SYNOPSIS ON (A STUDY OF CURRENCY DERIVATIVE IN INDIA)

CHOOSE TO KNOW SUBMITTED FOR MBA PROGRAM UNDER THE SUPERVISION OF (DR. VIQAR ALI BAIG)

SUBMITTED TO: SUBMITTED BY:

LINGAYAS UNIVERSITY KUMUD R.MISHRA 09MBA035 (BETCH-:2009-2011)

TABLE OF CONTENT

(1) INTRODUCTIN OF CURRENCY DERIVATIVES

(2) LITERATURE REVIEW

(3) RESERCH METHODOLOGY

(a) Type of research

(b) Sources of data collection (c) purpose of study

(d) Objective of the study

(e) Limitation

(4) Introduction to the topic (a) Introduction of financial derivatives(b) Type of financial derivatives(c) Derivatives introduction in India(d) Introduction to currency derivatives(e) Utility of currency derivatives

(5) Brief overview of the foreign exchange market in India (a)overview of foreign exchange market in india (b) Currency derivatives product (c) Foreign exchange spot market (d) Foreign exchange quotation (e) Trding and process settlement process (f) Regulatory framework for currency future

(6) Conclusion

(7) Refrence

INTRODUCTION

Each country has its own currency through which both national and international transaction are performed.All the international business transaction involve an exchange of one currency for another.For example If any Indian firm borrow funds from international financial market in USdollars for short or long term then at maturity The 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 knows as exchange rate. The foreign market 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 several past decade .

Since the exchange rate are continuously changing , so the firms are exposed to the risk rate movement . As a reasult the assets or liability or cash flows of a firm which are denominated in foreign currencies undergo a chabge in value over a period of time due to variation in exchange rate. This variability in the value of asset or liability or cash flows is referred to exchange rate risk has become substantial for many business firms. As a result these firm increasingly turning to various risk hedging prduct. LITERATURE REVIEW

This paper defines derivatives as financil instrument such as option, future, forward and swap that are derived from their underlying currencies. The retrun on derivatives are tied to yield of these underlying securities and currencies. This paper detail the essential role the derivatives market plays in the global economy in countries such as Asia, Germany and Switzerland, in which these economies reap substantial growth rate due to these financial practices. The writer contend that with the presence of this market the financial condition of business entities are stabilized and secure from the possibility of hedge currency risk. The derivatives market also decrease the amplitude in the fluctuation of spot prices and promote optimal funds placing. The research stress the importance in the implimention and development of the currency derivatives market as a necessary prerequisite for the groth of international trade volume , expansion of foreign investment and for the genral development economy.

RESERCH METHODOLOGY

TYPE OF RESEARCH

Descriptive research methodology were use.

The research methodology adopted carrying out the study was at the first stage theoretical study is attempted and at the second stage observed online trading on NSE\ BSE.

SOURCES OF DATA COLLECTION

Secondary data were used such as various book , report submitted by RBI\ SEBI Committee and NCFM\ BCFM module

Purpose of the study

Currency base derivatives are used by exporters invoicing receivables in foreign currency willing to protect their earning from the foreign currency depreciation by locking the currency conversion rate at a high level . their use by importers hedging forogn currency paybles is effectives when the payment currency expacted to appreciated and the importer would like to guarantee . a lower conversion rate . investor in foreign currency denominated securities would like to secure strong foreign earning by obtaing the right to foreign currency at a conversion rate , thus defending their revenue from the foreign currency depreciation.

OBJECTIVES OF THE STUDY

To differentiate risk and allocate it to those investor most able and willing to take it.

To provide the right platform for the trading in currency future .

To show how currency future cover ground in comparision with other available derivatives instrument and provide awarness in market and attract the investors.

The basic idea behind undertaking currency derivatives product to gain knowledge about currency future market.

TO study the basic concept of currency future.

TO study the exchange traded currency future.

TO understand the practical consideration and wars of consideration currency future price.

TO analze different currency derivatives product.

LIMITATION

The analysis is purely base on the secondary data, so any error in the secondary data might also affect the study

INTRODUCTION TO THE TOPIC

INTRODUCTION OF FINANCIAL DERIVATIVES

A word formed by derivation. It means, thus word has been arisen by derivation

Something derived , it means that something have to be derived or arisen out of the underlying variables . A financial derivatives is an indeed derived from the financial market.

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 trun depends upon the demand and supply of mlk.

TYPE OF FINANCIAL DERIVATIVE

Financial derivatives are those assets whose values are determined by the value of some other asset, called as the underlying , presently these are cmplex varieties of derivatives already in existence and the market are innovating newer and new ones continuously. In the simple form the derivatives can be classified into different categories , which are shown below.

Financial (basic) Comodities (complex) Forwards swaps

Future exotics(non std)

Options

Warrants and convertibles

Derivatives introduction in india

The first step forward introduction of derivatives trading in India was the promulgation of the security law (amendment) ordinance ,1995 ,which withdraw the prohibition on option in security. SEBI set-up a 24 – memberCommittee under the chairmanship of DR. L.C.GUPTA on November 18, 1996 to develop appropriate regulatory framework for derivting in India , submmited its reports on march 17,1988. The committee recominded that the derivatives should be declared as securities , so that regulatory framework applicable to trading of , security, could also govern trding of derivatives .To begin with, SEBI approved trding in index future contract based on S&P CNX NIFTY and BSE 30 (SENSEX) INDEX.The trading in index option commenced in june 2001 and the trading in option on individual security securities commenced in july 2001.Future contracts on individual stocks were launched in November 2001.

Introduction to currency future

Future as contrcts is a standardized contracts, traded on exchange, to buy or sell a underlying asset or an instrument data certain date in the future at a specified price .When the underlying assets is commodities,e.g oil or wheat ,the contract is termed a currency at a specified date and specified rate in the future .Therefore the buyer and seller lock themselves into an exchange rate for a specific value or delivery date . Both parties of the future contracts must fall their obligation on the settlement date . Currency can be cash settled or s ettled by delivery the respective obligation of seller and buyer, all settlement however , unlike in the case of OTC markets go through the exchange

UTILITY OF CURRENCY DERIVATIVES

Currency –based derivatives are used by exporter invoiceing receivables in foreign currency , willing to protect their earning from the foreign currency depreciation by looking the currency conversion rate at the high leval. Their use by importer hedging foreign currency paybles is effectives , when the payment currency is expacted to appreciate and the importers would like to secure strong foreign earning by obtaining the right to sell foreign currency depreciation . Multinational companies use currency derivatives being engaged in direct investment.A high degree of volatility of exchange rate creates a fertiles ground for foreign exchange , speculator objectives is to guarantee a high selling rate of a foreign currency by obtaining a derivatives markets contracts while hoping to buy the currency at low rate in future.

BRIEF OVERVIEW OF THE FOREIGN EXCHANGE MARKET IN

INDIA

OVERVIEW OF THE FOREIGN EXCHANGE MARKET IN INDIA

During the early 1990s , India embarked on a series of structura in reform 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 instrument in developing a market determined exchange rate of the rupee and was an important step in the process toward total current account convertibility, which was achived in august 1994. although liberlalization helped the Indian forex market in various ways , it led to extensive fluctuation of exchange rate . this issue has attracted a great deal of concern from policy- makers and investor. While some flexibility in foreign exchange markets and exchange rate determination is desirable , excessive volatility can have an adverse impact on price discovery , export performance , sustainability of current account balance , and balance sheet . in the context of upgrading Indian foreign market to international standard , well-developed foreign derivatives markets(both OTC aswell as exchange traded ) is imperative .RBI on april 20, 2007 issued comprehensive guidelines on the usage of foreign currency forwards , swaps and option in the OTC market.

CURRENCY DERIVATIVES PRODUCT

Derivative contracts have several variants. The most common variants are forward , future, option and swap. We take a brief look at various derivatives contracts that have come to be used.

FORWARD

The basic objective of a forward market in any underlying assets is to a fix a PAprice for a contract to be carried through on the future agreed date and is intended to free both the purchaser and the seller from any risk of which might incur due to fluctuation in the price of underlying asset.

FUTURE

A currency future contracts provides a simultaneous right and obligation to buy and sell a particular curreny at a specified future date , a specified price and a standard quantity . in another word, a future contracts is an agreement between two parties to buy or sell an asset at a certain time in the future at acertain price . future contractsbare special type of forward contracts in the sence that they are standardized exchange traded contract.SWAP

Swap is a private agreement between two parties to exchange cashflow in the future according to prearranged formula . they can be regarded as portfolio of forward contracts . the currency swap entail swapping both principal and interest between parties , with the cashflow in one direction being in a different currency than those in the opposite direction . there are various type of currency swap

like as fixed to fixed acurrency swap , floating to floating swap, and fixed to floating swap.

OPTION

Currency option is a financial instrument that gives the option holder a right and not the obligation to buy or sell a given amount of foreign exchange at a fixed price per unit for specified time period (until the expiration date) .in the other word , a foreign currency option is a contracts 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.

FOREIGN EXCHANGE SPOT (CASH ) MARKET

The foreign exchange spot market trades indifferent currencies for both spot and forward delivery .generally they do not have specific location , and mostly take place primarly by means of telecommunication both within and between countries . it consist of a network of foreign dealer which are oftenly banks , financial institiuation , large concern etc. the large banks usually make market in different currencies . in the spot exchange market, the business is transacted throughout the world on a continual basis . so it is possible to transaction in foreign exchange market 24 hours a day . the standard settlement period in this market is 48 hours . i.e. 2 days after the execution of transaction . the spot foreign exchange market is similar to the OTC market for securities . there is no fixed opening and closing time . since most of the business in this market done by bank, hence transaction usually do not involve a

physical transfer of currency , rather simply book keeping transfer entry among bank.

FOREIGN EXCHANGE QUOTATION

Foreign exchange quotation can be confusing because currencies are quoted in terms of other currencies . it means exchange rate is relative price.

For exampleIf one US doller is worth of RS 45 indian rupees than it implies that 45 indian rupees will by one doller of USA doller , or that one rupee is worth of 0.022 USA doller. Which is simply reciprocal of the former doller exchange rate. Exchange rateDirectIndirectThe number of unit of domestic The number of unit of foreign Currency stated against one unit

There are two ways of quatating exchange rate , the direct and indirect . most country use the direct method . in global foreign exchange market , two rate are quoted by dealer , one rate for buying (bid rate ) and another rate for selling (ask or offered rate) for a currency.

TRADING PROCESS AND SETTLEMENT PROCESS

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

It has been observed that in most future markets actual , physical delivery of underlying asset is very rare and hardly it ranges from 1percent to 5 percent. Most often buyers and sellers offset orginal position prior to delivery date by taking on opposite position. This is becoz most of future contracts in different products are predominantly speculative instrument. For example , x purchage American doller future and y sell it. It lead to two contracts , first, x party and clearing house and second y party and clearing house. Assume next day x sell same contracts to z, then x is out of the picture and the clearing house is seller to z, and buyer from y , hence , this process is goes on.

REGULATORY FRAMEWORK FOR CURRENCY FUTURE

With a view to enables entities to manage volatility in the currency market .RBI on april 20, 2007 issued comprehensive guideline on the usage of foreign currency forward, swap and option in the OTC market . At same time RBI also setup an intended working group to explore the advantage of introducing currency futures.

The terms of refrence to the committee was as under-

-To coordinate the regulatory roles of RBI and SEBI in regard to trading of currency and interest rate future on exchange.-To suggest eligibility criteria for the member of such exchange.-To suggest the eligibility norms for currency and interest rate future trading.

CONCLUSION

By far the most significant event in finance during the past decade has been the extraordinary development expansion of financial derivatives. These instrument enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it- a process that has undoubtly improved national productivity , groth and standard of living.

The currency future gives the safe standardized contracts to its investors and individual are aware about the forex market or predict the movement of exchange rate so they will get the right plateform forh the trading in currency future .

Initially NSE had the permission but now BSE and MCX has also started currecy future , it is show that how currency future cover ground in the compare of other derivatives instrument . not only big businessmen and exporter importer use this but individual who are interested and having knowledge forex market they can also invest in currency future.

REFERENCE

Books and journals

Financial derivatives (theory , concept and problem) by S L GUPTA

NCFM : Currency future module

BCFM : Currency future module

Report of the RBI- SEBI standing committee on exchange traded currency future , 2008

Report of the internal working group on currency future (Reserve bank of India ,april 2008)

Websitewww.sebi.gov.inwww.rbi.org.inwww.bseindia.comwww.nseindia.comwww.economywatch.com