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Capstone Project Synopsis


Foreign Exchange derivatives

Institute for

Technology and

Submitted by :
Binuja Shrestha


Roll no - 057

TITTLE: Foreign Exchange Derivatives
PROJECT GUIDE: Prof. Bharat Shah
SUBMITTED BY: Binuja B Shrestha (KHR2010PGDM20F057) (9892173850)


OBJECTIVES: To study in details Foreign Exchange Derivatives and studies in respect to

Derivatives are an important class of financial instrument that are central to todays
financial and trade markets. They offer various types of risk protection and allow innovative
investment strategies. Given the derivative markets global nature, users can trade around the
clock and make use of derivatives that offer exposure to almost any underlying across all markets
and assets classes. The derivative market is predominantly a professional wholesale market with
banks, investment firms, insurance companies and corporate as its main participants.
Foreign Exchange or FOREX, is the financial market in which participants are able to
buy, sell, exchange and speculate on currencies. Foreign exchange markets are made up of banks,
commercial companies, central banks, investments management firms, hedge funds and retail
FOREX brokers and investors. The FOREX market is considered to be the largest financial
market in the world.
A Foreign Exchange Derivatives is a financial derivative where the underlying is a
particular currency and/ or its exchange rate. These instruments are used either for currency
speculation and arbitrage or for hedging foreign exchange risk.
Explanation of Foreign Exchange Derivatives will be done through following:
1. Foreign Exchange Options: It is a derivative financial instrument where the owner has the
right but not the obligation to exchange money denominated in one currency into another
currency at pre-aged exchange rate on a specified date.
2. Forex Swap: It is simultaneous purchase and sale of identical amounts of one currency
for another with two different value dates i.e. normally spot to forward.
3. Currency Futures: It is a future contract to exchange one currency for another at specified
date in the future at a price (exchange rate) that is fixed on the purchase date.
4. Currency Swap: It is a foreign exchange agreement between two parties to exchange
aspects (namely principal and/or interest payments) of a loan in one currency for
equivalent aspects of an equal in net present value loan in another currency. It is
motivated by comparative advantage.
5. Foreign Exchange Hedge: It is a method used by the companies to eliminate or hedge
foreign exchange risk resulting from transactions in foreign currencies. This is done using

either the cash flow or the fair value method. The accounting rules for this are addressed
both by IFRS and GAAP.
6. Binary option: It is the type of option where the payoff is either some fixed amount of
some asset or nothing at all. The two main types of binary options are the cash-or-nothing
binary option and the asset-or-nothing binary option. Thus the options are binary in
nature because there are only two possible outcomes.
Then I would explain about the Foreign Exchange Derivatives Markets in India, their evolution
in Indian market, development in capital inflows, development in capital inflows, rupee
forwards, Options and other derivative products like Rupee Swaps, etc. I would add up with the
survey of foreign exchange and derivatives market activity in Canada taken on April 2007.
Article by Anuradha Guru.
Collection of Articles from Clearing Corporation of India