currency derivatives & impact of different macro-economic indicators on currency movement

8/9/2019 Currency Derivatives & Impact of Different Macro-Economic Indicators on Currency Movement

1/50

___________________________________________________IMSCD&R Ahmednagar

B.P.H.E.SOCIETYSB.P.H.E.SOCIETYSInstitute of Management Studies Career Development &Institute of Management Studies Career Development &

Research, AhmednagarResearch, Ahmednagar

AA

PROJECT REPORTPROJECT REPORT

ONONCurrency Derivatives & Impact of Different Macro-Economic

Indicators on Currency Movement

SUBMITTED TO

THE UNIVERSITY OF PUNE

IN

PARTIAL FULFILMENT OF MASTERS DEGREE IN BUSINESS

ADMINISTRATION

UNDER THE GUIDANCE OF

Mr. D.A KULKARNI, M.Com; C.A.

Internal guide and faculty - M.B.A. Department

PREPARED BY

VINIT PATIL

(MBA-II 2010-11)

PREPARED FOR

ANGEL BROKINGS LTD.

CurrencyDerivatives______________________________________________________1


2/50


ACKNOWLEDGEMENT

I take this opportunity to express my deep gratitude to all those who

came out of their way to help me during the course of the project.

I express my deep sense of gratitude and profound thanks to our

Director, Mr. M.B MEHTA, for his kind help and support. Then I thankMr.

D.A KULKARNI, M.Com; C.A. - faculty guide,IMSCD & R Ahmednagar,

for timely help and guidance

I am grateful to express my sincere thanks to my friends and our seniors,

for their help and suggestions throughout the project.

I would also like to thank the Branch Manager & the staff of Angel

Brokings Limited, Pune for their constant support and guidance during my

project work.

Last but not the least I would like to give my best regards from the

bottom of my heart to my parents who have taken a lot of efforts to bring me

at this stage.

Patil

Vinit



3/50


ABBREVIATIONS

INITIALS TERMS

SEBI Securities and Exchange Board of India

F&O Future and Option

NSE National Stock Exchange

BSE Bombay Stock Exchange

MCX Multi Commodity Exchange

NCDEX National Commodity Exchange

NSDL National Securities Depository Limited

MTM Marking-to-market

GDP Gross Domestic Product

ATM At-the-money-option

OTC Over The Counter

OPEC The Organization of the Petroleum Exporting

Counties



4/50


INDEX

SERIAL

NO. TOPICS

PAGE

NO.

1 ABSTRACT 2

2 COMPANY PROFILE 3-6

3 RESEARCH DESIGN & METHODOLOGY 7

3.1 OBJECTIVES OF THE STUDY 8

3.2 SCOPE 9

3.3 TYPE OF DATA 9

3.4 LIMITATIONS 9

3.5 TOOLS OF ANALYSIS 10

4 INTRODUCTION TO THE TOPIC 11

4.1 DEFINITION OF FINANCIALDERIVATIVES 12

4.2 INTRODUCTION TO CURRENCY DERIVATIVES 12

4.3 INTRODUCTION TO CURRENCY FUTURE 13

4.4 OVERVIEW OF THE FOREIGN EXCHANGE MARKET IN INDIA 14

4.5 CURRENCY DERIVATIVE PRODUCTS 14

4.6 FUTURE TERMINOLOGY 15-18

4.7 USES OF CURRENCY FUTURES 19-20

4.8 TRADING PROCESS AND SETTLEMENT PROCESS 21

4.9 REGULATORY FRAMEWORK FOR CURRENCY FUTURES 21

4.10COMPARISION OF FORWARD AND FUTURES CURRENCYCONTRACT 22

4.11 CONTRACT SPECIFICATIONS FOR USD - INR 23

4.12 BENEFITS OF CURRANCY FUTURES 24

4.13 CURRENCY MOVEMENT 26-28

5 DATA ANALYSIS AND INTERPRETATION 29-41

6 RESEARCH FINDINGS 42

7 SUGGESTIONS 43

8 CONCLUSION 44

9 BIBLIOGRAPHY 45

10 WEBLIOGRAPHY 45



5/50


ABSTRACT

Each country has its own currency through which both national and international

transactions are performed. All the international business transactions involve an exchange

of one currency for another.

Thus, the currency units of a country involve an exchange of one currency for

another. The price of one currency in terms of other currency is known as exchange rate.

The foreign exchange markets of a country provide the mechanism of exchanging

different currencies with one and another, and thus, facilitating transfer of purchasing

power from one country to another.

With the multiple growths of international trade and finance all over the world,

trading in foreign currencies has grown tremendously over the past several decades. Since

the exchange rates are continuously changing, so the firms are exposed to the risk of

exchange rate movements. As a result the assets or liability or cash flows of a firm which

are denominated in foreign currencies undergo a change in value over a period of time due

to variation in exchange rates.

This variability in the value of assets or liabilities or cash flows is referred to

exchange rate risk.. As a result, these firms are increasingly turning to various risk hedging

products like foreign currency futures, foreign currency forwards, foreign currency

options, and foreign currency swaps.The purpose of the study is to gain knowledge about currency future market &

analyze the impact of different Macro-economic indicators on currency movement over the

past few years for the use of investors i.e.(Hedgers, Traders & Arbitragers) so as to

enhance their knowledge about volatility and possible direction of currency movement to

take a right decision.



6/50


COMPANY PROFILE

Angel Broking's tryst with

excellence in customer relations

began in 1987. Today, Angel has

emerged as one of the most

respected Stock-Broking and

Wealth Management Companies in India. With its unique retail-focused stock trading

business model, Angel is committed to providing Real Value for Money to all its clients.

The Angel Group is a member of the Bombay Stock Exchange (BSE), National Stock

Exchange (NSE) and the two leading Commodity Exchanges in the country: NCDEX &

MCX. Angel is also registered as a Depository Participant with CDSL.

Vision

To provide best value for money to investors through innovative products,

trading/investments strategies, state of the art technology and personalized service.

Motto

To have complete harmony between quality-in-process and continuous improvement

to deliver exceptional service that will delight our Customers and Clients.

CRM Policy: Customer is King

A Customer is the most Important Visitor on our premises. He is not dependent onus, but we are dependent on him. He is not an interruption in our work. He is the purpose

of it. He is not an outsider in our business. He is part of it. We are not doing him a favour

by serving him. He is doing us a favor by giving us an opportunity to do so. - Mahatma

Gandhi

Business Philosophy

Ethical practices & transparency in all our dealings

Customers interest above our ownAlways deliver what we promise

Effective cost management

Quality Assurance Policy

We are committed to providing world-class products and services which exceed

the expectations of our customers, achieved by teamwork and a process of

continuous improvement.



7/50


SERVICES OFFERED

Equity Trading- Angel provides guidance in the exciting world of stock market with

suitable trading solutions and value-added tools and services to enhance your trading

experience.

Online Trading

Three different online products tailored for traders & investors

Customized single screen Market Watch for multiple exchanges

Real-time rates

Flash news & intra-day calls

Intra-day & historical charts with technical tools

Online research

E-broking & back-office software training

Quality Research

Wide range of daily, weekly and special Research reports

Expert Sector Analysts with professional industry experience

Advisory

Real-time market information with News updates

Investment Advisory services

Dedicated Relationship Managers Portfolio Management Services

Support

24x7 Web-enabled Back Office

Centralized Help Desk

Live Chat support system

Commodities

Portfolio Management Services

Mutual Funds

Life Insurance

Personal Loans

IPO

Depository Services

Investment Advisory



8/50


CURRENCY TRADING

Low Commissions: Brokerage fees are very low as the market is highly competitive.

No Middlemen : Futures/Options currency trading does away with the middleman and

allows clients to interact directly on the exchange platform.

Standardized Lot Size : In the futures markets, exchanges determine lot or contract sizes

which are fixed in nature. This allows traders to trade in multiple lots.

Low Transaction Cost : The retail transaction cost (the bid/ask spread) is typically less

than 0.1% under normal market conditions. In large deals, the spread could be as low as

0.07%.

High Liquidity : With an average trading volume of over $4 trillion per day, Forex market

has high liquidity. It means that a trader can enter or exit the market at will in almost any

market condition.Instant Transactions: This is a very advantageous by-product of high liquidity. Low

Margin, High Leverage: These factors increase the potential for higher profits (and losses).

Online Access: The big boom in Forex came with the advent of online trading platforms.

Interbank Market: The backbone of the Forex market consists of a global network of

dealers. They are mainly major commercial banks that communicate and trade with one

another and with their clients through electronic networks and by telephone. There is no

organized exchange to serve as a central location to facilitate transactions the way the New

York Stock Exchange serves the equity markets. The Forex market operates in a manner

similar to that of the NASDAQ market in the United States. Thus, it is also referred to as an

over-the counter (OTC) market.

Self-regulatory: The Forex market is so vast and has so many participants that no single

entity, not even a Central Bank, can control the market price for an extended period. Even

interventions by mighty Central Banks are becoming increasingly ineffectual and short-

lived. Thus, Central Banks are becoming less and less inclined to intervene and manipulate

currency prices.

No Insider trading: because of the Forex markets size and non-centralized nature, there

is virtually any chance for ill effects caused by insider trading. Fraud possibilities, at least

against the system as a whole, are significantly less than in any other financial instruments.

Limited Regulation: There is limited governmental influence via regulation in the Forex

markets, primarily because there is no centralized location or exchange.



9/50


Milestones

Angel Broking bagged the coveted Major Volume Driver Award by BSE for

2008-09, 2007-2008, 2006-2007, 2005-2006, and 2004-2005.

May, 2009- Angel Broking wins two prestigious awards for 'Broking House

with Largest Distribution Network' and 'Best Retail Broking House' at Dun &

Bradstreet Equity Broking Awards.

July, 2006- Angel Broking launches Portfolio Management Services (PMS)

April, 2004- Angel Broking expands its basket of services by establishing the

Commodity Broking division

December, 1997- Angel Broking Ltd incorporated as a wealth management,

retail and corporate broking firm.



10/50


RESEARCH DESIGN

&

METHODOLOGY



11/50


OBJECTIVES OF THE STUDY

1. To study the exchange traded currency future.

2. To study & analyze the impact of different Macro-Economic indicators on Indian

Currency.

Inflation

Crude Oil Prices

Gross Domestic product (GDP)

S&P CNX Nifty

3. To understand the practical considerations and ways of considering currency

Future price.

4 .To analyze different currency derivatives products



12/50


SCOPE

1. Study mainly concentrates on USD/INR EXHANGE RATE contracts though NSE has

introduced trading in currency futures based on

Euro(EUR)-INR

Pound Sterling(GBP)-INR

Japanese Yen (JPY)-INR exchange rates

2. The main factor that affects the USD/INR EXHANGE RATE or any other currency is

the Demand/supply dynamics for the individual currencies. However the Demand/supply

dynamics is influenced by many other factors such as interest rates, inflation, money

supply, trade balance, growth in imports, exports, capital flows, and overall economic

growth in the country and global developments.

Due to time constraints only four major economic indicators are selected for analysis

Inflation

Crude Oil Prices

Gross Domestic product (GDP)

S&P CNX Nifty

TYPE OF DATA

Primary Data:

1. The data collected from the Live Terminal of Angel Broking Ltd.

2. Firsthand information from Angel Broking staff

Secondary data:

1. The secondary data is also collected from the newspapers, magazines, different

websites report submitted by RBI/SEBI committee and NCFM/BCFM modules

periodicals.

2. A major bulk of the data has been obtained from Angel Broking Ltd.

LIMITATIONS

Only four economic indicators are selected for the study

The currency future is new concept and topic related book was not available in

library and market

Some part of analysis was purely based on the secondary data. So any error in the

secondary data might also affect the study undertaken.



13/50


TOOLS OF ANALYSIS

Karl Pearsons correlation coefficient

In statistics, correlation indicates the strength and direction of a linear relationship

between two random variables.

The quantity r, called the linear correlation coefficient, measures the strength and the

direction of a linear relationship between two variables. The linear correlation coefficient

is sometimes referred to as the Pearson product moment correlation coefficient in honor of

its developer Karl Pearson.

The mathematical formula for computing r is:

Where n is the number of pairs of data.

The value of r is such that -1 < r < +1. The + and signs are used for positive linear

correlations and negative linear correlations, respectively.

Positive correlation: If x and y have a strong positive linear correlation, r is close to +1.

An r value of exactly +1 indicates a perfect positive fit. Positive values indicate a

relationship between x and y variables such that as values for x increases, values for y also

increase.

Negative correlation: If x and y have a strong negative linear correlation, r is close to

-1. An r value of exactly -1 indicates a perfect negative fit. Negative values indicate a

relationship between x and y such that as values for x increase, values for y decrease.

No correlation: If there is no linear correlation or a weak linear correlation, r is close to

0. A value near zero means that there is a random, nonlinear relationship between the two

variables

http://en.wikipedia.org/wiki/Statisticshttp://en.wikipedia.org/wiki/Random_variableshttp://en.wikipedia.org/wiki/Statisticshttp://en.wikipedia.org/wiki/Random_variables


14/50


INTRODUCTION TO THE TOPIC



15/50


DEFINITION OF FINANCIAL DERIVATIVES

Derivatives are financial contracts whose value/price is independent on the behaviour

of the price of one or more basic underlying assets. These contracts are legally binding

agreements, made on the trading screen of stock exchanges, to buy or sell an asset in future.

These assets can be a share, index, interest rate, bond, rupee dollar exchange rate, sugar,

crude oil, soybeans, cotton, coffee and what you have.

A very simple example of derivatives is curd, which is derivative of milk. The price

of curd depends upon the price of milk which in turn depends upon the demand and supply

of milk.

The Underlying Securities for Derivatives are :

Commodities: Castor seed, Grain, Pepper, Potatoes, etc.

Precious Metal : Gold, Silver

Short Term Debt Securities : Treasury Bills

Interest Rates

Common shares/stock

Stock Index Value : NSE Nifty

Currency : Exchange Rate

INTRODUCTION TO CURRENCY DERIVATIVES

Each country has its own currency through which both national and international

transactions are performed. All the international business transactions involve an

exchange of one currency for another.

For Example,

If any Indian firm borrows funds from international financial market in US dollars for

short or long term then at maturity the same would be refunded in particular agreed

currency along with accrued interest on borrowed money. It means that the borrowed

foreign currency brought in the country will be converted into Indian currency, and when

borrowed fund are paid to the lender then the home currency will be converted into foreign

lenders currency. Thus, the currency units of a country involve an exchange of one

currency for another.

The price of one currency in terms of other currency is known as exchange rate.

The foreign exchange markets of a country provide the mechanism of exchanging

different currencies with one and another, and thus, facilitating transfer of purchasing

power from one country to another.



16/50


With the multiple growths of international trade and finance all over the world,

trading in foreign currencies has grown tremendously over the past several decades. Since

the exchange rates are continuously changing, so the firms are exposed to the risk of

exchange rate movements. As a result the assets or liability or cash flows of a firm which

are denominated in foreign currencies undergo a change in value over a period of time due

to variation in exchange rates.

This variability in the value of assets or liabilities or cash flows is referred to

exchange rate risk. Since the fixed exchange rate system has been fallen in the early

1970s, specifically in developed countries, the currency risk has become substantial for

many business firms. As a result, these firms are increasingly turning to various risk

hedging products like foreign currency futures, foreign currency forwards, foreign

currency options, and foreign currency swaps.INTRODUCTION TO CURRENCY FUTURE

A futures contract is a standardized contract, traded on an exchange, to buy or sell a

certain underlying asset or an instrument at a certain date in the future, at a specified price.

When the underlying asset is a commodity, e.g. Oil or Wheat, the contract is termed a

Commodity futures contract

. When the underlying is an exchange rate, the contract is termed a Currency futures

contract.

Currency futures contract

In other words, it is a contract to exchange one currency for another currency at a

specified date and a specified rate in the future.

Therefore, the buyer and the seller lock themselves into an exchange rate for a

specific value or delivery date. Both parties of the futures contract must fulfil their

obligations on the settlement date.

Currency futures can be cash settled or settled by delivering the respective obligation

of the seller and buyer. All settlements however, unlike in the case of OTC markets, go

through the exchange. Currency futures are a linear product, and calculating profits or

losses on Currency Futures will be similar to calculating profits or losses on Index

futures. In determining profits and losses in futures trading, it is essential to know both the

contract size (the number of currency units being traded) and also what the tick value is. A

tick is the minimum trading increment or price differential at which traders are able to

enter bids and offers. Tick values differ for different currency pairs and different

underlying.



17/50


OVERVIEW OF THE FOREIGN EXCHANGE MARKET IN INDIA

During the early 1990s, India embarked on a series of structural reforms in the

foreign exchange market. The exchange rate regime, that was earlier pegged, was partially

floated in March 1992 and fully floated in March 1993. The unification of the exchange

rate was instrumental in developing a market-determined exchange rate of the rupee and

was an important step in the progress towards total current account convertibility, which

was achieved in August 1994.

The following four currency futures are allowed on the Indian exchanges.

Symbol Country Currency Nickname

USD United States Dollar Geenback

EUR Euro members Euro Fiber

JYP Japan Yen Yen

GBP Great Britain Pound Cable

India is 16th largest forex market in the world. The daily global FX turnover is USD 4

Trillion.

Market Share in World FX Market has increased from 0.1% (in 1998) to 0.9%

( 2009)

Daily FX Indian Market volume is $50 bn

59% of the total market USD INR

Daily Currency Futures Turnover Rs 32000 Crs. (NSE + MCX SX)

Main trading centers are London, NY, Tokyo, Singapore &now In MUMBAI

USD-INR volatility has seen an average increase of over 9% p.a.

Available FX Derivatives: Futures, Forwards, Options & Swaps

CURRENCY DERIVATIVE PRODUCTS

Derivative contracts have several variants. The most common variants are forwards,

futures, options and swaps. We take a brief look at various derivatives contracts that have

come to be used.

FORWARD:

A forward contract is customized contract between two entities, where settlement

takes place on a specific date in the future at todays pre-agreed price. The exchange rate

is the time the contract is entered into. This is known as forward exchange rate or simply

forward rate.

FUTURE :



18/50


A currency futures contract provides a simultaneous right and obligation to buy and

sell a particular currency at a specified future date, a specified price and a standard

quantity. Future contracts are special types of forward contracts in the sense that they are

standardized exchange-traded contracts.

SWAP

Swap is private agreements between two parties to exchange cash flows in the future

according to a prearranged formula.

OPTIONS:

In other words, a foreign currency option is a contract for future delivery of a

specified currency in exchange for another in which buyer of the option has to right to buy

(call) or sell (put) a particular currency at an agreed price for or within specified period.

FUTURE TERMINOLOGY

SPOT PRICE:

The price at which an asset trades in the spot market. The transaction in which

securities and foreign exchange get traded for immediate delivery. Since the exchange of

securities and cash is virtually immediate, the term, cash market, has also been used torefer to spot dealing. In the case of USD/INR, spot value is T + 2.

FUTURE PRICE:

The price at which the future contract traded in the future market.



19/50


CONTRACT CYCLE:

The period over which a contract trades. The currency future contracts in Indian

market have one month, two month, and three month up to twelve month expiry cycles. In

NSE/BSE will have 12 contracts outstanding at any given point in time.

VALUE DATE / FINAL SETTELMENT DATE:

The last business day of the month will be termed the value date /final settlement date

of each contract. The last business day would be taken to the same as that for inter bank

settlements in Mumbai. The rules for inter bank settlements, including those for known

holidays and would be those as laid down by Foreign Exchange Dealers Association of

India (FEDAI).

EXPIRY DATE:

It is the date specified in the futures contract. This is the last day on which thecontract will be traded, at the end of which it will cease to exist. The last trading day will

be two business days prior to the value date / final settlement date.

CONTRACT SIZE:

The amount of asset that has to be delivered under one contract, also called as lot

size. In case of USD/INR it is USD 1000.

COST OF CARRY :

The relationship between futures prices and spot prices can be summarized in terms

of what is known as the cost of carry. This measures the storage cost plus the interest that

is paid to finance or carry the asset till delivery less the income earned on the asset. For

equity derivatives carry cost is the rate of interest.

INITIAL MARGIN:

When the position is opened, the member has to deposit the margin with the clearing

house as per the rate fixed by the exchange which may vary asset to asset. Or in another

words, the amount that must be deposited in the margin account at the time a future

contract is first entered into is known as initial margin.



20/50


MARKING TO MARKET:

At the end of trading session, all the outstanding contracts are reprised at the

settlement price of that session. It means that all the futures contracts are daily settled, and

profit and loss is determined on each transaction. This procedure, called marking to

market, requires that funds charge every day. The funds are added or subtracted from a

mandatory margin (initial margin) that traders are required to maintain the balance in the

account. Due to this adjustment, futures contract is also called as daily reconnected

forwards.

MAINTENANCE MARGIN:

Members account are debited or credited on a daily basis. In turn customers

account are also required to be maintained at a certain level, usually about 75 percent of

the initial margin, is called the maintenance margin. This is somewhat lower than theinitial margin.

This is set to ensure that the balance in the margin account never becomes negative.

If the balance in the margin account falls below the maintenance margin, the investor

receives a margin call and is expected to top up the margin account to the initial margin

level before trading commences on the next day.

TICK SIZE/PIP & TICK VALUE

Tick Size is the minimum tradable price movement that an exchange makes in a

currency pair. For example, 1 pip=one hundredth of 1%=0.0001.

Tick value is the change in value of 1 lot of the future contract for every tick

movement.

For example; If a trader takes long position in 1lot of USD/INR currency future

contract at 48.5020 & if future price increased by 1 paisa to 48.5125, then the trader would

make a profit of Rs 10 i.e. 1 pip = 0.0001 100pips = INR0.01 per USD Hence profit is

0.01*1000 = INR 10

BID PRICE & ASK PRICE:

The Bid price is the highest or the best among all prices that the buyers are willing to

pay to the seller at that particular period of time.

The Ask price is the price at which seller at the exchange are ready to sell their

currency to the buyers.



21/50


LONG POSITION & SHORT POSITION:

Taking a long position in currency futures means a trader will buy a futures

contract with the expectation that the price will rise in the future.

On the other hand taking a short position means that a trader will sell a futures

contract with the expectation that the price will decrease in the future.

BASIS:

Basis refers to difference between the spot rate & the future contract price

BASE CURRENCY & QUOTE CURRENCY:

The first currency in the currency pair is referred to as the base currency & the

second currency in a currency pair is called the quote currency. In USD/INR currency pair

USD- Base currency & INR-Quote currency.

FOREIGN EXCHANGE QUOTATIONSForeign exchange quotations can be confusing because currencies are quoted in terms

of other currencies. It means exchange rate is relative price.

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.

Direct- $1 = Rs. 45.7250 Indirect. Re 1 = $ 0.02187



22/50


USES OF CURRENCY FUTURES

HEDGING:

Exchange-traded currency futures are used to hedge against the risk of rate volatilities

in the foreign exchange markets. Here, we give two examples to illustrate the concept and

mechanism of hedging

Suppose an edible oil importer wants to import edible oil worth USD 100,000 and

places his import order on July 15, 2008, with the delivery date being 4 months ahead. At

the time when the contract is placed, in the spot market, one USD was worth say INR

44.50. But, suppose the Indian Rupee depreciates to INR 44.75 per USD when the

payment is due in October 2008, the value of the payment for the importer goes up to INR

4,475,000 rather than INR 4,450,000. The hedging strategy for the importer, thus, would

be:

Current Spot Rate (15th July '08)

Buy 100 USD - INR Oct '08 Contracts

on 15th July 08

: 44.5000

(1000 * 44.5500) * 100 (Assuming the Oct '08

contract is trading at 44.5500 on 15th July, '08)

Sell 100 USD - INR Oct '08 Contracts

in Oct '08 Profit/Loss (futures market)

: 44.7500

1000 * (44.75 44.55) * 100 = 20,000

Purchases in spot market @ 44.75 Totalcost of hedged transaction

: 44.75 * 100,000100,000 * 44.75 20,000 = INR 4,455,000

SPECULATION:

Take the case of a speculator who has a view on the direction of the market. He

would like to trade based on this view. He expects that the USD/INR rate presently at

Rs.42, is to go up in the next two-three months. How can he trade based on this belief? In

case he can buy dollars and hold it, by investing the necessary capital, he can profit if say

the Rupee depreciates to Rs.42.50. Assuming he buys USD 10000, it would require an

investment of Rs.4,20,000. If the exchange rate moves as he expected in the next three

months, then he shall make a profit of around Rs.5000. This works out to an annual

return of around 4.76%. It may please be noted that the cost of funds invested is not

considered in computing this return.

A speculator can take exactly the same position on the exchange rate by using futures

contracts. Let us see how this works. If the INR/USD is Rs.42 and the three month futures

trade at Rs.42.40. The minimum contract size is USD 1000. Therefore the speculator



23/50


may buy 10 contracts. The exposure shall be the same as above USD 10000. Presumably,

the margin may be around Rs.21, 000. Three months later if the Rupee depreciates to Rs.

42.50 against USD, (on the day of expiration of the contract), the futures price shall

converge to the spot price (Rs. 42.50) and he makes a profit of Rs.1000 on an investment

of Rs.21, 000. This works out to an annual return of 19 %. Because of the leverage they

provide, futures form an attractive option for speculators.

ARBITRAGE:

Arbitrage is the strategy of taking advantage of difference in price of the same or

similar product between two or more markets. That is, arbitrage is striking a combination

of matching deals that capitalize upon the imbalance, the profit being the difference

between the market prices..One of the methods of arbitrage with regard to USD-INR could be a trading strategy

between forwards and futures market. As we discussed earlier, the futures price and

forward prices are arrived at using the principle of cost of carry. Such of those entities who

can trade both forwards and futures shall be able to identify any mis-pricing between

forwards and futures. If one of them is priced higher, the same shall be sold while

simultaneously buying the other which is priced lower. If the tenor of both the contracts is

same, since both forwards and futures shall be settled at the same RBI reference rate, the

transaction shall result in a risk less profit.



24/50


TRADING PROCESS AND SETTLEMENT PROCESS

Like other future trading, the future currencies are also traded at organized

exchanges. The following diagram shows how operation take place on currency future

market:

It has been observed that in most futures markets, actual physical delivery of the

underlying assets is very rare and hardly it ranges from 1 percent to 5 percent. Most often

buyers and sellers offset their original position prior to delivery date by taking an opposite

positions. This is because most of futures contracts in different products are predominantly

speculative instruments.

REGULATORY FRAMEWORK FOR CURRENCY FUTURES

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 was

constituted.



25/50


COMPARISION OF FORWARD AND FUTURES CURRENCY CONTRACT

CONTRACT SPECIFICATIONS FOR USD - INR

Symbol USD/INR

Instrument Type FUTCUR Unit of trading 1 (1 unit denotes 1000 USD)


BASIS FORWARD FUTURES

Size

Structured as per requirement of the

parties Standardized

Delivery Date Tailored on individual needs Standardized

Method of

transaction

Established by the bank or broker

through electronic media

Open auction among buyers

and seller on the floor of

recognized exchange.

Participants

Banks, brokers, forex dealers,

multinational companies,institutional investors, arbitrageurs,

traders, etc.

Banks, brokers,

multinational companies,

institutional investors, small

traders, speculators,

arbitrageurs, etc.

MarginsNone as such, but compensating

bank balanced may be requiredMargin deposit required

MaturityTailored to needs: from one week to

10 yearsStandardized

Settlement

Actual delivery or offset with cash

settlement. No separate clearing

house

Daily settlement to the

market and variation margin

requirements

Market placeOver the telephone worldwide and

computer networks

At recognized exchange

floor with worldwide

communications

AccessibilityLimited to large customers banks,

institutions, etc.

Open to any one who is in

need of hedging facilities or

has risk capital to speculate

DeliveryMore than 90 percent settled by

actual delivery

Actual delivery has very less

even below one percent

Secured Risk is high being less securedHighly secured through

margin deposit.


26/50


Underlying USD

Quotation/Price Quote Rs. per USD

Tick size 0.25 paise or INR 0.0025

Trading hoursMonday to Friday

9:00 a.m. to 5:00 p.m.Contract trading cycle 12 month trading cycle.

Last trading dayTwo working days prior to the last business day of the

expiry month at 12 noon.

Final settlement day

Last working day (excluding Saturdays) of the expiry

month.

The last working day will be the same as that for

Interbank Settlements in Mumbai.

Base price Theoretical price on the 1st day of the contract. On all

other days, DSP of the contract.

Minimum initial margin 1.75% on first day & 1% thereafter.

Extreme loss margin 1% of MTM value of gross open position.

SettlementDaily settlement : T + 1

Final settlement : T + 2

Mode of settlement Cash settled in Indian Rupees

Daily settlement price

(DSP)

DSP shall be calculated on the basis of the last half an

hour weighted average price of such contract or such other

price as may be decided by the relevant authority from

time to time.

Final settlement price

(FSP)RBI reference rate

BENEFITS OF CURRANCY FUTURES

Greater accessibility to potential participants (Online / Offline platforms).

Standardized Contracts, small lot size US$ 1,000. Encourages retail and SME

participation.

Electronic Settlement of MTM Profits / Losses: Control and track losses.



27/50


No counterparty default risk.

Large number of market participants.

High Transparency Real time dissemination of prices.

No requirement of underlying document to book the FCY.

Cost efficient: Low brokerage thus lower transaction cost.

Intraday volatility (43 Bps): Short term profits for the traders.

Lower margins: 3- 3.5% of the contract value compared to average of 10- 15%

on index/stock futures.



28/50


Indian Currency Futures Market-Present Status

Currency Futures trading was launched in India on 29 th Aug, 2008 on NSE.NSE &

MCXSX are the major two exchanges presently.BSE is almost non-active.

Times of India- Aug 31st, 2009

It has been exactly one year since the trading in Rupee Dollar futures was

introduced in India. Since then the currency derivative segment has grown by over 1500%

in terms of daily average turnover. From about $ 60 million per day in August September

2008, the current rate is nearly $1 billion per day in each of the two.

The Financial Express Feb 6th, 2010

The total turnover in the segment has increased incredibly from $ 3.4 bn in

October2008 to $84 bn in December 2009. The average daily volume reached $4 bn in

December 2009. India had witnessed enhanced FIIs thus Indian currency is becoming an

important currency in world market . According to BIS, the total share of Indian rupee in

total daily average foreign exchange has increased from 0.1% in 1998 to 0.9% in April

2007. Since the exchange rate is volatile during the last few years and hence increased

importance of ETF.



29/50


Currency Movement

Major Events in International and Indian Monetary System

1. Free float of currencies - 1973.

2. Oil crisis in 1973 - quadrupling of oil prices

3. European Currencies float against US$ - 1978

4. Post emergency years

5. Majority Govt. formed - 1984-85

6. Liberalization of Indian Economy: devaluation of INR - 1991

7. East and South East Asian Currency crisis - 1997

8. Nuclear tests by India - 1998

9. Robust economic growth in India

10. High crude oil and commodity prices



30/50


Currency Movement Impact

Importer Exporter

Imports Goods & Services Exports Goods & Services

Payments in foreign currency Receivables in foreign currency

Buys currency from the bank Sells currency to the bank

Re - STRONG Gain Re - STRONG Loss

Re - WEAK Loss Re - WEAK Gain

Factors: Appreciation of INR

Events likely to impact

USD/INR rate

General trend for

demand/supply ofUSD

Impact on

USD

Impact on

INR

Increase in exports of

India

Excess inflow of USD

in the countryDepreciates Appreciates

RBI is selling USD to

meet demand for the dollar

Supply of USD

increasesDepreciates Appreciates

NRI Forex remittance is

increasing Increase in USD inflow Depreciates Appreciates

Positive trade balance Increase in USD inflow Depreciates Appreciates



31/50


Factors: Depreciation of INR


Events likely to

impact USD/INR

rate

General trend for

demand/supply of USD

Impact on

USD

Impact on

INR

Increase in imports of

India

Demand for USD

increasesAppreciates Depreciates

Rise in global prices

of commodities

Demand for USD rises

due to costlier importsAppreciates Depreciates

FIIs buying back

USDExcessive USD outflow Appreciates Depreciates

RBI is buying USD

to absorb excess

USD due to forex

inflows

Absorption of excess

USD liquidityAppreciates Depreciates


32/50


DATA ANALYSIS &

INTERPRETATION



33/50


TABLE NO. I

Table of Correlation between Rates of Inflation & USD/INR EXHANGE Rate

43.1144.95

47.19 48.6 46.55 45.33 44.11 45.33

41.29

43.41

48.35

4.67 4 3.68 4.39 3.8 3.77 4.245.8 6.37

8.3510.14

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

USD/INR Vs Inflation Rate

Annual Averages of USDINR Rate Inflation Rate (annual %)


Year

Annual

Averages of

Currency

rate

GDP

growth

(annual

%)

X Y XY X2 Y2

1999 43.11 7.387 - - - -

2000 44.95 4.03 4.268 -45.441 -193.951 18.217 2064.926

2001 47.19 5.216 4.983

29.438

3

146.700

4 24.833 866.6154

2002 48.6 3.766 2.987 -27.795 -83.0508 8.9276 772.5912

2003 46.55 8.37 -4.21

122.22

6 -515.564 17.792 14939.31

2004 45.33 8.278 -2.62 -1.1076

2.90305

7 6.8687 1.226961

2005 44.11 9.352 -2.69

12.975

2 -34.9213 7.2434 168.3581

2006 45.33 9.669 2.765

3.3900

2

9.37618

3 7.6497 11.49229

2007 41.29 9.06 -8.91 -6.2976

56.1271

6 79.431 39.66019

2008 43.41 6.074 5.134 -32.951 -169.188 26.362 1085.827

2009 48.35 5.36 11.37 -11.766 -133.906 129.5 138.462

= 13.076

42.668 -915.48 326.827

20088.5


34/50


SAMPLE CALCULATIONS:

USD/INR Growth rate for Year-2000

= {[(44.95-43.11)/43.11]*100}

=4.268151

Change in Inflation Rate for Year-2000

= {[(4.67-4)/4]*100}

=-14.34

Calculation of Coefficient Of Correlation between Inflation & Exchange Rate:

Where;x = Annual Growth Rate of USD/INR EXHANGE Ratey = Annual Growth Rate of Inflation Raten = Number of Observations = 11

(11*339.47) [(13.07)*(94.32)]

r = ____________________________________________________

__________________________ ___________________________

{(11)*(326.82) 170.82} * {(11)*(3854.72) 8896.26}

r = 0.2951

INTERPRETATION:

The coefficient correlation (r = 0.2951) shows that there is a positive correlation.

Though there is no strong correlation between two. Positive values indicate a relationship

between x and y variables such that as rate of inflation increases, values of USD/INR

exchange rate also increases.

If domestic inflation rate is higher

Domestic goods are costlier than foreign goods

It encourages import of foreign goods

Foreign goods are cheaper

More demand for foreign currencies

Foreign currencies are costlier

Decline in the value of domestic currencies

More demand for foreign currency results in Depreciation of Domestic currency.

Thus higher Inflation leads to weakening of Domestic Currency.



35/50


TABLE NO. II

Table of Correlation between USD/INR EXHANGE Rate & S&P CNX Nifty

Month

Monthly

Averages of

USD/INR

Rate

Monthly

Averages

of Nifty

X Y XY X2 Y2

Jun-07 40.77 4222.17

Jul-07 40.41 4474.18 0.883 5.968 5.27 0.779 35.625

Aug-07 40.81 4301.35 0.989 -3.86 -3.82 0.979 14.921

Sep-07 40.34 4659.92 -1.15 8.336 -9.6 1.326 69.492

Oct-07 39.51 5456.61 -2.05 17.09 -35.1 4.233 292.29

Nov-07 39.44 5748.57 -0.17 5.35 -0.94 0.031 28.628

Dec-07 39.44 5963.57 0 3.74 0 0 13.988

Jan-08 39.37 5756.35 -0.17 -3.47 0.616 0.031 12.073

Feb-08 39.72 5201.56 0.889 -9.63 -8.56 0.79 92.888

Mar-08 40.35 4769.49 1.586 -8.3 -13.1 2.515 68.998Apr-08 40.02 4901.9 -0.81 2.776 -2.27 0.668 7.7072

May-08 42.12 5028.66 5.247 2.585 13.56 27.53 6.687

Jun-08 42.82 4463.78 1.661 -11.2 -18.6 2.761 126.18

Jul-08 42.83 4121.6 0.023 -7.66 -0.17 0 58.762

Aug-08 42.94 4417.11 0.256 7.169 1.841 0.065 51.405

Sep-08 45.56 4206.68 6.101 -4.76 -29 37.22 22.695

Oct-08 48.64 3210.22 6.76 -23.6 -160 45.7 561.1

Nov-08 49 2834.78 0.74 -11.6 -8.65 0.547 136.77

Dec-08 48.64 2895.79 -0.73 2.152 -1.58 0.539 4.6319

Jan-09 48.83 2854.36 0.39 -1.43 -0.55 0.152 2.0468

Feb-09 49.22 2819.2 0.798 -1.23 -0.98 0.637 1.5173Mar-09 51.23 2802.27 4.083 -0.6 -2.45 16.67 0.3606

Apr-09 50.06 3359.82 -2.28 19.89 -45.4 5.215 395.86

May-09 47.29 3957.96 -5.53 17.8 -98.5 30.61 316.93

Jun-09 47.77 4436.37 1.015 12.08 12.26 1.03 146.1

Jul-09 48.47 4343.09 1.465 -2.1 -3.08 2.147 4.421

Aug-09 48.34 4571.1 -0.26 5.249 -1.4 0.071 27.561

Sep-09 48.43 4859.3 0.186 6.304 1.173 0.034 39.75

Oct-09 46.72 4994.1 -3.53 2.774 -9.79 12.46 7.6954

Nov-09 46.57 4953.53 -0.32 -0.81 0.26 0.103 0.6599

Dec-09 46.63 5099.74 0.128 2.951 0.38 0.016 8.7121Jan-10 45.96 5156.22 -1.43 1.107 -1.59 2.064 1.2265

Feb-10 46.32 4839.57 0.783 -6.14 -4.81 0.613 37.713

Mar-10 45.5 5178.14 -1.77 6.995 -12.3 3.133 48.942

Apr-10 44.5 5294.75 -2.19 2.251 -4.94 4.83 5.0713

May-10 45.8 5052.97 2.921 -4.56 -13.3 8.534 20.852

Jun-10 46.56 5187.77 1.659 2.667 4.426 2.753 7.1168

=16.11

3

34.05

3

451.3

4

216.8

42677.42



36/50


r = -0.625

Interpretation- The coefficient correlation (r = -0.625) shows that there is a negative

correlation. As x and y have a strong negative linear correlation, r is close to -1. .Negative

values indicate a relationship between USD/INR EXHANGE Rate and S&P CNX Nifty

such that as values for x increase, values for y decrease.

One of the reasons for Nifty Index to go up is investment made by Foreign

Institutional Investors (FIIs).Thus FIIs have to sell Dollar to buy Indian rupee.

More demand for Domestic currency and excessive supply of foreign currency results

in Appreciation of Domestic currency.


X-%change in USDINRover the previoud

month

Y-%Change in Nifty ovethe previous month

-20

-15

-10

-5

0

5

10

15

20

cangeovereprevourmon

USD/INR Vs S&P CNX Ni


37/50


TABLE NO. III



38/50


Table of Correlation between USD/INR EXHANGE Rate & Crude Oil Prices (US$/Barrel)


Month

Monthly

Averages

of

Currency

rate

Monthly Averages

of Crude Oil

Prices(US$/Barrel)

X Y XY X2 Y2

Jun-07 40.77 66.89

Jul-07 40.41 71.89 -0.887.474 -6.6

0.779 55.875

Aug-07 40.81 68.70.989 -4.43 -4.392

0.979 19.689

Sep-07 40.34 74.17 -1.157.962 -9.169

1.326 63.395

Oct-07 39.51 79.32 -2.056.943 -14.28

4.233 48.212

Nov-07 39.44 88.84 -0.17 12 -2.1260.031 144.04

Dec-07 39.44 87.05 0 -2.01 0 0 4.0596

Jan-08 39.37 88.35 -0.171.493 -0.265

0.031 2.2302

Feb-08 39.72 90.640.889

2.591 2.3042 0.79 6.7182

Mar-08 40.35 90.021.586 -0.68 -1.084

2.515 0.4678

Apr-08 40.02 105.16 -0.8116.81 -13.75

0.668 282.86

May-08 42.12 119.385.247

13.52 70.956

27.53 182.85

Jun-08 42.82 128.331.661

7.497 12.459

2.761 56.206

Jul-08 42.83 131.220.023

2.252 0.0525 0 5.0715

Aug-08 42.94 112.40.256 -14.3 -3.683

0.065 205.7

Sep-08 45.56 96.846.101 -13.8 -84.46

37.22 191.64

Oct-08 48.64 69.16 6.76 -28.5 -193.2 45.7 817

Nov-08 49 49.75 0.74 -28 -20.770.547 787.66

Dec-08 48.64 38.6 -0.73 -22.4 16.4660.539 502.3

Jan-09 48.83 41.54 0.397.616 2.9752

0.152 58.012

Feb-09 49.22 41.410.798 -0.31 -0.249

0.637 0.0979

Mar-09 51.23 45.784.083

10.55 43.095

16.67 111.36

Apr-09 50.06 50.2 -2.289.654 -22.04

5.215 93.216

May-09 47.29 56.98 -5.53 13.5 -74.7330.61 182.41

Jun-09 47.77 68.361.015

19.97 20.271 1.03 398.87

Jul-09 48.47 64.58 1.465 -5.52 -8.102 2.147 30.575

Aug-09 48.34 71.34 -0.2610.46 -2.807

0.071 109.57

Sep-09 48.43 67.170.186 -5.84 -1.088

0.034 34.166

Oct-09 46.72 72.66 -3.538.173 -28.85

12.46 66.802


39/50


r = -0.404

Interpretation-

The coefficient correlation (r = -0.404) shows that there is a negative correlation.

Though there is no strong correlation between two. Negative values indicate a relationship

between USD/INR EXHANGE Rate and Crude Oil Prices such that as Crude Oil Price

decreases, values for USD/INR EXHANGE Rate increases & vice-versa.

Thus Indian Rupee has appreciated with rise in crude oil prices.



40/50


TABLE NO. IV

Table of Correlation between USD/INR EXHANGE Rate & GDP growth (annual %)


Year

Annual

Averages

ofCurrency

rate

GDP

growth(annual %)

X Y XY X2

Y2

1999 43.11 7.387 - - - -

2000 44.95 4.03 4.268 -45.441 -193.951 18.217 2064.926

2001 47.19 5.216 4.983

29.438

3

146.700

4 24.833 866.6154

2002 48.6 3.766 2.987 -27.795 -83.0508 8.9276 772.5912

2003 46.55 8.37 -4.21

122.22

6 -515.564 17.792 14939.31

2004 45.33 8.278 -2.62 -1.1076

2.90305

7 6.8687 1.226961

2005 44.11 9.352 -2.69

12.975

2 -34.9213 7.2434 168.3581

2006 45.33 9.669 2.765

3.3900

2

9.37618

3 7.6497 11.49229

2007 41.29 9.06 -8.91 -6.2976

56.1271

6 79.431 39.66019

2008 43.41 6.074 5.134 -32.951 -169.188 26.362 1085.8272009 48.35 5.36 11.37 -11.766 -133.906 129.5 138.462

=13.07

642.668 -915.48 326.827 20088.5


41/50




42/50


r = -0.388

Interpretation-

The coefficient correlation (r = -0.388) shows that there is a negative correlation.

Though there is no strong correlation between two .Negative values indicate a relationship

between USD/INR EXHANGE Rate and GDP Growth Rate such that as values for

USD/INR EXHANGE Rate increases, GDP rate shows declining trend.

The gross domestic product (GDP) is a measure of a country's overall economic

output. It is the market value of all final goods and services made within the borders

of a country in a year.

Higher GDP means increasing export & decreasing import which results in positive

trade balance. Lower demand for foreign currency

Thus higher GDP leads to appreciation of Domestic Currency



43/50


PRICING FUTURES i) INTEREST RATE PARITY PRINCIPLE

For currencies which are fully convertible, the rate of exchange for any date other

than spot is a function of spot and the relative interest rates in each currency. The

assumption is that, any funds held will be invested in a time deposit of that currency.

Hence, the forward rate is the rate which neutralizes the effect of differences in the interest

rates in both the currencies. The forward rate is a function of the spot rate and the interest

rate differential between the two currencies, adjusted for time. In the case of fully

convertible currencies, having no restrictions on borrowing or lending of either currency

the forward rate can be calculated as follows;

For example,

Assume that on January 10, 2002, six month annual interest rate was 7 percent p.a.

on Indian rupee and US dollar six month rate was 6 percent p.a. and spot ( Re/$ ) exchange

rate was 46.3500. Using the above equation the theoretical future price on January 10,

2002, expiring on June 9, 2002 is : the answer will be Rs.46.575 per dollar. Then, this

theoretical price is compared with the quoted futures price on January 10, 2002 and the

relationship is observed.

PRICING FUTURES ii) COST OF CARRY MODEL

Pricing of futures contract is very simple. Using the cost-of-carry logic, we calculate

the fair value of a futures contract. Every time the observed price deviates from the fair

value, arbitragers would enter into trades to capture the arbitrage profit. This in turn would

push the futures price back to its fair value.

The cost of carry model used for pricing futures is given below:

F=Se^(r-rf)T

Where:

r = Cost of financing (using continuously compounded interest rate)

rf = one year interest rate in foreign

T = Time till expiration in years

E = 2.71828


Future Rate = (spot rate) {1 + interest rate on home currency * period}/

{1 + interest rate on foreign currency * period}


44/50


This relationship is known as interest rate parity relationship and is used in

international finance. To explain this, let us assume that one year interest rates in US and

India are say 7% and 10% respectively and the spot rate of USD in India is Rs. 44.

From the equation above the one year forward exchange rate should be

F = 44 * e^ (0.10-0.07)*1=45.34

It may be noted from the above equation, if foreign interest rate is greater than the

domestic rate i.e. rf > r, then F shall be less than S. The value of F shall decrease further as

time T increase. If the foreign interest is lower than the domestic rate, i.e. rf < r, then value

of F shall be greater th77an S. The value of F shall increase further as time T increases.

HEDGING WITH CURENCY FUTURES

Exchange rates are quite volatile and unpredictable, it is possible thatanticipated profit in foreign investment may be eliminated, rather even may incur loss.

Thus, in order to hedge this foreign currency risk, the traders often use the currency

futures. For example, a long hedge (I.e.., buying currency futures contracts) will protect

against a rise in a foreign currency value whereas a short hedge (i.e., selling currency

futures contracts) will protect against a decline in a foreign currencys value.

It is noted that corporate profits are exposed to exchange rate risk in many situation.

For example, if a trader is exporting or importing any particular product from other

countries then he is exposed to foreign exchange risk. Similarly, if the firm is borrowing or

lending or investing for short or long period from foreign countries, in all these situations,

the firms profit will be affected by change in foreign exchange rates. In all these

situations, the firm can take long or short position in futures currency market as per

requirement.

The general rule for determining whether a long or short futures position will hedge a

potential foreign exchange loss is:

Loss from appreciating in Indian rupee= Short hedge

Loss from depreciating in Indian rupee= Long hedge



45/50


46/50


As On 26-Nov-2008 12:00:00 Hours IST

Underlying RBI reference rate USD/INR 49.8500

Solution:

He should buy hundred contract of USD/INR 28012009 at the rate of 49.8850. Value

of the contract is (49.8850*1000*100) =4988500. (Value of currency future per

USD*contract size*No of contract). For that he has to pay 5% margin on 4988500. Means

he will have to pay Rs.299425 at present. And suppose on settlement day the spot price of

USD is 51.0000. On settlement date payoff of importer will be (51.0000-49.8850) =1.115

per USD. And (1.115*100000) =111500.Rs.

CHOICE OF THE NUMBER OF CONTRACTS (HEDGING RATIO)

Another important decision in this respect is to decide hedging ratio HR. The value ofthe futures position should be taken to match as closely as possible the value of the cash

market position. As we know that in the futures markets due to their standardization, exact

match will generally not be possible but hedge ratio should be as close to unity as possible.

We may define the hedge ratio HR as follows:

HR= Vf / Vc

Where, Vf is the value of the futures position

Vc is the value of the cash position.

Suppose value of contract dated 28 January 2009 is 49.8850. And spot value is

49.8500.

HR=49.8850/49.8500=1.001.



47/50


RESEARCH FINDINGS

Thus higher Inflation leads to weakening of Domestic Currency.

INR has appreciated with every upward movement shown by Nifty Index over

a period of time.

Indian currency has appreciated with rise in crude oil prices.

.

Higher GDP leads to appreciation of Domestic Currency.

Cost of carry model and Interest rate parity model are useful tools to find out

standard future price and also useful for comparing standard with actual future

price. And its also a very help full in Arbitraging.

There is a limit of USD 100 million on open interest applicable to trading

member who are banks. And the USD 25 million limit for other trading

members so larger exporter and importer might continue to deal in the OTC

market where there is no limit on hedges.

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.



48/50


SUGGESTIONS

Currency Future need to change some restrictions it imposed such as cut off

limit of 5 million USD, Ban on NRIs and FIIs and Mutual Funds from

Participating.

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.

In India the regulatory of Financial and Securities market (SEBI) has Ban on

other Currency Derivatives except Currency Futures, so this restriction seem

unreasonable to exporters and importers. And according to Indian financial

growth now its become necessary to introducing other currency derivatives in

Exchange traded currency derivative segment.



49/50


CONCLUSION

By far the most significant event in finance during the past decade has been the

extraordinary development and expansion of financial derivativesThese instruments

enhances the ability to differentiate risk and allocate it to those investors most able and

willing to take it- a process that has undoubtedly improved national productivity growth

and standards of livings.

The currency future gives the safe and standardized contract to its investors and

individuals who are aware about the forex market or predict the movement of exchange

rate so they will get the right platform for the trading in currency future. Because of

exchange traded future contract and its standardized nature gives counter party risk

minimized.

Initially only NSE had the permission but now MCX has also started currency future.

It is shows that how currency future covers ground in the compare of other available

derivatives instruments. Not only big businessmen and exporter and importers use this but

individual who are interested and having knowledge about forex market they can also

invest in currency future.

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.



50/50


BIBLIOGRAPHY

NCFM: Currency future Module.

BCFM: Currency Future Module.

Report of the Internal Working Group on Currency Futures .Reserve Bank of India,

Report of the RBI-SEBI standing technical committee on exchange traded

(Currency futures)

KNOWLEDGE KIT Published by Angel Brokings.

WEBLIOGRAPHY

www.angelbroking.com

www.angelcommodities.com

www.sebi.gov.in

www.mcx-sx.com

www.nseindia.com

www.investopedia.com

www.opec.org

www.worldbank.org
http://www.angelbroking.com/http://www.sebi.gov.in/http://www.nseindia.com/http://www.investopedia.com/http://www.worldbank.org/http://www.angelbroking.com/http://www.sebi.gov.in/http://www.nseindia.com/http://www.investopedia.com/http://www.worldbank.org/

currency derivatives & impact of different macro-economic indicators on currency movement

Documents