V Environment today has many risks than before

and companies those manage these risks

becomes successful.

V There are many factors that influence the risks

but the modern method to manage risk is
´hedgingµ.
V 
ERTAI ITY OF RETR .
V
AIFIED I TO TWO TYPE.
BI E RI
Includes strategic risk, macroeconomic risk,
competition risk and technological
innovation risk.
FI A
IA RI

aused due to financial market activities.
Includes liquidity risk and credit risk.
V An effective manager should be aware of the
instruments for handling financial risks.

V Derivatives are financial instruments that are

used as risk management tools.

V They help in transferring riskfrom the risk

averse to the risk taker.
V BROADY
AIFEID I TO 3 TYPE

EDGER
Trade with an objective to minimize the risk in trading.
edgers willingly bear some costs in order to achieve
protection against unfavorable price changes.
PE
ATOR
peculators use derivatives to bet on the future
direction of the markets.
They take calculated risks but the objective is to gain
when the prices move as per their expectation.
ARBITRAGER
Arbitrageurs try to make risk-less profit by
simultaneously entering into transactions in two or
more markets or two or more contracts.
For example, they try to benefit from difference in
currency rates in two different markets.
V Foreign exchange rate is the value of a foreign
currency relative to domestic currency.
V The participants of the market are banks,
corporations, exporters, importers etc.
V A foreign exchange contract typically states the
currency pair, the amount of the contract, the
agreed rate of exchange etc.
V A foreign exchange deal is always done in
currency pairs, for example, us dollar ² indian
rupee contract (usd ² inr); british pound ² inr
(gbp - inr).
V In a currency pair, the first currency is referred
to as the base currency and the second currency
is referred to as the ¶counter/terms/quote·
currency.
V The exchange rate tells the worth of the base
currency in terms of the terms currency.
V Also known as a pegged exchange rate, is
when a currency's value is maintained at a
fixed ratio to the value of another currency.
V When the value of currency rises beyond the
permissible limits, the government sells the
currency in the open market, thereby
increasing its supply and reducing value.
V Also when the value of currency falls down
govt. Buys it from open market.
V A floating exchange rate is determined by a
market mechanism through supply and
demand for the currency, termed as ´self
correctingµ.

V For example, if demand for a currency is low,

its value will decrease, thus making imported
goods more expensive and exports relatively
cheaper.
V F DAME TA FA
TOR
The fundamental factors are basic economic policies
followed by the government in relation to inflation,
balance of payment position, unemployment etc.
V TE
 I
A FA
TOR
2



2 



  

   
 



V POITI
A FA
TOR
Exchange rates are susceptible to political instability
and can be very volatile during times of political
crises.
V PE
ATOR
peculative activities by traders worldwide also
affect exchange rate movements.
Ex: If speculators think that the currency of a country
is over valued and will devalue in near future, they
will pull out their money from that country resulting
in reduced demand for that currency and
depreciating its value.
V The market participant wants to exchange the
currency at a future date.
V Enter into a futures/forward contract.
V Buy a currency option contract, wherein he
commits for a future exchange of currency,
with an agreement that the contract will be
valid only if the price is favorable to the
participant.
 á

 á 


 
  



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)
*
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#+!.
V EDGI G I G
RRE
Y FTRE
ORT EDGE
It is taken by someone who already owns the base
currency or is expecting a future receipt of the base
currency.
EX:An exporter, who is expecting a receipt of D in
the future will try to fix the conversion rate by holding
a short position in the D-I R contract.
O G EDGE
It involves holding a long position in the futures
market.
A ong position holder agrees to buy the base currency
at the expiry date by paying the agreed exchange rate.
This strategy is used by those who will need to acquire
base currency in the future to pay any liability in the
future.
EX: An importer who has to make payment for his
imports in D will take a long position in D I R
contracts and fix the rate at which he can buy D in
future by paying I R.
V PE
ATOR A TI
IPATE TAT TE
POT PRI
E I TE FTRE WI BE
DIFFERE T FROM TE PREVAII G
FTRE PRI
E.
V A PE
ATOR WO A TI
IPATE A
WEAE I G OF TE BAE
RRE
Y I
TERM OF TE TERM
RRE
Y, WI
OD A ORT POITIO I TE
FTRE
O TRA
T O TAT E
A
MAE A PROFIT WE TE EX
A GE
RATE MOVE DOW .
V PROD
T PE
IFI
ATIO 
 DERYI G
TRDI G OR
IZE OF TE
O TRA
T
QAOTATIO
TE OR OF TE
O TRA
T
AVAIABE
O TRA
T
ETTEME T ME
A IM
ETTEME T PRI
E
FI A ETTEME T DAY
V EDGI G
V R

 

A speculator can take exactly the same position on
the exchange rate by using futures contracts.
V R


 


Futures can be used by a speculator who believes
that an underlying is over-valued and is likely to see
a fall in price.
V ARBITRAGE
Arbitrage is the strategy of taking advantage of
difference in price of the same or similar product
between two or more markets .
If the same or similar product is traded in say two
different markets, any entity which has access to
both the markets will be able to identify price
differentials, if any.
One of the methods of arbitrage with regard to D-
I R could be a trading strategy between forwards
and futures market
V Membership
Only Trading Membership
Both Trading Membership and
learing
Membership of 


Both Trading Membership of E and
learing
Membership of 


V Participation
Participants are clients of trading member who trade
through them.
Participants may trade through multiple trading
members but settle through a single member.
V Individuals.
V Partnership Firms registered under the Indian
Partnership Act, 1932.
V
orporations,
ompanies or Institutions or
subsidiaries of such
orporations.
V
ompanies or Institutions set up for providing
financial services.
V uch other person as may be permitted under
the ecurities
ontracts (Regulation) Rules
1957
V Banks authorized by the Reserve Bank of India
under section 10 of the Foreign Exchange
Management Act, 1999 as ¶AD
ategory - I
bank· are permitted to become trading and
clearing members.
V Requirements:
Minimum net worth of Rs. 500
rores
Minimum
RAR of 10 per cent
et PA should not exceed 3 per cent
Made net profit for last 3 years
V !

 

Permitted lot size for DI R future contracts is
1000  dollars. Members place orders in terms of
number of lots.
If a member wants to take a position for 10000 D,
then the number of contracts required is 10000/1000
= 10 contracts.
V àR

Price steps in respect of all currency futures contracts
admitted to dealing on the Exchange have been
specified to be Rs. 0.0025.
EX: If the current price is I R 48.5000, a single tick
movement will result the price to be either I R
48.5025 or 48.4975 for one D.
V r 



Quantity Freeze for
urrency Futures
ontracts is
10,001 lots or greater i.e. orders having quantity up
to 10001 lots are allowed.
V 
!

The base price of the contracts on subsequent trading
days is the daily settlement price of the DI R
futures contracts.
V !

 
The exchanges generally disseminate the open price,
high price, low price, last-traded prices and the total
number of contracts traded in the day through its
trading system on a real-time basis.
V @
 

When the orders are received, they are time stamped
and then immediately processed for potential match.
The best buy order will match with the best sell
order.
The matching of orders at E is done on a price-
time priority i.e. in the following sequence:
Best Price
Within Price, by time priority
Orders lying unmatched in the system are 'passive'
orders and orders that come in to match the existing
orders are called 'active' orders
V @
 
à

 

——A Day order is valid for the day on which it
is entered.
2 

 
2An IO
order allows the
Trading Member to buy or sell a security as soon as the order
is released into the market.
! 
 

i 
 the price has to be specified while entering
the order into the system.
ÿ
 ere the constraint is the time of
execution and not the price.
R

i
Ri top-loss orders allows the trading
member to place an order,which gets activated only when
the market price of the relevant security reaches a threshold
price.
V à

 

The purpose of market watch is to allow continuous

monitoring of contracts that are of specific interest to
the user.
V 2  
The inquiry window enables the user to view
information such as Market by Price (MBP),Previous
Trades (PT), Outstanding Orders (OO).

 
 !
!nable the user to view passive
orders in the market aggregated at each price and are
displayed in order of best prices.

  2
acilitates the user to view the order/
trade statistics for the contract descriptor.
V While entering orders on the trading system,
members are required to identify orders as
being proprietary or client orders.
V Proprietary orders should be identified as 'Pro¶
& clients should be identified as '
li¶.
V The EAT-
D system supports an order
driven market, wherein orders match
automatically.
V Order matching is essentially on the basis of
security, its price and time.
V  


a trading member has the facility of defining a
hierarchy amongst users of the system.
This hierarchy comprises corporate manager, branch
manager and dealer.
V  
 

The term '
orporate
manager' is assigned to a user placed at the
highest level in a trading firm.
V   

The branch manager is a term
assigned to a user who is placed under the
corporate manager.
V 


Dealers are users at the lower most
level of the hierarchy.
V Following cases explain activities to users




 
  





 
  


  
 
  


 
  


V    

 



  
V !
 


Fixing position limits is one of the mechanisms to
control excessive concentration of positions with a
single entity and well as prevent building of
positions which are way too large as compared to
the underlying market.
V   
2 
Initial margin is payable on all open
positions of
learing Members, upto client level, and
is payable upfront by
learing Members in
accordance with the margin computation
mechanism.

R 

A calendar spread is a
position in an underlying with one maturity which is
hedged by an offsetting position in the same
underlying with a different maturity.
 
The minimum margin
percentage is 1.75% on the first day of currency
futures trading and 1 % thereafter, which is scaled
up as per the rules and regulations specified by the

learing
orporation from time to time.
V 
 R



Futures Final ettlement Margin is levied at the
clearing member level in respect of the final
settlement amount due.
V !"

# 

learing members are subject to extreme loss
margins in addition to initial margin.
Requirements:
For client positions - it is netted at the level of
individual client and grossed across all clients, at the
trading/ clearing member level.
For proprietary positions - it is netted at trading/
clearing member level without any setoffs between
client and proprietary positions.
V R


!

— R


 















 


 
! R


 













V R


R

 !


Daily mark to market settlement
Final settlement
Option to settle daily MTM on T+0 day: Option to
settle daily MTM on T+0 day
V For contracts executed during the day but not squared
off during the day:
urrent Day·s ettlement Price ²
Trade Price
V If the contracts were executed as well as squared off
during the day: ell Price ² Buy Price
V If the contracts were brought forward from previous
day close and squared off during the day:Trade Price ²
Previous Day ettlement Price
V If the contracts were brought forward from previous
day close but not squared off during theday:
urrent
Day·s ettlement Price ² Previous Day ettlement Price