Currency Futures

National Stock Exchange of India Limited

Why Currency Risk emerged ???

The last few years have seen extreme volatility in USDINR and G3 currencies Correlation to equities and oil has been high Corporate selling of USD contributed significantly to volatility. Not only spot, forwards have also been very volatile. Initiatives towards stricter Accounting principles.

Translates to

Need for a sound Risk Management Policy Analyzing the profit and loss profile and balance sheet exposures Strict definition of treasury role

Dynamic review of applicability and execution of the risk management policy

Factors affect trading decisions

Macro economic views Monetary Policy RBI intervention Supply and demand of forex Economical and political scenario Data announcements

USD sentiment Performance of equity markets Performance of other Asian currencies Performance of key commodities affecting trade Policy announcements affecting flows trade or capital
3

Foreign exchange markets

Products Spot Forwards Outright forwards = Spot + Forwards (Points)

Market participants Market makers Hedgers, arbitrageurs, speculators Banks, institutions, corporate entities, individuals

Regulators

Understanding Currency Quotes

Concept of Base Currency & Quoted Currency USD / INR Base Currency / Quoted Currency First two letters of the code are the two letters of the Countrys code and the third letter represents initial of the Currency name of respective Country For example: USD - US represents United States and D represents Dollar Except EURO as it is the official currency of Euro Zone

Understanding Currency Quotes - 1

Two way quotes Forex markets works on two way quotes Bid rate - rate at which the bank is ready to buy dollars Ask rate - rate at which the bank is ready to sell dollars The difference between the Bid and the Ask is called the Spread

Quotation methods Direct method (European Method) Indirect method (American method)

Understanding Currency Quotes - 2

Bid Ask USDINR

46.48/46.49

Bid Bank is ready to buy dollars, i.e. exporters will have to sell at this rate

Ask Bank is ready to sell dollars at this rate, i.e. importers will have to buy at this rate

Note : In case of indirect quote, one must take care of Bid Ask rate. Also the difference between the Bid/Ask is Banks profit.

Understanding Currency Quotes - 3

European Method (Direct)

Bid Ask Banks buying rate Banks selling rate USD/INR USD/JPY 46.41 46.43 89.32 89.34

Exchange Rate expressed in local currency in terms of per unit of Foreign Currency.

American Method (Indirect)

Exchange Rate expressed in foreign currency in terms of per unit of Local currency.

EUR/USD 1.4000 GBP/USD 1.6193 AUD/USD 0.8989 NZD/USD 0.7066

1.4009 1.6195 0.8991 0.7067

Exchange rate movements European Method

E.g. - USD/INR current rate 46.50 47.50 USD/INR 46.50 This would mean that US dollar has appreciated against the rupee. That Rupee has depreciated against the dollar.

Exchange rate movements American Method

E.g. EURO/USD current rate 1.4045 1.4500

EUR/USD
1.4100

This would mean that EURO has appreciated against the Dollar. That US $ has depreciated against the Dollar.

10

How does the exchange rate affect corporate entities?

Cost of imports Realization on exports Capital goods imports Service contracts realizations Engineering contracts offshore Cost of capital equity / debt Interest costs Indirect exposures

PROFITABILITY

11

11

Usage of New Currency Futures Contract

According to estimates by market players, around 20 per cent of the currency trades in over the counter (OTC) market is done in non-dollar currency. Introduction of new currency pairs will help in improving the depth and breadth of the currency market. Directional Views Hedging Existing Exposure Transparency in the Cross rates on the CDS platform will help the corporate to mitigate the curtail two-currency risk

12

Contract specification
Category Trading Hours Description 9:00 am to 5:00 pm (Monday to Friday on all business day) 12 near calendar months Two business days prior to last business day of the month (spot convention).

Contract Months

Last Trading Day

Final Settlement Day

Settlement Holiday Calendar

Last working day of the month

INR cash settled at RBI reference rate Mumbai-Interbank
13

Features of Currency Pairs

USD-INR
Rate of exchange between 1 USD and INR (USDINR)

EUR-INR

GBP-INR
Rate of exchange between 1 GBP and INR (GBPINR) GBP 1000

JPY-INR

Quotation

Rate of exchange between 1 EURO and INR (EUR-INR)

Rate of exchange between 100 JPY and INR (JPY-INR)

Contract Size

USD 1000

EURO 1000

JPY 100000

Calendar Spread Margin

Rs. 400 for a spread of 1 month; Rs 500 for a spread of 2 months, Rs 800 for a spread of 3 months

Rs.700 for spread of 1 month Rs.1000 for spread of 2 months Rs.1500 for spread of 3 months or more

Rs.1500 for spread of 1 Rs.600 for spread month of 1 month Rs.1800 for Rs.1000 for spread of 2 spread of 2 months months Rs.2000 for Rs.1500 for spread of 3 spread of 3 months or months or more more
14

Position Limits
USD-INR
6% of the Open Interest or USD 10 Million whichever is higher 15% of the Open Interest or USD 50 Million whichever is higher 15% of the Open Interest or USD 100 Million whichever is higher

EURO-INR
6% of the Open Interest or EUR 5 Million whichever is higher

GBP-INR 6% of the Open Interest or GBP 5 Million whichever is higher

JPY-INR 6% of the Open Interest or JPY 200 Million whichever is higher

Client Level

Non-Bank Trading Member Level

15% of the Open Interest or EUR 25 Million whichever is higher 15% of the Open Interest or EUR 50 Million whichever is higher

15% of the Open Interest or GBP 25 Million whichever is higher 15% of the Open Interest or GBP 50 Million whichever is higher

15% of the Open Interest or JPY 1000 Million whichever is higher 15% of the Open Interest or JPY 2000 Million whichever is higher
15

Bank

Product specifications - Collaterals

Margins / collaterals

Based on previous day volatility. Released once trade is unwound or the contract matures.

Forms of collaterals

Cash, bank guarantees, fixed deposits, GOI bonds, approved equities / mutual fund units.

Releasing collaterals

Cash next day in the bank a/c, FD and BG same day. Approved securities to custodians on same day.

16

Product specifications settlement

Daily settlement

Closing price of each contract last 30 minutes weighted average.

T + 1.
Through your clearing member. Paid or received in cash.

Final settlement

RBI fixing price at 12 noon on last trading day. Net settled in cash.

17

Trade explanation 1
Trade date (7 April): USDINR 27 April contract: Current Spot rate: Buy 100 April contracts: Hold contract to expiry:

44.4000 44.2500 Value Rs. 44,40,000 (USD 1000 *100* 44.40) RBI fixing rate on 27 April 11 45.0000

Futures return: Profit, Rupees 60,000 (45,00,000 44,40,000) Margins: Approx. 4.00%: Rs 1,77,600 Funding @ 12%: Rs 1780 (if margins paid in cash) Net return: Rs. 58,220 Margins (collateral) can be paid in FDs, Bank Guarantees, Approved Securities Daily Mark to Market will be received / paid in Cash
18

OTC and Currency futures

OTC Market Price transparency Liquidity Settlement Low; bilateral contracts with banks Subject to credit limits Full notional, unless cancelled Currency Futures High; online real time screen Margins equate all participants Net settled in INR Clearing corporation guarantees all trades 700+ trading members, including banks Margins and MTM are mandatory
19

Credit Exposure Exposure to your counterparty (bank) Execution Margins / MTM Only by Authorized Dealer Nil

Hedging
What is a hedge A position established in one market in an attempt to offset exposure to the price risk of an equal but opposite obligation in another market Why hedge Costs & Revenues in different currencies

Time differences in costs and revenues

Evaluating impact on net returns (profits) Risk management is important Not doing anything is also taking a RISK

Understanding your risk profile and appetite to take risks, determines your risk management policy

20

Scenario 1
Indian Co. sold a Raw Material to USA based Co. for 10,00,000 USD with an expected remittance in Eight month. When you enter into sell transaction of 10,00,000 USD/INR, Meaning you Sold 10,00,000 USD by buying 4,79,80,000 INR. Sold 1000 contracts of December 2011 maturity on NSE On 28 December 2011, the contract will expire and the payment trade needs to be executed Sold USD 10,00,000 to a bank at RBI fixing rate on 28 December 2011.Banks may charge some spread over fixing rate Ensuring RBI fixing rate on Payment and Contract fixing, will help to crystallize the rate contracted on the exchange

21

If USD will be 49.00

Today Sell 1000 Contracts Dec,2011 Expected Remittance On 28 Dec ,2011 RBI fixing rate Sold USD 10,00,000 to the bank Loss on Dec,11 Contract Total INR Receipt = 10,00,000*49.00 = 1000*1000*(49.00 -47.98) = 4,90,00,000 - 10,20,000 49.00 4,90,00,000 10,20,000 4,79,80,000 = 1000*1000*47.98 47.98 4,79,80,000

The above computation ignores Margin & Mark to Market Loss/Profit.

22

If USD will be 46.00

Today Sell 1000 Contracts Dec,2011 Expected Remittance On 28 Dec ,2011 = 1000*1000*47.98 47.98 4,79,80,000

RBI fixing rate

Sold USD 10,00,000 to the bank Profit on Dec,11 Contract Total INR Receipt = 10,00,000*46.00 = 1000*1000*(47.98 -46.00) = 4,60,00,000 + 19,80,000

46.00
4,60,00,000 19,80,000 4,79,80,000

The above computation ignores Margin & Mark to Market Loss/Profit.

23

24

CURRENCY OPTIONS

25

Options
An option is a contract which gives the right, but not the obligation, to buy or sell the underlying at a stated date and at a stated price

Gives the right CALL to buy Gives the right PUT to sell
European

26

Definition of Options

A Currency Option is a Financial Contract which gives the BUYER (Holder) the RIGHT, but not the Obligation, to exchange a specified amount of currency versus another at a specified rate on, or up to, a specified date.

The SELLER (or Writer) of the Currency Option contract has the OBLIGATION to deliver the specified amount of currency at the specified rate on the specified date.

Benefits over Forwards

Options offer Flexibility to not lock in rates.

Classification of Options

Type Exercise style Settlement Underlying

Benefit if the
Long Call
Buy Right to buy the underlying at strike price underlying rises. Profits substantial

Lose if the underlying is

steady/ falling. Loss limited to Premium

Call Options

Benefit if the
underlying is steady/ falling. Profit limited to Premium Sell

Short Call
Obligation to sell the underlying at strike price

Lose if the underlying rises.

Loss substantial

Benefit if the Long Put

Buy Right to sell the underlying at strike price underlying falls. Profits substantial

Lose if the underlying is

steady/ rising. Loss limited to Premium

Put Options
Sell

Benefit if the
Short Put
Obligation to Buy the underlying at strike price underlying is steady/ rising. Profit limited to Premium

Lose if the underlying falls.

Loss substantial

Classification of Options (contd)

American
Exercised any time prior to expiration

European
Generally exercised on expiration date

Expiration date: Date after which the option has no value.

Classification of Options (contd)

Cash settled Settled by the difference between the strike price and the determined value of the underlying.

Relationship between underlying and option

In the money At the money Out of the money

Strikes - Call, an example

I N R p e r U S D

47.50 47.00 46.50 46.00 45.50

USDINR strike for 1ST Month

December Spot :
46.50

Strike Prices:
OTM: Calls: 47.00, 47.50

Strike price > Spot

ATM: Calls: 46.50

Strike price = spot

ITM: Calls: 46.00, 45.50

Strike price < spot

Strikes - Put, an example

I N R p e r U S D

47.50 47.00 46.50 46.00 45.50

USDINR strike for 1st Month

December Spot :
46.50

Strike Prices:
ITM: Puts : 47.00, 47.50

Strike price > Spot

ATM: Calls: 46.50

Strike price = spot

OTM: Puts : 46.00, 45.50

Strike price < spot

Currency Options
Category Type of Option Description Premium Styled European Call and Put Options 9:00 am to 5:00 pm

Trading Hours
Permitted Lot Size

(Monday to Friday on all business day) One lot denotes $ 1000 Three serial monthly contracts followed by three quarterly contracts of the cycle March/June/September/December Two business days prior to last business day of the month Last working day of the contract month (Excluding Saturdays) INR cash settled at RBI reference rate Mumbai-Interbank
36

Contracts Available
Last Trading Day Final Settlement Day Settlement Holiday Calendar

Benefits of Currency Options

Allows you to buy protection from currency strengthening or weakening to hedge your FX risk Allows you to protect your downside without necessarily giving up upside Allows you to structure a set of bought and sold options to suit your risk profile and/or view Allows you to earn premium by writing options, albeit with unlimited downside

Have a underlying FX risk by way of

Imports USD loans Exports Indirect imports (Billing in INR but linked to USD exchange rate)

Service contract receivables/payables in foreign currency

Option - an example
$ 1 Mio Call 45.30 45.50 Rs.45.50 Rs.0.50 Dec 29, 2010 : Notional or principal. : Right to buy underlying.(Importer) : Spot rate on Dec 1, 2010 : 29 Dec Futures. : Strike price(ATMF). : Option premium. : Expiration date(Outward date).

Option - an example (Cont)

Of 1 Dec 2010 Buy 1 Mio Call Options : 1000*1000*0.50=5, 00,000 INR.

Once Trade Gets Executed Margin reversed to Clients A/C Total Payment Break Even On 29 Dec 2010 Spot Payoff On exercise date 29.12.2010 : 5, 00,000=5,00,000 INR : 45.5000+0.5000=46.0000 : 47.00 :47.00-46.00=1.00 INR (1000*1000*1.00=10, 00,000 INR) Net Payoff On exercise date 29.12.2010 :10,00,000-5,00,000=10,00,000

(Charges Excluding Brokerage and SEBI &Stamp Duty)

How can an exporter manage risk of rate of USD receivable ?

Sell the future Buy a $ Put Sell a $ Call Buy a $ Put spread Buy a $ Put and sell a $ Call Collar {Examples and payoffs of each strategy to be done in detail}

For exporter : Sell Future

View : Bearish on USD Strategy : Sell future Risk: Unlimited Reward : Unlimited Breakeven : Future price Profit, when: USD-INR goes down Max loss, when: USD-INR goes up
Example: Sell 1 Future* USD/ INR on expiry (`) Net Pay-off
(`)

45.00
45.50 46.00 46.50 47.00

1000
500 0 -500 -1000

USD/INR
*Lot size 1 Contract = 1000 USD

Spot Price (`)

Future Price (`)

46.46
46.00

1800 1300 800 300

Profit (` )

Net Pay-off

USD/INR

43.00

43.50

44.00

44.50

45.00

45.50

46.00

46.50

47.00

47.50

48.00

48.50

49.00

49.50

Break Even (`)

46.00

-700 -1200 -1700 -2200

Loss (` )

50.00

-200

For exporter : Buy Put

View : Bearish on USD Strategy : Buy put option Risk: Limited to premium Reward : Unlimited Breakeven :Strike Price Premium Profit, when: USD-INR goes down and option exercised Max loss, when: USD-INR goes up and option not exercised
Example: Buy 1 Put Option*
900
Profit (` ) Net Pay-off

USD/ INR on expiry (`)

Premium Pay-off
(`)

Exercis e Payoff (`)

Net Pay-off
(`)

45.00 45.50 45.80 46.00

-200 -200 -200 -200

1000 500 200 0

800 300 0 -200

46.50

-200

-200

USD/INR *Lot size 1 Contract = 1000 USD

Spot Price (`) Strike Price (`)

46.46 46.00

600 300
USD/INR

0
44.00 44.50 45.00 45.50 46.00 46.50 47.00

Premium (`)
Break Even (`)

0.20
45.80

-300 -600 -900

Loss (` )

47.50

For exporter : Short Call

View : Very bearish on USD Strategy : Sell Call option Risk: Unlimited Reward : Limited to premium Breakeven :Strike Price + Premium Max Profits, when: USD-INR goes down and option not exercised Loss, when: USD-INR goes up and option exercised
900
Profit (` )

USD/ INR on expiry (`) 46.50 47.00 47.33 48.00 48.50

Premiu m Payoff (`) 330 330 330 330 330

Exercise Pay-off
(`)

Net Payoff (`) 330 330 0 -670 -1170

0 0 -330 -1000 -1500

Net Pay-off

Example: Sell 1 Call Option*

600

USD/INR

Spot Price (`)

46.46
300

*Lot size 1 Contract = 1000 USD

Strike Price (`)

Premium (`)

47.00
0.33

USD/INR

0
45.00 45.50 46.00 46.50 47.00 47.50 48.00 48.50 49.00 49.50

-300 -600

Break Even (`)

47.33
-900

Loss (` )

50.00

For exporter : Put Spread

View : Moderately Bearish on USD Strategy : Buy ITM Put and sell OTM Put option to reduce cost and breakeven of ITM Put Risk: Limited to net premium paid Reward : Limited to the difference between the two strikes minus net premium paid Breakeven :Strike price of long Put -Net premium paid Max profit, when: USD-INR goes down and both options exercised Max loss, when: USD-INR goes up and both options unexercised
Example: Buy 1 ITM Put Option and Sell 1 OTM Put Option* USD/INR Spot Price (`) Buy ITM Put Strike Price (`) Put Premium (`) Sell OTM Put Strike Price(`) Put Premium (`) Break Even (`) 46.46
1500
Profit (` )

USD/ INR on expiry

(`)

Pay-off from ITM Put purchased

(`)

Pay-off from OTM Put sold

(`)

Net Pay-off
(`)

45.00 45.50 46.00 46.21 47.00

1120 620 120 -90 -380

-410 90 90 90 90

710 710 210 0 -290

47.50

-380

90

-290

Pay-off from Put purchased Pay-off from Put sold Net Pay-off

43.00

43.50

44.00

44.50

45.00

45.50

46.00

46.50

47.00

47.50

48.00

48.50

49.00

49.50

-500

0.09 46.21

-1000 -1500
Loss (` )

50.00

*Lot size 1 Contract = 1000 USD

46.50 0.38 45.50

1000 500 0

USD/INR

For exporter : Buy Put, Sell Call

View : Bearish on USD Strategy : Buy Put and sell Call option to reduce cost and breakeven of Put Risk: Unlimited Reward : Unlimited Breakeven :Strike price of long Put -Net premium paid Max profit, when: USD-INR goes down and put option is exercised Max loss, when: USD-INR goes up and call options is exercised
Example: Buy 1 Put Option and Sell 1 Call Option*
800

USD/ INR on expiry

(`)

Pay-off from Put purchase d (`) 1250 750 -120 -250 -250 -250

Pay-off from Call sold

(`)

Net Pay-off
(`)

44.50 45.00 45.87 46.50 48.00 48.50

120 120 120 120 -380 -880

1370 870 0 -130 -630 -1130

Profit (` )

Pay off from Put purchased Pay-off from Call sold Net Pay-off

USD/INR *Lot size 1 Contract = 1000 USD

Spot Price (`) Buy Put Strike Price (`) Put Premium (`) Sell Call Strike Price(`) Call Premium (`) Break Even (`)

46.46
500

46.00 0.25 47.50

200
USD/INR

45.00

45.50

46.00

46.50

47.00

47.50

48.00

-400

0.12 45.87

-700 -1000
Loss (` )

48.50

-100

For exporter : Collar

View : Conservatively bearish Strategy : Sell Future, buy Call to insure downside, sell Put option to partly finance Call Risk: Limited Reward : Limited Breakeven :Purchase price of futures Net premium paid Max profit, when: USD-INR goes down and put option exercised Max loss, when: USD-INR goes up and call option exercised
Example: Sell 1 Future and 1 put Option Contract and Buy 1 Call Option Contract* USD/INR *Lot size 1 Contract = 1000 USD Future Price (`) Put Strike Price (`) Put Premium (`) Call Strike Price (`) Call Premium (`) Breakeven (`) 47.00 45.00 0.04 48.00 0.08 46.96
1800 1300 800 300
43.00 43.50 44.00 44.50 45.00 45.50 46.00 46.50 47.00 47.50 48.00 48.50 49.00
USD/INR

USD/ INR on expiry (`)

Pay-off from Futures sold (`) 2500 2000 500 40 -500 -1000 -1500

Pay-off from Call purchase d (`) -80 -80 -80 -80 -80 -80 420

Payoff from Put sold (`)

-460 40 40 40 40 40 40

Net Pay-off (`)

44.50 45.00 46.50 46.96 47.50 48.00 48.50

1960 1960 460 0 -540 -1040 -1040

Profit (` )

Pay-off from Future sold Pay-off from Call purchased Pay-off from Put sold Net Pay-off

49.50

-700 -1200 -1700 -2200

Loss (` )

50.00

-200

How can an importer manage risk of rate of USD payable ? Buy the future Buy a $ Call Sell a $ Put Buy a $ Call spread Buy a $ Call and sell a $ Put Collar {Examples and payoffs of each strategy to be done in detail}

For importer : Buy Future

View : Bullish on USD Strategy : Buy future Risk: Unlimited Reward : Unlimited Breakeven : Future price Profit, when: USD-INR goes up Max loss, when: USD-INR goes down
USD/ INR on expiry (`) 45.00 45.50 46.00 46.50 47.00 Net Pay-off
(`)

-1000 -500 0 500 1000

Example: Buy 1 Future* USD/INR Spot Price (`) 46.46

1800 1300 800 300

Profit (` )

Net Pay-off

43.00

43.50

44.00

44.50

45.00

45.50

46.00

46.50

47.00

47.50

48.00

48.50

49.00

49.50

*Lot size 1 Contract = 1000 USD

-700 -1200

Break Even (`)

46.00

-1700 -2200
Loss (` )

50.00

Future Price (`)

46.00

USD/INR

-200

For importer : Long Call

View : Very bullish on USD Strategy : Buy call option Risk: Limited to premium Reward : Unlimited Breakeven :Strike price + Premium Profit, when: USD/INR goes up and option exercised Loss, when: USD/INR does not go up and option expires unexercised
Example: Buy 1 Call Option*
900
Profit (` ) Net Pay-off

USD/ INR on expiry (`)

Premium Pay-off (`)

Exercise Pay-off (`)

Net Payoff (`)

46.50 47.00 47.33 48.00 48.50

-330 -330 -330 -330 -330

0 0 330 1000 1500

-330 -330 0 670 1170

USD/INR

Spot Price (`)

Strike Price (`)

46.46
47.00 0.33 47.33

600 300
USD/INR

*Lot size 1 Contract = 1000 USD

0
45.00 45.50 46.00 46.50 47.00 47.50 48.00 48.50 49.00 49.50

Premium (`) Break Even (`)

-300 -600 -900

Loss (` )

50.00

For importer : Short Put

View : Bullish on USD Strategy : Sell put option Risk: Unlimited Reward : Limited to premium Breakeven :Strike price Premium Profit, when: USD-INR does not go down and option expires unexercised Loss, when: USD-INR goes down and option exercised
900

USD/ INR on expiry (`) 45.00 45.50 45.80 46.00 46.50

Premiu m Payoff (`) 200 200 200 200 200

Exercise Pay-off
(`)

Net Payoff (`) -800 -300 0 200 200

-1000 -500 -200 0 0

Profit (` )

Net Pay-off

Example: Sell 1 Put Option* USD/INR *Lot size 1 Contract = 1000 USD Spot Price (`) Strike Price (`) Premium (`) Break Even (`) 46.46 46.00 0.20 45.80

600 300
USD/INR

0
44.00 44.50 45.00 45.50 46.00 46.50 47.00

-300 -600 -900

Loss (` )

47.50

For importer : Call Spread

View : Moderately bullish on USD Strategy : Buying ITM Call and selling OTM call thereby reducing cost and breakeven of ITM call Risk: Limited to net premium paid Reward : Limited to the difference between the two strikes minus net premium paid Breakeven :Strike price of purchased call + Net premium paid Max profit, when: both options exercised Max loss, when: both options unexercised
Example: Buy 1 ITM Call Option and Sell 1 OTM Call Option * USD/INR *Lot size 1 Contract = 1000 USD Spot Price (`) ITM Call Strike Price (`) Call Premium (`) OTM Call Strike Price(`) Call Premium (`) Break Even (`) 46.46 46.00 0.88 47.00 0.33 46.55
1500 1000 500 0
43.00 43.50 44.00 44.50 45.00 45.50 46.00 46.50 47.00 47.50 48.00 48.50 49.00
USD/INR

USD/ INR on expiry (`)

Pay-off from ITM Call purchased

(`)

Pay-off from OTM Call sold (`)

Net Payoff (`)

44.50
45.50 46.55 47.50 48.50 49.00

-880
-880 -330 620 1620 2120

330
330 330 -170 -1170 -1670

-550
-550 0 450 450 450

Pay-off from ITM Call purchased Pay-off from OTM Call sold Profit (` ) Net Pay-off

49.50

-500 -1000 -1500

Loss (` )

50.00

For importer : Buy Call, Sell Put

View : Bullish on USD USD/ Strategy : Buy Call and sell Put option to INR on reduce cost and breakeven of Call expiry (`) Risk: Unlimited Reward : Unlimited 45.00 Breakeven :Strike price of long Call + Net 46.00 premium paid 47.00 Max profit, when: USD-INR goes up and call 47.24 option is exercised Max loss, when: USD-INR goes down and put 47.50 48.00 options is exercised
Example: Buy 1 Call Option and Sell 1 Put Option* USD/INR Spot Price (`) Buy Call Strike Price (`) Call Premium (`) Sell Put Strike Price(`) Put Premium (`) Break Even (`) 46.46 47.00
200 USD/INR

Pay-off from Call purchased

(`)

Pay-off from Put sold (`) -410 90 90 90 90

Net Pay-off
(`)

-330 -330 -330 -90 170

-740 -240 -240 0 260

670

90

760

800

Profit (` )

Pay-off from Call purchased Pay off from Put sold Net Pay-off

500

44.50

45.00

45.50

46.00

46.50

47.00

47.50

-100

45.50
-400

0.09 47.24
-700 -1000 Loss (` )

48.00

*Lot size 1 Contract = 1000 USD

0.33

For importer : Collar

View : Conservatively bullish Strategy : Buy futures, buy put to insure downside, sell call option to partly finance put Risk: Limited Reward : Limited Breakeven :Purchase price of futures Call premium + Put premium Max profit, when: USD-INR goes up and call option exercised Max loss, when: USD-INR goes down and put option exercised
Example: Buy 1 Future and 1Put Option Contract and Sell 1 Call Option Contract*
USD/INR *Lot size 1 Contract = 1000 USD Future Price (`) Put Strike Price (`) Put Premium (`) Call Strike Price (`) Call Premium (`) 47.00
500 1500 1000

USD/ INR on expiry (`) 45.00 45.50 47.12 47.50 48.00 48.50

Pay-off from Futures purchased (`) -2000 -1500 120 500 1000 1500

Pay-off from Put purchased (`)

800 300 -200 -200 -200 -200

Pay-off from Call sold (`)

80 80 80 80 80 -420

Net Pay-off (`) -1120 -1120 0 380 880 880

Profit (` )

Pay-off from Future purchased Pay-off from Put purchased Pay-off from Call sold Net Pay-off

46.00
0
43.00 43.50 44.00 44.50 45.00 45.50 46.00 46.50 47.00 47.50 48.00 48.50 49.00

USD/INR

49.50

0.20 48.00 0.08

-500 -1000 -1500

Loss (` )

Breakeven (`)

47.12

50.00

55

Why National Stock Exchange

Pioneer of online trading in India Access to investors from over 150,000 terminals, 1400 locations NSCCL first Clearing Corporation in India; first to provide settlement guarantee, rated CCR - AAA by CRISIL NSDL First depository dematerialization 3rd largest exchange - cash market Largest exchange in the world - stock futures One of the top global derivatives exchanges First in India to introduce DMA (Direct Market Access) First in the world to setup and operate STP central HUB

Innovation, invention and world class infrastructure

First to launch Currency Derivatives.

56

57