Group members:

Kinjal
Pranav
Manoj
Srikant
Mahesh
 Introduction to Currency Derivatives

 Global Scenario

 Indian Scenario

 Regulations

 Euro & its effect on India

 BOP

 Interest rates

 Speculation
 Buy or sell currencies at a future date

 Rates of exchange agreed on the very day of

deal
Type of contract Settlement

Cash Same working day

Tom Next working day

Spot Second working day

Forward Beyond spot date

  Determination

Spot USD/INR 40.0250- 40.0300 Spot USD/CHF 1.3685-1.3695

+ 1 month 400- 450 - 1 month 35- 30
1 moth fwd USD/INR 40.0650-40.0750 1 month fwd USD/CHF 1.3650- 1.3665
Example:

 Bank A: Rs 46.7510- 46.7630

 Bank B: Rs 46.7680- 46.7770
 Choice 1:
 Choice 2:
 Contract to exchange 1 currency with another
at specified date & rate in future

 Features:
1. Standardized & exchange traded
2. Contract size
3. Initial margin
4. Maintenance margin
 Buy base currency (USD)

 Expecting base currency to rise in value

 On 1 May, 2008 expects INR will depreciate
against USD

 Buys 1USD/INR contract

New rate 42.4600 x 1000 42460

Previous rate 40.5800 x 1000 40580

Profit Rs. 1880

Long position in futures Short position in futures

Buying Selling

Buy base currency Sell base currency

Want base currency to rise Want base currency to fall

 Take a position in futures market opposite to
position in physical market
New rate on July 1 43.2300 x 110 4755.30

Previous rate 39.4100 x 110 4335.10

Increased cost Rs. 420.20

Total increased cost 420.20 x 1000 barrels Rs. 420200

 Spot market Futures market
Jan 1 1 USD= ` 39.41 July USD contract at IN` 39.90
Current Cost= 39.41*110*1000=4335100 Price per contract = 39.90*1000= I`NR
39900
Appro contracts 110000/1000= 110
Buy 110 contracts for 39900*110= 4389000
July 1 1 USD= IN` 43.23 Sell 110 contracts, rate= 43.72
Buy 110000 USD*43.23 = 4755300 Price per contract = 43.72*1000=` 43720
Hence, value of 110 contracts =
43720*110= 4809200

4755300- 4335100 4809200- 4389000

= 420200 = 420200

4755300- 420200
= 4335100
 Holder has the right to exchange a fixed amount of
one currency for another at pre-fixed rate on or
upto a specified date in future.
 Importer purchases call option from BOI,
Amount= USD 1 million, rate= R`s 43.25 per $,
Delivery date 30th Sept, premium= R`s 0.54/$
 On 30th Sept., spot dollar rate

“In the money”

Spot price = 43.90 “Out the money”
- Exercise price = 43.25 Spot rate = 43.10
Pay off = 0.65
 Size of contract:
€62,500

Exercise price The indicated contract price

0.90 ¢/€ is:
€62,500  $0.0125/€ = $781.25

Maturity month
One call option gives the holder the right to purchase
One call option
€62,500gives
for $56,250 (= €62,500 
the holder Option price for
$0.90/€)
the right to purchase €62,500 for purchase of €1 at
$56,250. This option costs $781.25. 90¢ is 1.25 ¢
EUR Euro to US dollar c.f.
GBP British pound to US dollar c.f.
CHF Swiss Franc to US dollar c.f.
AUD Australian dollar to US dollar c.f.
CAD Canadian dollar to US dollar c.f.
RP Euro to British pound c.f.
RF Euro to Swiss franc c.f.
RANK EXCHANGE TRADING VOLUME (Number
of contracts)
1 Korea Exchange 2 474 593 261

2 Eurex 1 526 751 902

3 Chicago Mercantile Exchange 1 403 264 034
4 Chicago Board of Trade 805 884 413
5 Euronext.liffe 730 303 126
6 Chicago Board Options Exchange 674 735 348
7 International Securi-ties Exchange 591 961 518
8 Sao Paulo Stock Ex-change (Bovespa) 287 518 574

9 Bolsa de Mercadorias y Futuros 283 570 241

10 New York Mercantile Exchange 276 152 326
CURRENCIES VALUE
(percentage)
USD/EUR 31

USD/CHF 15

EUR/CHF 14

USD/JPY 11

USD/GBP 6

OTHER 23
 1992 1995 1998 2001 2004 2007
EUR/USD _ _ _ 30 28 27
USD/DEM 25 22 20 _ _ _
USD/FRF 2 4 4 _ _ _
USD/JPY 20 21 18 20 17 13
GBP/USD 10 7 8 11 14 12
AUD/USD 2 3 3 4 5 6
USD/CHF 6 5 5 5 4 5
CAD/USD 3 3 3 4 4 4
USD/SEK _ _ _ _ _ 2
USD/other _ 17 25 17 16 19
EUR/JPY _ _ _ 3 3 2
EUR/GBP _ _ _ 2 2 2
EUR/CHF _ _ _ 1 1 2
OTHER 32 18 14 3 6 6
 The relative weight of the core currencies (EUR, USD,
JPY and GBP) declined in April 2007.
 USD has declined slightly in JPY and the CAD remains
unchanged.
 EUR as a base currency rose further between 2004 and
2007.
 The GBP declined , confirming the global trend.
 The USD remains the most actively traded currency.
 Other currencies in futures are South African Rand,
Hungarian Forint, Polish ,Zloty, Czech Koruna,
Brazilian Real, Swedish Krona.
 Currency price stability
 Easy access
 Complete transparency
 Better liquidity
 Lower transaction costs
 Easy to trade
 Exchange traded instrument
 Smaller lot size ($1000)
 Elimination of counter-party risk
 Low brokerage charges
 Decent intraday volatility
 Transparency, efficiency and speed
Contract Size USD 1000
Tick size R`s. 0.0025
Trading cycle 12 Months
Expiry day Last working day of month
Settlement basis Daily MTM on T+1 basis and final on cash basis on T+2
basis
Settlement price RBI reference rate for last trading day of contract and
daily MTM settlement price is closing price for futures
contract for the trading day
Settlement Cash settled
 NSE August 29, 2008

 BSE October 1, 2008

 MCX October 6, 2008

Currency futures trading will be of interest to :
1. Investors

2. Hedgers

3. Arbitraguers
 RBI – SEBI standing technical committee
 BSE taking 15 % stake in United Stock Exchange
of India
 Average combined daily trading volume around
R` 2000 Crore
 Retail participation increasing due to increasing
awareness about the concept
 BIS Triennial Survey – FX market in India 16th largest
globally in terms of total daily turnover
 MCX – SX daily turnover of Rs` 3838 Crore in July
from Rs` 324 Crore in October
 SMEs actively participating in the futures market due
to advantage of hedging as well as small brokerage
charges
 Assocham wants extension in trade timings till 11.30
pm from SEBI.
 NO. of contracts traded – 70,000
 First trade by East India Securities Ltd.
 Among bank participants HDFC bank was
first to trade
 Largest trade by Standard Chartered bank –
15,000 contracts
 Most active contract was Sept. 2008 expiry
with 43,000 contracts being traded
Month Avg. Vol. Avg. daily value OI at the end of the month
(Contracts) (Lakhs)

Jan. 09 245,045 119,899 254,797

Feb.09 337,687 167,271 315,316

Mar.09 521,430 267,459 277,554

Apr.09 490,719 229,094 206,620

May 09 684,123 332,156 318,203

Month Avg. Vol. (Contracts) Avg. daily value OI at the end of
(Lakhs) month

Jan.09 249,480 122,075 238,887

Feb.09 341,467 169,450 204,217
Mar.09 499,013 256,021 194,265
Apr.09 471,695 236,613 105,957
May 09 560,865 292,346 208,805
 MCX and NSE neck to neck competition with
regards to volume and turnover
 BSE also trying to enter into aggressive strategy
while partnering with USEI
 NSE offered to its members a free product called
“TAME” as a powerful tool for charting
 MCX providing the trading platform in Indian
languages as well for attracting the greater
customer base from various corners of the
country
 MCX also tying up with trade bodies for
registering their members on its platform
 Perfect hedge not possible as compared to
OTC contract

 Cost of hedge increases in futures as

compared to forward contract

 FII participation will lead to more speculative

activities and wide swings in currency trades
thus affecting trade balance
 Clearing Members

 Clearing Banks
 The financial soundness  of the members.
 Upfront initial margin is charged for all the
open positions of a CM.
 The on line position monitoring system
monitors the member open positions.
 Margin violations result in withdrawal of
trading facility.
Initial margin
 The initial security deposit paid by a member.
 Minimum Initial margin of 1.75% on day of trade and thereafter 1%

Portfolio based margin

 Portfolio margin accounting requires a margin position that is equal to
the remaining liability that exists after all offsetting positions have
been netted against each other. 
 For example, if a position in the portfolio is netting a positive return,
then it could offset the liability of a losing position in the same
portfolio.
 This would reduce the overall margin requirement that is necessary for
holding a losing derivatives position.
Calendar spread margins.
 A currency futures position at one maturity
which is hedged by an offsetting position at a
different maturity is treated as a calendar
spread.
 It is at a value of RS`250 for all months of spread.
Extreme loss margin
 1% of value of gross open positions.
 Shall be deducted from the liquid assets of
clearing member.
 Margin collection  and enforcement.
 Safeguarding client’s money. 
 Periodic risk evaluation report.
 Surveillance. 
 Unique client code.
 Securities contracts(regulation)act,1956.

 SEBI act,1992 .

 RBI-SEBI standing technical committee.

 FEMA 1999.
 The trading should take place through an
online. 
 Required independent clearing corporation. 
 The exchange must have an online
surveillance capability. 
 The exchange shall have a balance sheet
networth of at least `100 crores. 
 Should be a 
company incorporated under the companies 
act,1956.

 The CC must perform full novation.

 The CC should enforce the stipulated margin

requirements,MTM settlement,EFT
 Coupling of Indian economy with world

 Volatility in currency

 Increase in the share of emerging market

foreign exchange in total turnover

 Increase in use of euro as invoice currency

 EU is India's largest trading partner

 bilateral trade in Goods is expected to exceed

EUR 70.7 billion by 2010 and EUR 160.6 billion
by 2015

 Bilateral trade in services is expected to

exceed EUR 246.8 billion by 2015
 Hedge instruments available to Indian firms will
rise
 Advantages of trading on exchange
 Low transaction cost
 Enhance transparency, safety, and
competitiveness of a financial system
 Individuals & SME participation
 Foreign exchange turnover will rise
 Corporate has raised debt from foreign markets