
Appro contracts 110000/1000= 110
Buy 110 contracts for 39900*110= 4389000
July 1 1 USD= IN` 43.23
Buy 110000 USD*43.23 = 4755300
Sell 110 contracts, rate= 43.72
Price per contract = 43.72*1000=` 43720
Hence, value of 110 contracts =
43720*110= 4809200
4755300- 4335100= 420200
4809200- 4389000= 420200
4755300- 420200= 4335100
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Holder has the right to exchange a fixed amount of
one currency for another at pre-fixed rate on or
upto a specified date in future.
Types
Call Put
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Importer purchases call option from BOI,
Amount= USD 1 million, rate= R`s 43.25 per
$, Delivery date 30th Sept, premium= R`s0.54/$
On 30th Sept., spot dollar rate
In the money
Spot price = 43.90
- Exercise price = 43.25
Pay off = 0.65
Out the money
Spot rate = 43.10
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Size of contract:62,500
Exercise price
0.90 /
The indicated contract priceis:
62,500 v $0.0125/ = $781.25
One call option gives the holder the right to purchase
62,500 for $56,250 (= 62,500 v $0.90/)Option price for
purchase of 1 at
90 is 1.25
Maturity month
One call option gives the holder
the right to purchase 62,500 for
$56,250. This option costs $781.25.
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EUR Euro to US dollar c.f.
GBP British pound to US dollar c.f.
CHF Swiss Franc to US dollar c.f.
AUD Australian dollar to US dollar c.f.
CAD Canadian dollar to US dollar c.f.
RP Euro to British pound c.f.
RF Euro to Swiss franc c.f.
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RANK EXCHANGE TRADING VOLUME (Numberof contracts)
1 Korea Exchange 2 474 593 261
2 Eurex 1 526 751 9023 Chicago Mercantile Exchange 1 403 264 034
4 Chicago Board of Trade 805 884 413
5 Euronext.liffe 730 303 126
6 Chicago Board Options Exchange 674 735 3487 International Securi-ties Exchange 591 961 518
8 Sao Paulo Stock Ex-change (Bovespa) 287 518 574
9 Bolsa de Mercadorias y Futuros 283 570 241
10 New York Mercantile Exchange 276 152 326
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CURRENCIES VALUE(percentage)
USD/EUR 31
USD/CHF 15
EUR/CHF 14
USD/JPY 11
USD/GBP 6
OTHER 23
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1992 1995 1998 2001 2004 2007
EUR/USD _ _ _ 30 28 27
USD/DEM 25 22 20 _ _ _
USD/FRF 2 4 4 _ _ _
USD/JPY 20 21 18 20 17 13GBP/USD 10 7 8 11 14 12
AUD/USD 2 3 3 4 5 6
USD/CHF 6 5 5 5 4 5
CAD/USD 3 3 3 4 4 4
USD/SEK _ _ _ _ _ 2
USD/other _ 17 25 17 16 19
EUR/JPY _ _ _ 3 3 2
EUR/GBP _ _ _ 2 2 2
EUR/CHF _ _ _ 1 1 2
OTHER 32 18 14 3 6 6
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The relative weight of the core currencies (EUR, USD,JPY and GBP) declined in April 2007.
USD has declined slightly in JPY and the CAD remains
unchanged. EUR as a base currency rose further between 2004
and 2007. TheGBP declined , confirming the global trend. The USD remains the most actively traded currency. Other currencies in futures are South African Rand,Hungarian Forint, Polish ,Zloty, Czech Koruna,Brazilian Real, Swedish Krona.
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Currency price stability
Easy access
Complete transparency Better liquidity
Lower transaction costs
Easy to trade
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Exchange traded instrument
Smaller lot size ($1000)
Elimination of counter-party risk Low brokerage charges
Decent intraday volatility
Transparency, efficiency and speed
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Contract Size USD 1000
Tick size R`s. 0.0025
Trading cycle 12 Months
Expiry day Last working day of month
Settlement basis Daily MTM on T+1 basis and final on cash basis on T+2basis
Settlement price RBI reference rate for last trading day of contract anddaily MTM settlement price is closing price for futures
contract for the trading daySettlement Cash settled
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NSE August 29, 2008
BSE October 1, 2008
MCX October 6, 2008
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Currency futures trading will be of interest to :
1. Investors
2. Hedgers
3. Arbitraguers
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RBI SEBI standing technical committee
BSE taking 15 % stake in United Stock ExchangeofIndia
Average combined daily trading volume aroundR` 2000 Crore
Retail participation increasing due to increasingawareness about the concept
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BIS Triennial Survey FX market in India 16th largestglobally in terms of total daily turnover
MCX SX daily turnover ofRs`
3838 Crore in JulyfromRs` 324 Crore inOctober
SMEs actively participating in the futures market dueto advantage of hedging as well as small brokeragecharges
Assocham wants extension in trade timings till 11.30pm from SEBI.
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NO. of contracts traded 70,000
First trade by East India Securities Ltd.
Among bank participants HDFC bank wasfirst to trade
Largest trade by Standard Chartered bank 15,000 contracts
Most active contract was Sept. 2008 expirywith 43,000 contracts being traded
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Month Avg. Vol.(Contracts)
Avg. daily value(Lakhs)
OI at the end of the month
Jan. 09 245,045 119,899 254,797
Feb.09 337,687 167,271 315,316
Mar.09 521,430 267,459 277,554
Apr.09 490,719 229,094 206,620
May 09 684,123 332,156 318,203
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Month Avg. Vol. (Contracts) Avg. daily value
(Lakhs)
OI at the end of
month
Jan.09 249,480 122,075 238,887
Feb.09 341,467 169,450 204,217
Mar.09 499,013 256,021 194,265
Apr.09 471,695 236,613 105,957
May 09 560,865 292,346 208,805
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MCX and NSE neck to neck competition withregards to volume and turnover
BSE also trying to enter into aggressive strategy
while partnering with USEI NSE offered to its members a free product called
TAME as a powerful tool for charting MCX providing the trading platform in Indian
languages as well for attracting the greatercustomer base from various corners of thecountry
MCX also tying up with trade bodies forregistering their members on its platform
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Perfect hedge not possible as compared to
OTC contract
Cost of hedge increases in futures as
compared to forward contract
FII participation will lead to more speculativeactivities and wide swings in currency trades
thus affecting trade balance
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Clearing Members
ClearingBanks
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The financial soundness of the members.
Upfront initial margin is charged for all the
open positions of a CM. The on line position monitoring system
monitors the member open positions.
Margin violations result in withdrawal of
trading facility.
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Initial margin
The initial security deposit paid by a member.
Minimum Initial margin of 1.75% on day of trade and thereafter 1%
Portfolio based margin
Portfolio margin accounting requires a margin position that is equalto the remaining liability that exists after all offsetting positions have
been netted against each other.
For example, if a position in the portfolio is netting a positive return,then it could offset the liability of a losing position in the sameportfolio.
This would reduce the overall margin requirement that is necessaryfor holding a losing derivatives position.
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Calendar spread margins. A currency futures position at one maturity
which is hedged by an offsetting position at a
different maturity is treated as a calendarspread. It is at a value ofRS`250 for all months of
spread.Extreme loss margin 1% of value of gross open positions. Shall be deducted from the liquid assets of
clearing member.
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Margin collection and enforcement.
Safeguarding clients money.
Periodic risk evaluation report. Surveillance.
Unique client code.
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Securities contracts(regulation)act,1956.
SEBI act,1992 .
RBI-SEBI standing technical committee.
FEMA 1999.
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The trading should take place through an
online.
Required independent clearing corporation. The exchange must have an online
surveillance capability.
The exchange shall have a balance sheet
networth of at least `100 crores.
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Should be a company incorporated under the
companies act,1956.
The CC must perform full novation.
The CC should enforce the stipulated margin
requirements,MTM settlement,EFT
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Coupling ofIndian economy with world
Volatility in currency
Increase in the share of emerging marketforeign exchange in total turnover
Increase in use of euro as invoice currency
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EU is India's largest trading partner
bilateral trade in Goods is expected to exceedEUR 70.7 billion by 2010 and EUR 160.6 billion
by 2015
Bilateral trade in services is expected toexceed EUR 246.8 billion by 2015
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Hedge instruments available to Indian firms will
rise
Advantages of trading on exchange
Low transaction cost
Enhance transparency, safety, and
competitiveness of a financial system
Individuals & SME participation Foreign exchange turnover will rise
Corporate has raised debt from foreign markets
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