CURRENCY FUTURES MARKET

IN INDIA

Submitted on: 25th Aug, 2010

By:

Neha(PGDM-02/15)

Raksha Chandra(PGDM-02/26)
TABLE OF CONTENTS

S.No. Content Page No.

1 About Currency Futures 3

 Need for Currency Futures
2 History of Currency Futures 3
3 Currency future derivatives in India 4
 Rationale behind Currency futures in India
 Exchanges engaged in Currency future in India
 Available Currency futures in India
 Features of Currency Futures
4 Benefits of currency trading in India 5
5 Trends in Currency Future in India 6
6 Comparisons with other market 9
7 Risks of trading in Currency Futures 9
8 Opportunities 9
9 Currency Futures – the road ahead 9
10 Conclusion 10
11 References 11
12 Exhibits 12

2|Page
1. About Currency Futures

Currency Futures are standardized contracts to buy or sell a currency at a future date at a rate
determined in advance. The contracts are traded on regulated exchanges in accordance with
the guidelines specified in the RBI-SEBI Standing Technical Committee Report on Exchange
Traded Currency Futures, 2008.

Currencies are the money of different countries, and currency trading is the buying and
selling of these currencies. There are almost as many different currencies as there are
countries, but the most popular currencies for trading are the US Dollar, the Euro, the British
Pound (Sterling), and the Japanese Yen. The currency markets are some of the most popular
day trading markets, and they therefore have some of the highest volume (number of
contracts) and liquidity. This high volume and liquidity makes the currency markets attractive
to all types of traders, including individual day traders, trading companies, financial and non
financial companies, banks, and governments.

1.1 Need for Currency Futures

Financial markets are, by nature, extremely volatile and hence the risk factor is an important
concern for financial agents. To reduce this risk, the concept of derivatives comes into the
picture. Derivatives are products whose values are derived from one or more basic variables
called bases. These bases can be underlying assets (for example forex, equity, etc), bases or
reference rates. For example, wheat farmers may wish to sell their harvest at a future date to
eliminate the risk of a change in prices by that date. The transaction in this case would be the
derivative, while the spot price of wheat would be the underlying asset.

A currency futures contract allows for three things:

 Hedging
Participants with exposure in currency can use futures to manage risk arising from
unfavourable exchange rate movements
 Speculation/Investment
Participants with a view on the Forex market can trade futures to profit from these
views, just like stocks or commodities or any other asset class
 Arbitrage
Entities with access to both Exchange traded Futures and OTC markets, or different
exchanges can exploit arbitrage arising due to pricing differences.

Currency futures benefits to investors as :

 Importers/Exporters may have some obligations in Forex market, trading in Currency

Futures will help them hedge their positions. Similarly, any investor can trade in
Currency Futures with or with no obligations.
 The counter-party risk is eliminated as the clearing corporation guarantees the trades.

3|Page
  By ensuring that the best price is available to all categories of market participants,
transactions are executed on a price time priority
 In Currency Futures, mark to market obligations are settled on a daily basis, unlike a
forward contract, which is an agreement to transact at a forward price on a future date
and no money changes hands except on the maturity date.

2. History of Currency Futures

Currency futures were first created at the Chicago Mercantile Exchange (CME) in 1972, less
than one year after the system of fixed exchange rates was abandoned along with the gold
standard. Some commodity traders at the CME did not have access to the inter-bank
exchange markets in the early 1970s, when they believed that significant changes were about
to take place in the currency market. They established the International Monetary Market
(IMM) and launched trading in seven currency futures on May 16, 1972. Today, the IMM is a
division of CME. In the fourth quarter of 2009, CME Group FX volume averaged 754,000
contracts per day, reflecting average daily notional value of approximately $100 billion.
Currently most of these are traded electronically.

3. Currency future derivatives in India

A RBI-SEBI Standing Technical Committee was set up to evolve norms and oversee
implementation of Exchange Traded Currency and Interest Rate derivatives. To begin with,
the Committee as looked at Exchange Traded Currency Derivatives and submitted a report on
Exchange Traded Currency Futures (―Report‖). This report was submitted on May 29, 2008.

The report laid down the framework for the launch of Exchange Traded Currency Future in
terms of the eligibility norms for existing and new Exchanges and their Clearing
Corporations/Houses, eligibility criteria for members of such Exchanges/Clearing
Corporations/Houses, product design, risk management measures, surveillance mechanism
and other related issues.

The Currency Future in India was first time traded at NSE on August 29, 2008. Thereafter
BSE and MCX were subsequently allowed to deal in currency future from October 1, 2008
and October 31, 2008.

3.1 Rationale behind Currency futures in India

The OTC transaction was happening in

With the help of electronic trading and efficient risk management systems, Exchange traded
currency future has helped to get transparency and efficiency in price discovery, elimination
of counterparty credit risk, access to all types of market participants, standardized products
and transparent trading platform. Banks are also allowed to become members of this segment
on the Exchange and this provides them new opportunity in this market segment.

4|Page
3.2 Exchanges engaged in Currency future in India

 NSE- Started in Aug,2008

 MCX-SX-Started in October,2008
 BSE- Started in October,2008
 USE-Will start on 31st Aug,2010

3.3 Available Currency futures in India

 US Dollar - Rupee Currency Futures Contract

 Euro - Rupee Currency Futures Contract-It was introduced on 29th Jan, 2010

 British Pound - Rupee Currency Futures Contract-It was introduced on 29th Jan, 2010

 Yen - Rupee Currency Futures Contract-It was introduced on 29th Jan, 2010

3.4 Features of Currency Futures

Standardized currency futures shall have the following features:

a. Only USD-INR INR/USD, INR/EUR, INR/JPY and INR/GBP contracts are allowed to be
traded.
b. For USD, EUR and GBP, the lot size will be 1,000 foreign currency; for JPY it will be
1,00,000 JPY (since quotation is for 100 Japanese Yen; lot size on trading system shall be
1,000 JPY)

c. The contracts shall be quoted and settled in Indian Rupees.

d. The maturity of the contracts shall not exceed 12 months.
e. The settlement price shall be the Reserve Bank‘s Reference Rate on the last trading day.

Permission

(i) Currency futures are permitted in US Dollar - Indian Rupee or any other currency pairs, as
may be approved by the Reserve Bank from time to time.

(ii) Only ‗persons resident in India‘ may purchase or sell currency futures to hedge an
exposure to foreign exchange rate risk or otherwise.

4. Benefits of currency trading in India

 Easy Accessibility - Small investors would get an easy access to currency futures
trading on the popular exchanges
 Easy Affordability - Margins are very low and the contract size is very small

5|Page
  Low Transaction Cost - As opposed to the high pay-out of commissions in overseas
forex trading, currency futures carries low costs for investors
 Transparency - It is possible for you to verify trade details on NSE if you have a
doubt that the broker has tried to cheat you
 Counter-party default risk - All the trades done on the recognized exchanges are
guaranteed by the clearing corporations and hence it eliminates the risks associated
with counter party default. NSCCL (National Securities Clearing Corporation
Limited) carries out all the notation, clearing and settlement process of currency
futures trading
 Standardized Contracts - Exchange Traded currency futures are standardized in
respect of lot size ($1000) and maturity (12 monthly contracts). Retail investors with
their limited resources would find it tremendously beneficial to take positions in
standardised USD INR futures contracts.

Moreover, the currency futures market is used by some companies for hedging. These
companies either purchase currency futures for their future payables, or sell the futures on
currencies for their future receipts.

Speculators may also buy or sell futures on a foreign currency as a protection against the
strengthening or weakening of the US dollar. So, speculators may be able to earn profit from
the rise or fall of these exchange rates.

5. Trends in Currency Future in India

Currency futures trading started in India on August 29, 2008 on National Stock Exchange.
This was the first time currency derivatives got listed on an exchange in India. Till this time,
the currency futures trading took place over the counter and were unorganized. With the entry
of the National Stock Exchange in the picture, currency trading became more organized with
the NSE acting as a counter party to all the transactions. Soon after the BSE and MCX also
marked their entry into the currency derivatives market.
Volumes on currency futures exchanges (mainly NSE and MCX) have consistently increased
since the start of trading. Combined daily volumes on the most active currency futures
bourses — MCX Stock Exchange (MCX-SX) and the National Stock Exchange (NSE) —The
BSE has failed to generate enough interest in this segment and the volumes remain abysmally
low on the exchange. Although volatility has ensured that volumes surged after the launch,
trading has been concentrated on front-month contracts as majority of users are traders, small
exporters and brokers/banks.

6|Page
 Market share Market share-
June,2009 June,2010

MCX-NX NSE MCX- NSE

47% 53% NX 44%
56%

The dominant exchanges in the Currency future market are NSE and MSX-NX. The above
pie-chart shows that the market share of MCX-NX is increasing and its taking the position of
NSE in this field. Although both the players are holding almost half share with them.

Traded Value
450000.00
400000.00
350000.00
300000.00
250000.00
200000.00 Trading value(Rs Cr)-NSE
150000.00
Trading value(Rs Cr)-MCX-NX
100000.00
50000.00
0.00

The above bar-chart shows that MCX-CX is trading more number of contracts in comparison
to NSE. The gap between the two exchange trading is increasing month by month.

7|Page
 No. of Contracts over the years
100000000.00

90000000.00

80000000.00

70000000.00

60000000.00

50000000.00
Contracts traded-NSE
40000000.00
Contracts traded-MCX-NX
30000000.00

20000000.00

10000000.00

0.00
Apr-09
Aug-08

Feb-09

Aug-09

Feb-10

Apr-10
Dec-08

Dec-09
Oct-08

Jun-09

Oct-09

Jun-10

We can see that the currency future market is in growing phase. The high fold increase in the
currency future trading is a testimony of the growth. The high in Indian rupee/dollar futures
demonstrates the increased demand among our global members and their commercial and
investor clients to manage their exchange rate risk or gain exposure to the Indian rupee. This
also reflects towards the increasing economy of India.

Month end open interest

5000.00
4500.00
4000.00
3500.00
3000.00
2500.00
2000.00 Month end open interest-NSE
1500.00 Month end open interest-MCX-NX
1000.00
500.00
0.00
Apr-09

Apr-10
Feb-10
Aug-08

Feb-09

Aug-09
Dec-08

Jun-09

Dec-09

Jun-10
Oct-08

Oct-09

8|Page
 Total no. of contracts trading and forecasting
300000000.00
200000000.00
TOTAL TRADING CONTRACTS
100000000.00
0.00 Linear (TOTAL TRADING
May-09
Aug-08

Aug-09

May-10
Aug-10
Nov-08
Feb-09

Nov-09
Feb-10

Nov-10
Feb-11
-100000000.00 CONTRACTS)

6. Comparisons with other market

Even though the combined volumes figure on NSE and MCX pales in comparison to
merchant and inter-bank forward transactions on the over-the-counter (OTC) market,
volumes on the currency exchanges are heading close to those traded on the offshore non-
deliverable forwards (NDF) market for the Rupee that is active, mainly in Singapore, London
and New York.

7. Risks of trading in Currency Futures

Trading in Currency futures comes with high levels of risk. Even a small adverse fluctuation
in the exchange rate may result in loss of the entire deposit of someone trading in currency.
Only people having an in-depth knowledge of the working of this market or have done a
thorough homework about the risks involved are advised to trade in this market.

8. Opportunities

 Introduction of Options trading

 FII participation could be allowed.
 NRI participation could be allowed which would add to more volumes and liquidity.
 Positions larger than $5 million could be allowed - a tiny limit when compared with the
size of exposure that is found in a trillion dollar economy‖.

9. Currency Futures – the road ahead

 Standardised rules for lot sizes and trading, framed by the Reserve Bank of India, means
exchanges and brokers have to rely on better technology and back-end support to attract
clients. Currency futures today are offered only for rupeedollar contracts for longer
periods (12 contracts) than the existing forward contracts (3 contracts – 3 months, 6

9|Page
 monthsand 12 months). MCX-SX will launch 11 currency trading websites in regional
languages (having launched 5 so far – in Hindi, Marathi, Gujarati, Tamil and Malayalam).
 Liberalisation in terms of changes in the contract size, variable lot sizes and extended
trading hours could help encourage larger participation. The rupee futures have a contract
size of $1,000. The position limit for a client is higher of 6% of the total open interest or $
5 million. For the trading member it is higher of 15% of the total open interest or $25
million. If the trading member is a bank it is higher of 15% of the total open interest or $
100 million. Hence till the total open interest rises, a participant cannot increase his open
interest beyond present proportion/limits.
 Foreign institutional investors are excluded from the market and their inclusion as
participants can help in stepping up volumes significantly.
 SEBI has approved a fourth exchange, promoted by a clutch of public and private sector
banks, to commence trading in rupee-dollar futures. United Stock Exchange of India,
expected to come on line in February 2009, is the fourth currency futures bourse after
National Stock Exchange, MCX-SX and BSE. The new stock exchange has been
promoted by key PSU lenders such as Bank of India, Bank of Baroda, Canara Bank,
Andhra Bank, Allahabad Bank, Indian Overseas Bank and Oriental Bank of Commerce,
Union Bank of India and United Bank of India jointly with MMTC that together will hold
minimum 49% in the bourse. Other shareholders include Standard Chartered Bank,
Federal Bank, Tata Consultancy Services and STCI, who will jointly own 25% and
national-level brokers with 20% stake.

10. Conclusion
With the current trend of growing market of currency futures, it is bound to grow at this rate.
However, it does not seem to be going well with its pace in India as industry due to lack of
awareness among retail investors and knowledge gap faced by the brokers.

India is one of the country to have achieved greater turnover of the currency futures market in
comparison to the currency forward market. The currency futures has a rosy future ahead,
given the industry provides good support in terms of making it popular and more conversant
with retail investors.

10 | P a g e
11.References

 http://www.nseindia.com/content/ncfm/smfedai.pdf
 http://www.bseindia.com/
 http://www.sebi.gov.in/
 http://economictimes.indiatimes.com/
 http://www.moneycontrol.com/
 http://www.mcx-sx.com/
 http://www.useindia.com/

11 | P a g e
12. Exhibit
TRADING STATISTICS
NSE
Trading Month end open
Contracts traded value(Rs Cr) interest

Aug-08 65,798 291 72

Sep-08 12,58,099 5,763 428

Oct-08 22,75,261 11,142 851

Nov-08 32,33,679 15,969 737

Dec-08 46,81,593 22,840 867

Jan-09 49,00,904 23,980 1,247

Feb-09 64,16,059 31,761 1,612

Mar-09 99,07,173 50,817 1,313

Apr-09 78,51,502 39,386 1,039

May-09 1,36,82,468 66,431 1,504

Jun-09 1,57,24,507 75,363 1,285

Jul-09 1,98,88,011 96,523 1,531

Aug-09 1,86,72,623 90,396 1,933

Sep-09 2,22,51,896 1,07,789 1,739

Oct-09 3,22,67,958 1,50,843 2,109

Nov-09 3,37,94,926 1,57,554 2,297

Dec-09 4,10,04,341 1,91,415 1,896

Jan-10 6,02,23,714 2,76,742 2,852

Feb-10 5,21,12,185 2,46,875 2,976

Mar-10 6,11,32,852 2,83,292 1,964

Apr-10 7,70,85,167 3,45,932 2,679

May-10 7,77,44,870 3,59,680 3,702

Jun-10 6,98,37,533 3,27,382 4,600

12 | P a g e
 MCX-SX
Contracts Month end open
traded Trading value(Rs Cr) interest
Aug-08
Sep-08

Oct-08 11,19,968 5,521 300

Nov-08 30,54,640 15,114 281

Dec-08 47,01,492 22,937 582

Jan-09 49,89,594 24,415 1,169

Feb-09 65,00,630 32,195 1,044

Mar-09 94,81,245 48,644 990

Apr-09 75,47,128 37,858 532

May-09 1,20,53,551 58,469 987

Jun-09 1,41,98,087 67,985 931

Jul-09 1,81,88,940 88,290 1,665

Aug-09 1,86,48,790 90,292 2,363

Sep-09 2,26,36,371 1,09,666 1,992

Oct-09 3,28,49,655 1,53,630 2,235

Nov-09 3,46,66,197 1,61,641 2,340

Dec-09 4,25,13,360 1,98,498 1,985

Jan-10 6,35,91,431 2,92,345 2,758

Feb-10 6,47,73,311 3,22,635 2,531

Mar-10 7,64,99,457 3,63,345 1,951

Apr-10 8,16,07,363 3,73,372 2,522

May-10 8,97,51,764 4,23,075 2,644

Jun-10 8,88,14,522 4,25,088 3,929

13 | P a g e