“Currency Futures in India”

1
 Introduction

 Largest financial market in the world

 ADTV (Average Daily Trading Volume ) globally is over US$ 3 trillion

 Forex derivatives accounts for 40% of ADTV (Average Daily Trading Volume)

 Futures contracts introduced in 1972 at the CME (Chicago Mercantile Exchange)

 Minimum trading size for most deals internationally is $100,000

 Forex as an asset class

 Main trading centers are London, NY, Tokyo & Singapore

(and now…..MUMBAI)

2
Forex Market: 24 Hrs a day – 7 days a week
24 Hrs Market

Location Regional time Indian Standard Time

Tokyo 9:00 a.m - 5:00 p.m 5:30 a.m - 1:30 p.m

Hong Kong 9:00 a.m - 5:00 p.m 6:30 a.m - 2:30 p.m

Singapore 9:00 a.m - 5:00 p.m 6:30 a.m - 2:30 p.m

Mumbai 9:00 a.m - 5:00 p.m 9:00 a.m - 5:00 p.m

London 9:00 a.m - 5:00 p.m 2:30 p.m - 10:30 p.m

New York 9:00 a.m - 5:00 p.m 7:30 p.m - 3:30 a.m

Los angles 9:00 a.m - 5:00 p.m 9:00 p.m - 5:30 a.m

3
 Participants

 Large banks (Citi bank, HSBC etc.)

 Multinationals & Commercial Companies
 Hedge Funds
 Institutions
 Retail Forex Brokers
 Speculators

4
 Few Terms

 Base Currency

 Term Currency

 Pips

5
Pricing

Future Rate = So e (rd-rf) T

Notation:

So = Spot Rate
rd = Domestic Rate of Interest
rf = Interest Rate in the foreign country
T = Tenure
E = 2.718

6
Major Events in International and Indian Monetary System
1. Free float of currencies - 1973.
2. Oil crisis in 1973 - quadrupling of oil prices
3. European Currencies float against US$ - 1978
4. Post emergency years
5. Majority Govt. formed - 1984-85
6. Liberalization of Indian Economy: devaluation of INR - 1991
7. East and South East Asian Currency crisis - 1997
8. Nuclear tests by India - 1998
9. Robust economic growth in India
10. High crude oil and commodity prices

7
Factors Affecting Exchange Rate

Political
Factors
Other Asian Uncertain
currencies Events

Equity Exchange Fundamental

Market Rate Factors

Policy Capital
Decision Flows
RBI
Intervention

8
Factors Affecting Currency Market

 Interest Rates
• Interest rates changes by central banks
• Expectation of change in interest rates

Interest rates are positively correlated with currency of that country

When interest rates increase in a country, its currency strengthens
against other currencies

9
 Factors Affecting Currency Market

 Inflows of Foreign Funds

• Strong economic fundamentals attract funds into the country
• Political stability and clear economic direction
• Country specific ratings based on economic indicators

Foreign funds inflows are positively correlated with a strong currency

When funds enter the country, they create a demand for the local
currency (read Rupee) resulting in the currency strengthening

10
 Factors Affecting Currency Market

 Release of Economic Data (Indicators)

• Buy sell decisions can be triggered by just a single statistic
• Source of statistic can be both national and international
• Numerous economic indicators are released every week
• Economic Indicators have a unique relationship in the manner in which
they impact markets

Identifying the manner in which an indicator will impact

the existing exchange rate is the challenge

11
Factors Affecting Currency Market

 RBI Intervention
• A tool in the hands of the government
• To meet long term economic objectives of growth and full
employment
• Protect fledgling economic sectors

Currency trader should be aware of government policies and the

limits beyond which RBI intervention could be expected

12
Factors Affecting Currency Market

 Natural Calamities
• Hurricanes (e.g. Katrina)

• Flooding, Drought

• Earthquake

Natural calamities weaken the economy and hence could result in

devaluation of currency

13
 Factors Affecting Currency Market

 Currency Reserve

• Countries with large reserves are considered to have robust economies

• Depleting reserves are a sign of slowdowns

• Impact on exchange rates

14
 Advantages from Currency Futures

 Provide an additional tool for hedging currency risk

 Further development of domestic foreign exchange market

 Commodity traders can hedge in currency futures

 Provide a platform to retail segment of the market to ensure broad based

participation based on equal treatment

 Efficient method of credit risk transfer through the Exchange

 Create a market to facilitate large volume transactions to go through on an

anonymous basis

15
 Forward Vs. Futures

Forward Contracts Future Contracts

 OTC  Exchange Traded

 Terms of contract changeable  Exchange assumes risk

 Poor liquidity  Terms defined by Exchange
 Few Players  High Liquidity
 High Margins  Many Players
 Settled by taking Physical  Low Margins
delivery
 Generally Cash Settled
 Relationship based
 Price Transparency
 Skill to Structure
 Standard structure
 No Regulations
 Abide by Regulations

16
 Benefits of Currency Futures

 Linear Payoff – not complicated for market participants to understand

 Standardized Contracts, small lot size – US $1,000 (and similarly for other pairs)

 Electronic Settlement of MTM Profits / Losses

 No counterparty default risk

 Efficient price discovery due to high liquidity

 Large number of market participants

 Transparency – real time dissemination of prices

 Access through internet from remote locations

17
 Contract Specification Snapshot

Trading Monday To Friday

Trading Hours 9:00 AM to 5:00 PM
Price Quotation In INR
Tenor of Contract Maximum of 12 Months
Available Contracts Monthly
Settlement Mechanism In INR
Settlement Reference Rate RBI Reference Rate
Last Trading Date Two working days prior to Final Settlement Date
Final Settlement Date Last working day of month, except Saturday.
Daily settlement : T + 1
Settlement Final settlement : T + 2

Note: The above product specification is as per the RBI-SEBI Standing Technical Committee
Report on Exchange Traded Currency Futures
18
 US Dollars - INR

Symbol USD-INR

Contract Size USD 1000

Tick size 0.25 Paisa or INR 0.0025

Quantity Freeze Above 10,000

+/-3 %(Tenure upto 6 months )
Price operating range +/- 5% (Tenure greater than 6 months
Higher of 6% of total open interest or USD 10
Client position limit million
Minimum Rs. 400/- per contract for one month of
spread, Rs. 500 for Two month Spread and
Calendar spreads Rs.800/- for three months spread
Initial Margin Minimum 1.75 % on First day and 1% thereafter
Extreme Loss Margin 1%

19
 EURO - INR

Symbol EUR - INR

Contract Size EURO 1000

Tick size 0.25 Paisa or INR 0.0025

Quantity Freeze Above 10,000

+/-3 %(Tenure up to 6 months )

Price operating range +/- 5% (Tenure greater than 6 months

Client position limit Higher of 6% of total open interest or EURO 5 million

Minimum Rs. 700/- per contract for one month of
spread, Rs. 1000/- for Two month Spread and
Calendar spreads Rs.1500/- for three months spread or more
Initial Margin Minimum 2.80 % on First day and 2% thereafter

Extreme Loss Margin 0.3 %

20
 Pound Sterling - INR

Symbol GBP - INR

Contract Size Pound Sterling 1000

Tick size 0.25 Paisa or INR 0.0025

Quantity Freeze Above 10,000

+/-3 %(Tenure up to 6 months )

Price operating range +/- 5% (Tenure greater than 6 months

Client position limit Higher of 6% of total open interest or GBP 5 million

Minimum Rs. 1500/- per contract for one month of
spread, Rs. 1800/- for Two month Spread and
Calendar spreads Rs.2000/- for three months spread or more
Initial Margin Minimum 3.20 % on First day and 2% thereafter

Extreme Loss Margin 0.5 %

21
 Japanese Yen - INR

Symbol JPY - INR

Contract Size Japanese Yen 100000

Tick size 0.25 Paisa or INR 0.0025

Quantity Freeze Above 10,000

+/-3 %(Tenure up to 6 months )

Price operating range +/- 5% (Tenure greater than 6 months

Client position limit Higher of 6% of total open interest or YEN 200 million
Minimum Rs. 600/- per contract for one month of
spread, Rs. 1000/- for Two month Spread and
Calendar spreads Rs.1500/- for three months spread or more
Initial Margin Minimum 4.50 % on First day and 2.30% thereafter

Extreme Loss Margin 0.7%

22
Benefits of New Currency Pairs (EUR/INR, GBP/INR,
JPY/INR)

• Hedging against cross-currency volatility

• Mitigate risk in exports and imports across all major
currencies
• Will improve the depth and breadth of currency market
• Will help mid and small-sized manufacturers to secure the
right market rate and increase transparency
• Exporters can price their products and services
appropriately by taking into account the prices of contracts
maturing in different months

23
 Appreciation and Depreciation of Currency

Scenario 1 USDINR 49

Event Importer Exporter

Appreciation of USD Loses Money Gains Money

USDINR 45
Depreciation of INR Loses Money Gains Money

Scenario 2 USDINR 45

Event Importer Exporter

Depreciation of USD Gains Money Loses Money

USDINR 40
Appreciation of INR Gains Money Loses Money

24
 Using Futures to Hedge Currency Risk

Transaction
An exporter who has executed an export order and money is to be
received on 31 Dec 10, say USD 500,000.

Spot USD/INR was as 43.80 when contract was executed.

Risk
Rupee will appreciate and export will realize USD 500,000 at a rate
lower than 43.80

Hedge Strategy
Short (Sell) 500 contracts of each expiry 31 Dec 10

25
 Payoff of Hedge vis-à-vis the transaction:

On 28th August

Spot is at 43.80
USDINR Dec futures at 44.10
Short (Sell) 500 USDINR futures contracts expiry Dec 2010

On Expiry Date – 31st Dec 2010

Spot on Expiry P/L on Exchange P/L on Physical

44.50 (INR 2,00,000) INR 3,50,000
43.50 INR 3,00,000 (INR 1,50,000)

So if rupee moves either way corporate is hedged

against currency fluctuation.
26
 Commodities Vs. Currency

All international reference commodities prices are taken from

international market and reflected in MCX in Rs. The prices of these
are in parity with international market most of the times. So MCX
prices are multiplication or USD/INR rate and international price.

Commodity MCX price if International MCX price if

USD/INR(49.35)Rs price ($) USD/INR(50.35)(Rs.)
Gold 14500 915 14800

Silver 22600 14.00 23050

Crude 2850 57.85 2910

Copper 240 4826 245

Change in price of commodities prices if USD/INR change form 49.35 to 50.35

27
 Commodities Vs. Currency

Expectation :- Gold prices going down form 915 to 900

Scenario 1: trading in commodities market only

Short Position: 1 lot of MCX Gold futures at 14500

USD/INR rate 49.35

Gold comes down to 900 but currency goes to 50.35.

So MCX gold price comes 14560.

Loss in Gold MCX Futures is (14560 – 14500) x 100 = INR 6000

28
 Commodities Vs. Currency

Scenario 2- Strategy for trading using Currency and

Commodities market
Short Position: 1 lots of MCX Gold futures at 14500
• Simultaneously, take long position in approx. 29 lots of
USDINR futures contracts at 49.35
Why approx. 29 lots?
• If spot USDINR is 49, then lot size of MCX USDINR
futures is approx: INR 49,350
• Value of 1 lot of MCX Gold futures contracts is approx:
INR 14,50,000 Thus, no. of lots corresponding to
INR 14.50 Lakhs is approx. 29 lots
Loss in Gold MCX Futures is (14560 – 14500) x 100 = INR 6000
Profit in USD/INR future (50.35 – 49.35) x 29 x 1000 = INR 29000
Net profit = 29000 – 6000 = INR 23000
29
 Equity Vs. Currency

Sensex
SENSEXvrs.
VS.Rupee
USD
22500 60

20500

18500 55

16500

14500 50
V alu e

V alu e
12500

10500 45

8500

6500 40

4500

2500 35

30
Equity Vs. Currency

As the last graph shows Equity market and USD/INR

are inversely proportional. Equity market has
following factor related Currency market
• FII- inflow and outflow
• Country’s Growth Indicator

Equity investor can make the portfolio much safer by

adding USD/INR in his portfolio

31
Benefit over currency Forward

The differences between currency futures and currency

forward
• Currency futures have been standardized, like lot
sizes, margin and fixed MTM (Mark to Market),
forwards can vary from bank to bank, and lots might
differ, generally banks don’t offer quotes below 5
million, and if they do also such quotes can be way
away from the market
• In future the quotes are transparent and the market
participants determine them, banks on the other hand
consider premium or discount on forwards.
• Transparency and dissemination in futures is easy
and available, bank forwards on the other hand might
be costly and disseminated is through letters, faxes or
emails, which can become cumbersome

32
Benefit s over currency Forward

• Futures are traded through an exchange and it acts as

a counter party risk guarantee, bank forwards are OTC
(Over the counter) contracts and hence this feature is
not available
• Banks develop exotics and custom made contracts for
large deals and the portfolio is generally not adjusted
so can result in sudden losses for customers after a
period of time. In futures the transaction is
transparent and daily MTM (Mark to Market) ensures
that the transaction is monitored actively
• Bank forwards are not for common people with small
needs, not for SME (Small Medium Enterprise) or
people with smaller risks, futures helps the smallest of
the participant to fine tune their hedges

33
Currency Futures is best suited for -

• NRIs involved in remitting money into India

• SMEs (Small Medium Enterprises) / Individuals involved in
Imports/Exports
• Corporate/ Institutions involved in Imports/Exports and
anybody else who has foreign currency exposure
• Who want to Hedge against their equity exposure

34
 A/C opening

Documentary requirements for Currency Derivative

FOR INDIVIDUALCLIENTS:
1. Photograph of account holder (s).
2. PAN Card Copy
3. Address Proof
4. Bank Proof containing name of the constituent
5. All documents should be self – attested & duly verified by Religare Official
with In Person stamp
6. Client master data printout from LD or AXIS in case of existing equity
client.

Contact :- Rajesh Gupta

Phone No. 011-40552676
The A/c opening forms are also available at our website
http://www.religaresecurities.com/Currency_futures.asp

35
 Margin Requirement

• Following margin requirements are prescribed by the

exchange for trading in this segment :

• Initial Margin :- it include two margins

– Span margin:- The actual position monitoring and margining
is carried out on-line through Parallel Risk Management
System (PRISM). PRISM uses SPAN® (Standard Portfolio
Analysis of Risk) system for the purpose of computation of
on-line margins, based on the parameters defined by SEBI.
– ELM (Extreme Loss Margin):- ELM has been fixed as one
percent. For spread position one third of ELM is charged.

36
• All payment instrument like Cheque, DD etc. need to be deposited
in Religare Securities Ltd.
• Exchange wise Margin allocation % need to defined
• Mail to rmc.currency@religare.in for any queries

STOCK EXCHANGES PERCENTAGE OF MARGIN

MCX-SX

NSE-CDS

Combined Equity- Cash &

F&O Segment [NSE +
BSE]

37
Research
• For currency research you can contact metals
(commodities and currencies) research desk at 0120-
3395520-28
• USD/INR, EURO/INR, YEN/INR, GBP/INR report sent
every day
• Included in commodities Monthly newsletter

38
Regulation

• Currency Futures are regulated by RBI and SEBI both.

• Profit-Loss from Currency Futures is not considered as
Speculative income.
• For CTCL id NISM in Derivative or Currency Market is
required.

CTCL Application
Form

39
Thank You

40