Scope & Limitations Of

Currency Derivatives In India

Prepared By:- Dharmesh Patel

 Organization Introduction
Bonanza is a leading Financial Services Provider &
Brokerage House working since 1994.
Bonanza has spread its trustworthy all over the country
with more than 1025 outlets spread across 340 cities.
It provides an extensive services in equity, commodities,
currency derivatives, wealth management, distribution
of third party products etc.
One core Mission is clients' wealth generation through
professional advice backed by research and in-depth
analysis.
 Memberships
National Stock Exchange of India(NSEIL)
 
The Bombay Stock Exchange(BSE)
 
Multi Commodity Exchange(MCX)
 
National Commodity & Derivatives Exchange Ltd(NCDEX)
 
National multi commodity exchange(NMCE)
 
Depository Participant for Equity(NSDL/CDSL)
 
Depository participant for commodity
 
Dubai Gold & Commodity Exchange(DGCX)
 
SEBI Authorized PMS
Core Value Of Bonanza Portfolio Ltd
Customer satisfaction

Maximization of Stakeholder value

Success through Team Work Integrity and people

 PART:- A Objectives
To get the basic knowledge about Foreign Exchange Market.

To know the different parties involved in the FORX market.

To learn about the currency derivatives and its different

instruments.

To learn about the different regulations for the derivative

trading in India.
Overview about the FORX market
 During the early 1990s, India embarked on a series of structural
reforms in the foreign exchange market
 Liberalization led to extensive fluctuations of exchange rate.
 Excessive volatility can have an adverse impact on price discovery,
export performance, sustainability of current account balance, and
balance sheets.
 In the context of upgrading Indian foreign exchange market to
international standards, a well- developed foreign exchange derivative
market (both OTC as well as Exchange-traded) is introduced.
 RBI on April 20, 2007 issued comprehensive guidelines on the usage of
foreign currency forwards, swaps and options in the OTC market.
 Currently, India is a USD 34 billion OTC market, where all the major
currencies like USD, EURO, YEN, Pound, Swiss Franc etc. are traded.
 Purpose
 The foreign exchange market is the mechanism by which currencies are
valued relative to one another, and exchanged.

 An individual or institution buys one currency and sells another in a

simultaneous transaction.

 Currency trading always occurs in pairs like EUR/USD or CHF/YEN.

 Foreign Exchange Traders generate profits, or losses, by speculating

whether a currency will rise or fall in value in comparison to another
currency.
 Foreign Exchange Spot (Cash) Market
 The foreign exchange spot market trades in different currencies for both
spot and forward delivery.

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

financial institutions, importers and exporters.

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

world on a continual basis.

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

after the execution of the transaction.

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

this market.
Foreign Exchange Quotations
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.

EXCHANGE RATE
1) Direct :- $1 = Rs. 45.7250
2) Indirect :- Re 1 = $ 0.02187
Introduction about Currency Derivatives
 A derivative security is a financial contract whose value is derived
from the value of underlying assets, such as a stock price, a
commodity price, an exchange rate, an interest rate, or even an
index of prices.

 Derivatives are often highly leveraged, such that a small movement

in the underlying value can cause a large difference in the value of
the derivative.

 Derivatives may be traded for a variety of reasons.

-Hedging
-Speculation
-Arbitrage
Concept of Currency Derivatives
A currency derivative is a contract between the seller
and the buyer, whose value is to be derived from the
underlying asset, the currency amount.

 A derivative based on currency exchange rates is a

future contract which stipulates the rate at which a
given currency can be exchanged for another currency
as at a future date.
Benefits of Currency Derivative
Arbitrage opportunity for entities, who can access onshore
and non-deliverable forward markets
 
Volatility and multiplier make it a significant trading
option for traders
 
Hedging current exposure:

 Importers and exporters can hedge future payables and

receivables
 Borrowers can hedge Foreign Currency loans for interest or
principal payments
Types of Currency Derivatives Instruments
Forwards:-A forward is a made-to-measure agreement between two
parties to buy/sell a specified amount of a currency at a specified rate on a
particular date in the future.

Future:-A futures contract is similar to the forward contract but is more

liquid because it is traded in an organized exchange i.e. the futures market.

Options:-A currency Option is a contract giving the right, not the

obligation, to buy or sell a specific quantity of one foreign currency in
exchange for another at a fixed price.

Swaps:-A swap is a foreign currency contract whereby the buyer and seller
exchange equal initial principal amounts of two different currencies at the
spot rate.
RBI Regulations
1) RBI Regulation for Rupee Forward

• The forward contracts are allowed to be booked for foreign

currencies (other than Dollar) and Rupee.

• The banks are also allowed to enter into forward contracts to

manage their assets - liability portfolio.

• The cancellation and re-booking of the forward contracts is

permitted only for genuine exposures out of trade/business upto 1
year for both exporters and importers.
2) RBI Regulations in Cross currency options

• Such contracts are allowed to be freely re-booked and cancelled.

Any premium payable on account of such transactions does not
require RBI approval.

• These currency options can be used as a hedge for foreign currency

loans provided that the option does not involve rupee and the face
value does not exceed the outstanding amount of the loan.

• Banks can also purchase call or put options to hedge their cross
currency.
3) RBI Regulations in Foreign currency – rupee swaps

 The authorized dealers offering swaps to corporates should try and

match demand between the corporates.

 The open position on the swap book and the access to the interbank
spot market because of swap transaction was restricted to US$ 10
million.

 The contract if cancelled is not allowed to be re-booked or re-entered

for the same underlying.
Foreign Exchange Risk Management
Firms dealing in multiple currencies face a risk (an
unanticipated gain/loss) on account of
sudden/unanticipated changes in exchange rates .

The process of identifying risks faced by the firm and

implementing the process of protection from these
risks by financial or operational hedging is defined as
foreign exchange risk management.
 
Foreign Exchange Risk Management Framework
Forecasts

Risk Estimation

Benchmarking

Hedging

Stop Loss

Reporting and Review

 Objectives Of the Research Work
To analyse the scope of currency derivative in India.

To study the factors that helped in development of currency

derivative in foreign country.

To study the legal regulation in Indian FOREX market.

To suggest suitable solution (like future, forward or option) to

the customers according to their risk taking ability.

To provide different hedging strategies.

 Research Methodology
Most of the data required for this study is collected from primary and
secondary methods.

Primary Data
- Survey
-Sample of 60 Respondent
The questionnaire of the survey will be design by keeping all this point in to
mind:

Classification of the respondent (i.e. Importer, Exporter, Professional, or any

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

Valid Cumulative
Frequency Percent Percent Percent
Valid financial Institute 6 10.0 10.0 10.0
Exporter 24 40.0 40.0 50.0
Importer 11 18.3 18.3 68.3
Both Exporter and Import 9 15.0 15.0 83.3

Professionals 10 16.7 16.7 100.0

Total 60 100.0 100.0
 Name the Currency
Cumul
ative
Valid Percen
     Frequency Percent Percent t
Valid USD 28 46.7 46.7 46.7
Pound 12 20.0 20.0 66.7
Euro 4 6.7 6.7 73.3
Yen 15 25.0 25.0 98.3
Any 1 1.7 1.7 100.0
Other
Total 60 100.0 100.0
 Nature of the Transactor

Valid Cumulative
Frequency Percent Percent Percent
Valid Arbitrator 3 5.0 5.0 5.0
Speculator 5 8.3 8.3 13.3
Hedger 9 15.0 15.0 28.3
None Of the Above 43 71.7 71.7 100.0

Total 60 100.0 100.0

 Cross Tabulation

Amount for Derivatives * Total Amount

Count

Total Amount

Rs 500000 Rs 1000000 Rs 2500000 Above

Less than to Rs to Rs to Rs Rs
Rs 500000 1000000 2500000 5000000 5000000 Total
Amount for Rs 5000 to Rs 1 1 0 0 0 2
Derivatives 10000
Rs 10000 to Rs 0 1 4 0 0 5
25000

Rs 25000 to Rs 0 0 0 23 1 24
50000

Above Rs 50000 0 0 0 0 29 29
Total 1 2 4 23 30 60
 Category of Respondent * Nature Of the Transaction

Count

Nature Of the Transaction

None Of the
Arbitrator Speculator Hedger Above Total
Category of financial Institute 2 4 0 0 6
Respondent
Exporter 0 0 1 23 24

Importer 0 0 0 11 11

Both Exporter and Import 0 0 0 9 9

Professionals 1 1 8 0 10

Total 3 5 9 43 60
 Knowledge about different instrument
Category of Respondent * Know forwards

Count

Know forwards

No Little High Very High

Knowledge Knowledge Knowledge Knowledge Total
Category of financial Institute 0 0 0 6 6
Respondent
Exporter 23 1 0 0 24
Importer 11 0 0 0 11
Both Exporter and 1 8 0 0 9
Import

Professionals 0 0 9 1 10
Total 35 9 9 7 60
 Category of Respondent * Know futures

Count

Know futures

No Little High Very high

Knowledge Knowledge knowledge Knowledge Total
Category of financial Institute 0 0 2 4 6
Respondent
Exporter 11 13 0 0 24
Importer 11 0 0 0 11
Both Exporter and 0 9 0 0 9
Import

Professionals 0 0 7 3 10
Total 22 22 9 7 60
 Category of Respondent * Know options

Count

Know options

Little Moderate High very High

Knowledge Knowledge Knowledge Knowledge Total
Category of financial Institute 0 1 3 2 6
Respondent
Exporter 1 23 0 0 24
Importer 11 0 0 0 11
Both Exporter and 9 0 0 0 9
Import

Professionals 0 0 4 6 10
Total 21 24 7 8 60
 Category of Respondent * Know swaps

Count

Know swaps

No Little Moderate High Very high

Knowledge Knowledge Knowledge Knowledge Knowledge Total
Category of financial Institute 0 0 1 4 1 6
Respondent
Exporter 24 0 0 0 0 24
Importer 0 11 0 0 0 11
Both Exporter and 8 1 0 0 0 9
Import

Professionals 0 0 1 1 8 10
Total 32 12 2 5 9 60
 Use of derivative instrument

Category of Respondent * Usage forwards

Count

Usage forwards

Very Less Most Of

Not at all time sometimes the time Always Total
Category of financial Institute 0 0 5 1 0 6
Respondent
Exporter 10 14 0 0 0 24
Importer 11 0 0 0 0 11
Both Exporter 9 0 0 0 0 9
and Import

Professionals 0 1 8 0 1 10
Total 30 15 13 1 1 60
 Category of Respondent * Usage futures

Count

Usage futures

Very less Most of the

Not at all time Sometimes time Total
Category of financial Institute 0 0 1 5 6
Respondent
Exporter 23 1 0 0 24
Importer 0 11 0 0 11
Both Exporter and 1 8 0 0 9
Import

Professionals 0 2 8 0 10
Total 24 22 9 5 60
 Category of Respondent * Usage options

Count

Usage options

very less Most of

Not at all time sometimes the time always Total
Category of financial Institute 0 0 1 4 1 6
Respondent
Exporter 1 13 10 0 0 24
Importer 0 11 0 0 0 11
Both Exporter 0 1 8 0 0 9
and Import

Professionals 0 0 1 9 0 10
Total 1 25 20 13 1 60
 Category of Respondent * Usage swaps

Count

Usage swaps

Very less Most of the

Not at alll time Sometimes time Total
Category of financial Institute 0 0 5 1 6
Respondent
Exporter 23 1 0 0 24
Importer 0 11 0 0 11
Both Exporter and 8 0 1 0 9
Import

Professionals 9 0 0 1 10
Total 40 12 6 2 60
 Findings
New concept of Exchange traded currency future trading is
regulated by higher authority and regulatory.

Larger exporter and importer has continued to deal in the

OTC counter even exchange traded currency future is available
in markets.

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.
 
 Suggestions
Managing Currency risks efficiently
 Select your currency

 Seek more quotations

 Knowing the Spread

 Shift

 Exchange rate predictions

 Try to minimize dependence on one currency hedge

 More Suggestions
 Currently in exchange traded currency future segment only one pair
USD-INR is available to trade so there is also one more demand by the
exporters and importers to introduce another pair in currency trading.
Like POUND-INR, CAD-INR etc.

  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.

 Should Introduced other currency derivatives in Exchange traded

currency derivative segment.
 Conclusion
 In terms of the growth of derivatives markets, and the variety of derivatives
users, the Indian market has equalled or exceeded many other regional
markets.
 By far the most significant event in finance during the past decade has been
the extraordinary development and expansion of financial derivatives.
 There remain major areas of concern for Indian derivatives users. Large
gaps exist in the range of derivatives products that are traded actively.
 The currency future gives the safe and standardized contract to its investors
and individuals who are aware about the FOREX market .
 Exchange between USD-INR markets in India is very big and these
exchange traded contract will give more awareness in market and attract
the investors.
 As Indian derivatives markets grow more sophisticated, greater investor
awareness will become essential
 Bibliography

Financial Derivatives (theory, concepts and problems)
By: S.L. Gupta.

NCFM: Currency future Module.

BCFM: Currency Future Module.

NISM: Currency Module.

Report of the RBI-SEBI standing technical committee on exchange traded currency futures) 2008


Websites:-
 
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www.bonanzaonline.com
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www.nseindia.com
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www.bseindia.com
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www.mcxindia.com

www.forextrading.com

www.sebi.gov.in

www.rbi.gov