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Development of Currency Derivatives
Markets in India
Group 6
27NMP51 Komal Tagra
27NMP56 Mayank Ashok Mirani
27NMP66 Raman Vig
27NMP70 Shyam Kumar S L
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Derivative Definition
"Never keep all your eggs in one basket"
DEFINITION OF "DERIVATIVE"A security whose price is dependent upon or derived from one ormore underlying assets. The derivative itself is merely a contractbetween two or more parties. Its value is determined byfluctuations in the underlying asset. The most common
underlying assets include stocks, bonds, commodities,currencies, interest rates and market indexes. Most derivativesare characterized by high leverage.
CURRENCY DERIVATIVEAn Exchange Traded Derivative or Over the counter Derivative
with an Underlying reference based on FOREIGN EXCHANGErates and flows. A Currency Derivative can be structured as aCurrency Option, Currency Forward, Currency Future,Currency Swap or Currency Warrant
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Lets say there is a farmerwho grows tea in India, which
is exported to the USA.
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And there is an importerof tea in the USA.
Lets assume the currentrate of exchange is Rs. 55
for 1 USD.
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Let us also assume that the teagrower agrees to supply 10quintals of tea to the importer at 10
dollars a quintal three monthsdown the line upon harvesting.
(1 Quintal = 100 kgs)
It is important tounderstand that the
importer buys tea at 10dollars a quintal, no matterwhat the exchange rate is.
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The tea grower thinks that the rate of exchange,
which is currently trading at Rs. 55 to a US
dollar, could fall to Rs. 54 in 3 months.
This would mean that while the importer wouldpay her 100 dollars ( $10 per quintal x 10
quintals = $ 100), as per their business deal, she
would earn only Rs. 5400 ( $100 x Rs 54 per
dollar) instead of Rs 5500 ( $100 x Rs 55 per
dollar) thus incurring a loss of Rs. 100. ( Rs 5500
Rs 5400)
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In such a scenario, the tea grower goes to
a currency trader and signs a forward
contract which says that at the end of 3
months the currency trader would hedge
her against a possible decrease inexchange rates.
This means that, at the end of 3 months,
the currency trader would pay her Rs.
5500 for her 100 USD, no matter what the
prevailing exchange rate.
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Such a contract is calleda Forward CurrencyDerivatives contract
because it is a currencycontract that has to be
executed at some future
date.
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Classification of DerivativesOTC Exchange Traded
Rupee Interest RateDerivatives
Forward Rate agreements,Interest rate Swaps
Interest Rate futures
Foreign CurrencyDerivatives
Forwards, Swaps, Options Currency Futures, Options
Equity Derivatives Index Futures, IndexOptions, Stock futures,
Stock options
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Overview of Currency Derivatives in
IndiaA currency future, also known as FX future, is a futurescontract to exchange one currency for another at a specifieddate in the future at a price (exchange rate) that is fixed on
the purchase date. On Stock Exchange like BSE, NSE theprice of a future contract is in terms of INR per unit of othercurrency e.g. US Dollars. Currency future contracts allowinvestors to hedge against foreign exchange risk. Currency
Derivatives are available on four currency pairs viz. USDollars (USD), Euro (EUR), Great Britain Pound (GBP) andJapanese Yen (JPY). Currency options are available on USDollars ONLY.
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Currency derivatives are a bundle of opportunities for a number ofplayers.It is a new asset class for diversification of investments for all residentIndians.
It gives hedging opportunities to:Importers and exporters, who can hedge their future payablesand receivables.Borrowers, who can hedge foreign currency (FCY) loans forinterest and principal payments, with the need for proof of
documented exposure.It gives arbitrage opportunities.It gives trading opportunities because of its volatility and multiplicity.It provides highly transparent rates to traders as it is exchange-traded.
What are the benefits of currency
Derivatives?
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Presently, all Futures contracts on Exchanges are settled in cash. There are no physical
contracts. All trades on Currency Exchanges take place on their respective nationwideelectronic trading platforms. These can be accessed from dedicated member terminals at
various locations across India.All participants on the Currency Exchange trading platform can participate only throughtrading members of the Exchange. Participants have to open a trading account and depositstipulated cash and/or collaterals with the trading member.Exchanges stand in as the counter-party for each transaction. Therefore, participants donot need to worry about defaults . In the event of a default, Exchanges will step in and fulfillthe obligations of the defaulting party, and then proceed to recover dues and penalties fromthem.Those who enter the market either by buying (long) or selling (short) a Futures contractcan close their contract obligations by squaring-off their positions at any time during thelife of that contract by taking an opposite position in the same contract.A long (buy) position holder has to short (sell) the contract to square-off their positionand vice versa.Participants will be relieved of their contract obligations to the extent they square-off theirpositions.
All contracts that remain open at expiry are settled in INR in cash at the reference ratespecified by the Reserve Bank of India
How Does Currency Derivatives
Trading Work in India?
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TRADER
( BUYER )
TRADER
( SELLER )
MEMBER
( BROKER )
MEMBER
( BROKER )
CLEARING
HOUSE
Purchase order Sales order
Transaction on the floor (Exchange)
Informs
Currency DerivativeTrading & Settlement Process
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Screen Shot / application of FX derivative
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Currency Derivatives Markets in India
Its Development
August 29, 2008 Currency Futures trading launched atNSE.
October 2008 Currency futures trading launched at MCX
and BSE. January, 2010 SEBI and RBI permitting the trade of
INRGBP, INREUR, INRYEN. 29thOctober, 2010 - NSE started currency option trading. Trades guaranteed by guaranteed by the National
Securities Clearing Corporation Limited (NSCCL) MCX-SX Average daily turnover increased from Rs. 356 cr
to Rs. 11,650 cr in August 2013 and Average daily turnoverfor the year 2014-2015 to Rs. 11,475.08
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Figure - Daily movement in the open interest of currency futures in NSEand MCX
The upward trend of the open interest, number ofcontracts traded and average daily turnover since itsinspection explain the whole story in detail.
Suggested future developments: Introduction of late evening sessions. Products on other currencies.
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