Currency Derivatives Project 1

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CURRENCY DERIVATIVES
A REPORT ON CURRENCY DERIVATIVES
Bachelor of Commerce
Financial Markets
Semester V
In Partial fulfillement of the
Requirements
For the Award of Degree of Bachelors of CommerceFinancial Markets
Submitted by
Manish Shetty
Roll no.35
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SIES College of Commerce and Economics,Mumbai
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CERTIFICATE
This is to certify that Shri Manish Shetty
of
B.Com-Financial Markets Semester V (20152016) has successfully completed the project on

Report on Currency Derivatives under the
guidance of Prof. Reema Castelino.
_____________________
Project Guide
_____________________
Internal Examiner
Principal
_______________________
External Examiner
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DECLARATION
I,
Manish
Shetty
the
student
of
B.Com.-
Financial Markets Semester V (2015
- 2016)
hereby declare that I have completed the

Project on Report on Currency Derivatives
The information submitted is true and original to
the best of my knowledge.
Signature of the Student

Manish Shetty
Roll No.-35
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Acknowledgement
I am deeply indebted to my Professor and guide Mrs. Reema

Castelino for her valuable guidance, patience and support. She
has been a beacon and pillar of strength that steered my way
towards the project I undertook. I greatly appreciate her
gentle but firm manner that helped me towards completing
my project.
I would also like to thank Mr.Abhijeit Bhosale for his valuable
inputs as well as Mrs.Falguni Mathews to whom I owe a
change in my outlook and attitude.
I appreciate everyone who made this study possible.
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INDEX
1. Introduction to Financial Derivatives7

2. Defination of Financial Derivatives...8
3. Types of Financial
Derivatives.9
3.1 Over the Counter Products......10

3.2 Exchange treade Products.10
4. Introduction of Financial Derivatives in India11
4.1 History of Currency Derivatives..11-12
4.2 Utility of Currency Derivatives12
5. Introduction to Currency Futures.13
5.1 Futures14
5.2 Forwards15
6. Research Methodology..16-19
7. Overveiw of Foreign Exchange Markets....20-21
8. Types of Currency Derivatives.22-35
8.1 Classification of Currency Derivatives22-24
8.2 Uses of Currency Derivatives..24-26
8.3 Terminologies in Currency Derivatives.27-28
8.4
Types of Trades in Currency Derivatives29
9. Analysis35-51
10. Findings..52-53
11. Suggestions54
12. Conclusions55
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13. Bibliography56
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INTRODUCTION TO THE TOPIC
INTRODUCTION TO FINANCIAL DERIVATIVES

By far the most significant event in finance during the past decade has been
the extraordinary development and expansion of
financial derivativesThese
instruments enhances the ability to differentiate risk and allocate it to those

investors most able and willing to take it- a process that has undoubtedly
improved national productivity growth and standards of livings.
Alan Greenspan, Former
Chairman.
US Federal Reserve
The past decades has witnessed the multiple growths in the volume of
international trade and business due to the wave of globalization and
liberalization all over the world.
As a result, the demand for the international
money and financial instruments increased significantly at the global level. In

this respect, changes in the interest rates, exchange rate and stock market
prices at the different financial market have increased the financial risks to the
corporate world.
It is therefore, to manage such risks; the new financial
instruments have been developed in the financial markets, which are also
popularly known as financial derivatives.
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**DEFINITION OF FINANCIALDERIVATIVES**
A word formed by derivation.
It means, this word has been arisen by
derivation.
Something derived; it means that some things have to be derived or arisen
out of the underlying variables. A financial derivative is an indeed derived
from the financial market.
Derivatives are financial contracts whose value/price is independent on the
behavior of the price of one or more basic underlying assets. These
contracts are legally binding agreements, made on the trading screen of
stock exchanges, to buy or sell an asset in future. These assets can be a
share, index, interest rate, bond, rupee dollar exchange rate, sugar, crude
oil, soybeans, cotton, coffee and what you have.
A very simple example of derivatives is curd, which is derivative of milk.
The price of curd depends upon the price of milk which in turn depends
upon the demand and supply of milk.
The Underlying Securities for Derivatives are :

Commodities: Castor seed, Grain, Pepper, Potatoes, etc.
Precious Metal : Gold, Silver
Short Term Debt Securities : Treasury Bills
Interest Rates
Common shares/stock
Stock Index Value : NSE Nifty
Currency : Exchange Rate
TYPES OF FINANCIAL DERIVATIVES
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Financial derivatives are those assets whose values are determined by the
value of some other assets, called as the underlying.
Presently there are
Complex varieties of derivatives already in existence and the markets are

innovating newer and newer ones continuously. For example, various types of
financial derivatives based on their different properties like, plain, simple or
straightforward, composite, joint or hybrid, synthetic, leveraged, mildly
leveraged, OTC traded, standardized or organized exchange traded, etc. are
available in the market.
Due to complexity in nature, it is very difficult to
classify the financial derivatives, so in the present context, the basic financial
derivatives which are popularly in the market have been described. In the
simple form, the derivatives can be classified into different categories which
are shown below :
DERIVATIVES
Commodities
Basics
Financials
Complex
1. Forwards
2. Futures
1. Swaps
2.Exotics (Non STD)
3. Options
4. Warrants and Convertibles
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One form of classification of derivative instruments is between commodity

derivatives and financial derivatives. The basic difference between these is the
nature of the underlying instrument or assets. In commodity derivatives, the
underlying instrument is commodity which may be wheat, cotton, pepper,
sugar, jute, turmeric, corn, crude oil, natural gas, gold, silver and so on. In
financial derivative, the underlying instrument may be treasury bills, stocks,
bonds, foreign exchange, stock index, cost of living index etc. It is to be noted
that financial derivative is fairly standard and there are no quality issues
whereas in commodity derivative, the quality may be the underlying matters.
Another way of classifying the financial derivatives is into basic and complex.
In this, forward contracts, futures contracts and option contracts have been
included in the basic derivatives whereas swaps and other complex derivatives
are taken into complex category because they are built up from either
forwards/futures or options contracts, or both.
In fact, such derivatives are
effectively derivatives of derivatives.
Derivatives are traded at organized exchanges and in the

Over The Counter ( OTC ) market :
Derivatives Trading Forum
Organized Exchanges
Over The
Counter
Commodity Futures
Forward
Contracts
Financial Futures
Swaps
Options (stock and index)

Stock Index Future
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Derivatives traded at exchanges are standardized contracts having standard

delivery dates and trading units.
OTC derivatives are customized contracts
that enable the parties to select the trading units and delivery dates to suit
their requirements.
A major difference between the two is that of counterparty riskthe risk of

default by either party.
With the exchange traded derivatives, the risk is
controlled by exchanges through clearing house which act as a contractual

intermediary and impose margin requirement.
In contrast, OTC derivatives
signify greater vulnerability.
DERIVATIVES INTRODUCTION IN INDIA

The first step towards introduction of derivatives trading in India was the
promulgation of the Securities Laws (Amendment) Ordinance, 1995, which
withdrew the prohibition on options in securities. SEBI set up a 24 member
committee under the chairmanship of Dr. L.C. Gupta on November 18, 1996
to develop appropriate regulatory framework for derivatives trading in India,
submitted its report on March 17, 1998. The committee recommended that
the derivatives should be declared as securities so that regulatory framework
applicable to trading of securities could also govern trading of derivatives.
To begin with, SEBI approved trading in index futures contracts based on S&P
CNX Nifty and BSE-30 (Sensex) index.
The trading in index options
commenced in June 2001 and the trading in options on individual securities

commenced in July 2001. Futures contracts on individual stocks were
launched in November 2001.
HISTORY OF CURRENCY DERIVATIVES
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Currency futures were first created at the Chicago Mercantile Exchange (CME)
in 1972.The contracts were created under the guidance and leadership of Leo
Melamed, CME Chairman Emeritus. The FX contract capitalized on the U.S.
abandonment of the Bretton Woods agreement, which had fixed world
exchange rates to a gold standard after World War II. The abandonment of the
Bretton Woods agreement resulted in currency values being allowed to float,
increasing the risk of doing business. By creating another type of market in
which futures could be traded, CME currency futures extended the reach of
risk management beyond commodities, which were the main derivative
contracts traded at CME until then. The concept of currency futures at CME
was
revolutionary, and gained credibility through endorsement of Nobel-prizewinning economist Milton Friedman.
Today, CME offers 41 individual FX futures and 31 options contracts on 19
currencies, all of which trade electronically on the exchanges CME Globex
platform. It is the largest regulated marketplace for FX trading. Traders of CME
FX futures are a diverse group that includes multinational corporations, hedge
funds, commercial banks, investment banks, financial managers, commodity
trading advisors (CTAs), proprietary trading firms; currency overlay managers
and individual investors. They trade in order to transact business, hedge
against unfavorable changes in currency rates, or to speculate on rate
fluctuations.
UTILITY OF CURRENCY DERIVATIVES

Currency-based derivatives are used by exporters invoicing receivables in
foreign currency, willing to protect their earnings from the foreign currency
depreciation by locking the currency conversion rate at a high level. Their use
by importers hedging foreign currency payables is effective when the payment
currency is expected to appreciate and the importers would like to guarantee a
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lower conversion rate. Investors in foreign currency denominated securities

would like to secure strong foreign earnings by obtaining the right to sell
foreign currency at a high conversion rate, thus defending their revenue from
the foreign currency depreciation. Multinational companies use currency
derivatives being engaged in direct investment overseas. They want to
guarantee the rate of purchasing foreign currency for various payments related
to the installation of a foreign branch or subsidiary, or to a joint venture with a
foreign partner.
A high degree of volatility of exchange rates creates a fertile ground for foreign
exchange speculators. Their objective is to guarantee a high selling rate of a
foreign currency by obtaining a derivative contract while hoping to buy the
currency at a low rate in the future. Alternatively, they may wish to obtain a
foreign currency forward buying contract, expecting to sell the appreciating
currency at a high future rate. In either case, they are exposed to the risk of
currency fluctuations in the future betting on the pattern of the spot exchange
rate adjustment consistent with their initial expectations.
The most commonly used instrument among the currency derivatives are
currency forward contracts. These are large notional value selling or buying
contracts obtained by exporters, importers, investors and speculators from
banks with denomination normally exceeding 2 million USD. The contracts
guarantee the future conversion rate between two currencies and can be
obtained for any customized amount and any date in the future. They normally
do not require a security deposit since their purchasers are mostly large
business firms and investment institutions, although the banks may require
compensating deposit balances or lines of credit. Their transaction costs are
set by spread between bank's buy and sell prices.
Exporters invoicing receivables in foreign currency are the most frequent users
of these contracts. They are willing to protect themselves from the currency
depreciation by locking in the future currency conversion rate at a high level. A
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similar foreign currency forward selling contract is obtained by investors in

foreign currency denominated bonds (or other securities) who want to take
advantage of higher foreign that domestic interest rates on government or
corporate bonds and the foreign currency forward premium. They hedge
against the foreign currency depreciation below the forward selling rate which
would ruin their return from foreign financial investment. Investment in foreign
securities induced by higher foreign interest rates and accompanied by the
forward selling of the foreign currency income is called a covered interest
arbitrage.
INTRODUCTION TO CURRENCY DERIVATIVES

Each country has its own currency through which both national and
international transactions are performed.
All the international business
transactions involve an exchange of one currency for another.

For example,
If any Indian firm borrows funds from international financial market
in US dollars for short or long term then at maturity the same would be
refunded in particular agreed currency along with accrued interest on borrowed
money. It means that the borrowed foreign currency brought in the country
will be converted into Indian currency, and when borrowed fund are paid to the
lender then the home currency will be converted into foreign lenders currency.
Thus, the
currency units of a country involve an exchange of one currency for another.

The price of one currency in terms of other currency is known as exchange
rate.
The foreign exchange markets of a country provide the mechanism of
exchanging different currencies with one and another, and thus, facilitating
transfer of purchasing power from one country to another.
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With the multiple growths of international trade and finance all over the world,
trading in foreign currencies has grown tremendously over the past several
decades. Since the exchange rates are continuously changing, so the firms are
exposed to the risk of exchange rate movements.
As a result the assets or
liability or cash flows of a firm which are denominated in foreign currencies

undergo a change in value over a period of time due to variation in exchange
rates.
This variability in the value of assets or liabilities or cash flows is referred to
exchange rate risk. Since the fixed exchange rate system has been fallen in
the early 1970s, specifically in developed countries, the currency risk has
become substantial for many business firms.
As a result, these firms are
increasingly turning to various risk hedging products like foreign currency

futures, foreign currency forwards, foreign currency options, and foreign
currency swaps.
INTRODUCTION TO CURRENCY FUTURE

A futures contract is a standardized contract, traded on an exchange, to buy or
sell a certain underlying asset or an instrument at a certain date in the future,
at a specified price. When the underlying asset is a commodity, e.g. Oil or
Wheat, the contract is termed a
commodity futures contract. When the
underlying is an exchange rate, the contract is termed a currency futures

contract. In other words, it is a contract to exchange one currency for
another currency at a specified date and a specified rate in the future.
Therefore, the buyer and the seller lock themselves into an exchange rate for a
specific value or delivery date. Both parties of the futures contract must fulfill
their obligations on the settlement date.
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Currency futures can be cash settled or settled by delivering the respective

obligation of the seller and buyer. All settlements however, unlike in the case of
OTC markets, go through the exchange.
Currency futures are a linear product, and calculating profits or losses on
Currency Futures will be similar to calculating profits or losses on Index
futures. In determining profits and losses in futures trading, it is essential to
know both the contract size (the number of currency units being traded) and
also what the tick value is. A tick is the minimum trading increment or price
differential at which traders are able to enter bids and offers. Tick values differ
for different currency pairs and different underlying. For e.g. in the case of the
USD-INR currency futures contract the tick size shall be 0.25 paise or 0.0025
Rupees. To demonstrate how a move of one tick affects the price, imagine a
trader buys a contract (USD 1000 being the value of each contract) at
Rs.42.2500. One tick move on this contract will translate to Rs.42.2475 or
Rs.42.2525 depending on the direction of market movement.
Purchase price:
Price increases by one
Rs .42.2500
+Rs.
tick: price:
New
00.0025
Rs .42.2525
Purchase price:
Price decreases by one
Rs .42.2500
Rs.
New
tick: price:
Rs.42.
2475
00.0025
The value of one tick on each contract is Rupees 2.50. So if a trader buys 5
contracts and the price moves up by 4 tick, she makes Rupees 50.
Step 1:
42.2600 42.2500
Step 2:
4 ticks * 5 contracts = 20 points

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Step 3:
20 points * Rupees 2.5 per tick = Rupees 50
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RESEARCH METHODOLOGY
RESEARCH METHODOLOGY
TYPE OF RESEARCH
In this project Descriptive research methodologies were used.
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The research methodology adopted for carrying out the study was at the
first stage theoretical study is attempted and at the second stage observed
online trading on NSE/BSE.
SOURCE OF DATA COLLECTION

Secondary data were used such as various books, report submitted
by RBI/SEBI committee and NCFM/BCFM modules.
OBJECTIVES OF THE STUDY

The basic idea behind undertaking Currency Derivatives project is to
gain knowledge about currency future market.
To study the basic concept of Currency future
To study the exchange traded currency future
To understand the ways of considering currency future price.
To analyze different currency derivatives products.
LIMITATION OF THE STUDY
The limitations of the study were:The analysis was purely based on the secondary data. So, any error in the
secondary data might also affect the study undertaken.
The currency future is new concept and topic related book was not
available in library and market.
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BRIEF OVERVIEW OF FOREIGN

EXCHANGE MARKET
OVERVIEW OF THE FOREIGN EXCHANGE MARKET IN INDIA
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During the early 1990s, India embarked on a series of structural reforms in the
foreign exchange market. The exchange rate regime, that was earlier pegged,
was partially floated in March 1992 and fully floated in March 1993. The
unification of the exchange rate was instrumental in developing a marketdetermined exchange rate of the rupee and was an important step in the
progress towards total current account convertibility, which was achieved in
August 1994.
Although liberalization helped the Indian Forex market in various ways, it led to
extensive fluctuations of exchange rate. This issue has attracted a great deal of
concern from policy-makers and investors. While some flexibility in foreign
exchange markets and exchange rate determination is desirable, excessive
volatility can have an adverse impact on price discovery, export performance,
sustainability of current account balance, and balance sheets. In the context of
upgrading Indian foreign exchange market to international standards, a welldeveloped foreign exchange derivative market (both OTC as well as Exchangetraded) is imperative.
With a view to enable entities to manage volatility in the currency market, RBI
on April 20, 2007 issued comprehensive guidelines on the usage of foreign
currency forwards, swaps and options in the OTC market. At the same time, RBI
also set up an Internal Working Group to explore the advantages of introducing
currency futures. The Report of the Internal Working Group of RBI submitted in
April 2008, recommended the introduction of Exchange Traded Currency Futures.
Subsequently, RBI and SEBI jointly constituted a Standing Technical Committee
to analyze the Currency Forward and Future market around the world and lay
down the guidelines to introduce Exchange Traded Currency Futures in the Indian
market. The Committee submitted its report on May 29, 2008. Further RBI and
SEBI also issued circulars in this regard on August 06, 2008.
Currently, India is a USD 34 billion OTC market, where all the major currencies
like USD, EURO, YEN, Pound, Swiss Franc etc. are traded. With the help of
electronic trading and efficient risk management systems, Exchange Traded
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Currency Futures will bring in more transparency and efficiency in price

discovery, eliminate counterparty credit risk, provide access to all types of
market participants, offer standardized products and provide transparent trading
platform. Banks are also allowed to become members of this segment on the
Exchange, thereby providing them with a new opportunity.
CURRENCY DERIVATIVE PRODUCTS

Derivative contracts have several variants.
forwards, futures, options and swaps.
The most common variants are
We take a brief look at various
derivatives contracts that have come to be used.
FORWARD :
The basic objective of a forward market in any underlying asset is to fix a
price for a contract to be carried through on the future agreed date and is
intended to free both the purchaser and the seller from any risk of loss
which might incur due to fluctuations in the price of underlying asset.
A forward contract is customized contract between two entities, where
settlement takes place on a specific date in the future at todays preagreed price.
entered into.
The exchange rate is fixed at the time the contract is

This is known as forward exchange rate or simply forward
rate.
FUTURE :
A currency futures contract provides a simultaneous right and obligation to
buy and sell a particular currency at a specified future date, a specified
price and a standard quantity.
In another word, a future contract is an
agreement between two parties to buy or sell an asset at a certain time in

the future at a certain price. Future contracts are special types of forward
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contracts in the sense that they are standardized exchange-traded

contracts.
SWAP :
Swap is private agreements between two parties to exchange cash flows in
the future according to a prearranged formula. They can be regarded as
portfolio of forward contracts. The currency swap entails swapping both
principal and interest between the parties, with the cash flows in one
direction being in a different currency than those in the opposite direction.
There are a various types of currency swaps like as fixed-to-fixed currency
swap, floating to floating swap, fixed to floating currency swap.
In a swap normally three basic steps are involve___
(1) Initial exchange of principal amount
(2) Ongoing exchange of interest
(3) Re - exchange of principal amount on maturity.
OPTIONS :
Currency option is a financial instrument that give the option holder a right
and not the obligation, to buy or sell a given amount of foreign exchange
at a fixed price per unit for a specified time period ( until the expiration
date ). In other words, a foreign currency option is a contract for future
delivery of a specified currency in exchange for another in which buyer of
the option has to right to buy (call) or sell (put) a particular currency at an
agreed price for or within specified period. The seller of the option gets the
premium from the buyer of the option for the obligation undertaken in the
contract. Options generally have lives of up to one year, the majority of
options traded on options exchanges having a maximum maturity of nine
months.
Longer dated options are called warrants and are generally
traded OTC.
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FOREIGN EXCHANGE SPOT (CASH) MARKET
The foreign exchange spot market trades in different currencies for both spot
and forward delivery. Generally they do not have specific location, and mostly
take place primarily by means of telecommunications both within and between
countries.
It consists of a network of foreign dealers which are oftenly banks, financial
institutions, large concerns, etc.
The large banks usually make markets in
different currencies.
In the spot exchange market, the business is transacted throughout the world
on a continual basis.
So it is possible to transaction in foreign exchange
markets 24 hours a day. The standard settlement period in this market is 48

hours, i.e., 2 days after the execution of the transaction.
The spot foreign exchange market is similar to the OTC market for securities.
There is no centralized meeting place and no fixed opening and closing time.
Since most of the business in this market is done by banks, hence, transaction
usually do not involve a physical transfer of currency, rather simply book
keeping transfer entry among banks.
Exchange rates are generally determined by demand and supply force in
this market. The purchase and sale of currencies stem partly from the need
to finance trade in goods and services. Another important source of demand
and supply arises from the participation of the central banks which would
emanate from a desire to influence the direction, extent or speed of exchange
rate movements.
FOREIGN EXCHANGE QUOTATIONS

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Foreign exchange quotations can be confusing because currencies are quoted in

terms of other currencies. It means exchange rate is relative price.
For example,
If one US dollar is worth of Rs. 45 in Indian rupees then it implies
that 45 Indian rupees will buy one dollar of USA, or that one rupee is worth of
0.022 US dollar which is simply reciprocal of the former dollar exchange rate.
EXCHANGE RATE
Direct
Indirect
The number of units of domestic

Currency stated against one unit
of foreign currency.
Re/$ = 45.7250 ( or )
The number of unit of foreign

currency per unit of domestic
currency.
Re 1 = $ 0.02187
$1 = Rs. 45.7250
There are two ways of quoting exchange rates: the direct and indirect.
Most countries use the direct method. In global foreign exchange market, two
rates are quoted by the dealer: one rate for buying (bid rate), and another
for selling (ask or offered rate) for a currency. This is a unique feature of
this market.
It should be noted that where the bank sells dollars against
rupees, one can say that rupees against dollar. In order to separate buying
and selling rate, a small dash or oblique line is drawn after the dash.
For example,
If
US
dollar is quoted in the market as Rs 46.3500/3550, it
means that the forex dealer is ready to purchase the dollar at Rs 46.3500 and
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ready to sell at Rs 46.3550.
The difference between the buying and selling
rates is called spread.

It is important to note that selling rate is always higher than the buying rate.
Traders, usually large banks, deal in two way prices, both buying and selling,
are called market makers.
Base Currency/ Terms Currency:

In foreign exchange markets, the base currency is the first currency in a
currency pair. The second currency is called as the terms currency. Exchange
rates are quoted in per unit of the base currency.
That is the expression
Dollar-Rupee, tells you that the Dollar is being quoted in terms of the Rupee.
The Dollar is the base currency and the Rupee is the terms currency.
Exchange rates are constantly changing, which means that the value of one
currency in terms of the other is constantly in flux.
Changes in rates are
expressed as strengthening or weakening of one currency vis--vis the second

currency.
Changes are also expressed as appreciation or depreciation of one currency
in terms of the second currency. Whenever the base currency buys more of
the terms currency, the base currency has strengthened / appreciated and the
terms currency has weakened / depreciated.
For example,
If Dollar Rupee moved from 43.00 to 43.25. The Dollar has
appreciated and the Rupee has depreciated. And if it moved from 43.0000 to
42.7525 the Dollar has depreciated and Rupee has appreciated.
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NEED FOR EXCHANGE TRADED CURRENCY FUTURES

currency forwards, swaps and options in the OTC market. At the same time,
RBI also set up an Internal Working Group to explore the advantages of
introducing currency futures. The Report of the Internal Working Group of RBI
submitted in April 2008, recommended the introduction of exchange traded
currency futures. Exchange traded futures as compared to OTC forwards serve
the same economic purpose, yet differ in fundamental ways. An individual
entering into a forward contract agrees to transact at a forward price on a
future date. On the maturity date, the obligation of the individual equals the
forward price at which the contract was executed. Except on the maturity date,
no money changes hands. On the other hand, in the case of an exchange
traded
futures contract, mark to market obligations is settled on a daily basis. Since
the profits or losses in the futures market are collected / paid on a daily basis,
the scope for building up of mark to market losses in the books of various
participants gets limited.
The counterparty risk in a futures contract is further eliminated by the
presence of a clearing corporation, which by assuming counterparty guarantee
eliminates credit risk.
Further, in an Exchange traded scenario where the market lot is fixed at a
much lesser size than the OTC market, equitable opportunity is provided to all
classes of investors whether large or small to participate in the futures market.
The transactions on an Exchange are executed on a price time priority
ensuring that the best price is available to all categories of market participants
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irrespective of their size. Other advantages of an Exchange traded market

would be greater transparency, efficiency and accessibility.
RATIONALE FOR INTRODUCING CURRENCY FUTURE

Futures markets were designed to solve the problems that exist in forward
markets. A futures contract is an agreement between two parties to buy or sell
an asset at a certain time in the future at a certain price. But unlike forward
contracts, the futures contracts are standardized and exchange traded. To
facilitate liquidity in the futures contracts, the exchange specifies certain standard
features of the contract. A futures contract is standardized contract with standard
underlying instrument, a standard quantity and quality of the underlying instrument
that can be delivered, (or which can be used for reference purposes in settlement)
and a standard timing of such settlement. A futures contract may be offset prior to
maturity by entering into an equal and opposite transaction.
The standardized items in a futures contract are:
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
The rationale for introducing currency futures in the Indian context has been
outlined in the Report of the Internal Working Group on Currency Futures
(Reserve Bank of India, April 2008) as follows;
The rationale for establishing the currency futures market is manifold. Both
residents and non-residents purchase domestic currency assets. If the
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exchange rate remains unchanged from the time of purchase of the asset to its
sale, no gains and losses are made out of currency exposures. But if domestic
currency depreciates (appreciates) against the foreign currency, the exposure
would result in gain (loss) for residents purchasing foreign assets and loss
(gain) for non residents purchasing domestic assets. In this backdrop,
unpredicted movements in exchange rates expose investors to currency risks.
Currency futures enable them to hedge these risks. Nominal exchange rates
are often random walks with or without drift, while real exchange rates over
long run are mean reverting. As such, it is possible that over a long run, the
incentive to hedge currency risk may not be large. However, financial planning
horizon is much smaller than the long-run, which is typically inter-
generational in the context of exchange rates. As such, there is a strong need

to hedge currency risk and this need has grown manifold with fast growth in
cross-border trade and investments flows. The argument for hedging currency
risks appear to be natural in case of assets, and applies equally to trade in
goods and services, which results in income flows with leads and lags and get
converted into different currencies at the market rates. Empirically, changes in
exchange rate are found to have very low correlations with foreign equity and
bond returns. This in theory should lower portfolio risk. Therefore, sometimes
argument is advanced against the need for hedging currency risks. But there is
strong empirical evidence to suggest that hedging reduces the volatility of
returns and indeed considering the episodic nature of currency returns, there
are strong arguments to use instruments to hedge currency risks.
FUTURE TERMINOLOGY
SPOT PRICE :
The price at which an asset trades in the spot market. The transaction in
which securities and foreign exchange get traded for immediate delivery.
Since the exchange of securities and cash is virtually immediate, the term,
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cash market, has also been used to refer to spot dealing. In the case of
USDINR, spot value is T + 2.
FUTURE PRICE :
The price at which the future contract is traded in the future market .
CONTRACT CYCLE :
The period over which a contract trades. The currency future contracts in
Indian market have one month, two month, three month up to twelve
month expiry cycles. In NSE/BSE will have 12 contracts outstanding at any
given point in time.
VALUE DATE / FINAL SETTELMENT DATE :

The last business day of the month will be termed the value date /final
settlement date of each contract. The last business day would be taken to
the same as that for inter bank settlements in Mumbai. The rules for inter
bank settlements, including those for known holidays and would be those
as laid down by Foreign Exchange Dealers Association of India (FEDAI).
EXPIRY DATE :
It is the date specified in the futures contract. This is the last day on which
the contract will be traded, at the end of which it will cease to exist. The
last trading day will be two business days prior to the value date / final
settlement date.
CONTRACT SIZE :
The amount of asset that has to be delivered under one contract. Also
called as lot size. In case of
USDINR it is USD 1000
BASIS :
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This reflects that futures In the context of financial futures, basis can be
defined as the futures price minus the spot price. There will be a different
basis for each delivery month for each contract. In a normal market, basis
will be positive. prices normally exceed spot prices.
COST OF CARRY :
The relationship between futures prices and spot prices can be summarized
in terms of what is known as the cost of carry. This measures the storage
cost plus the interest that is paid to finance or carry the asset till delivery
less the income earned on the asset. For equity derivatives carry cost is
the rate of interest.
INITIAL MARGIN :
When the position is opened, the member has to deposit the margin with
the clearing house as per the rate fixed by the exchange which may vary
asset to asset. Or in another words, the amount that must be deposited in
the margin account at the time a future contract is first entered into is
known as initial margin.
MARKING TO MARKET :
At the end of trading session, all the outstanding contracts are reprised at
the settlement price of that session. It means that all the futures contracts
are daily settled, and profit and loss is determined on each transaction.
This procedure, called marking to market, requires that funds charge every
day. The funds are added or subtracted from a mandatory margin (initial
margin) that traders are required to maintain the balance in the account.
Due to this adjustment, futures contract is also called as daily reconnected
forwards.
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MAINTENANCE MARGIN :
Members account are debited or credited on a daily basis.
In turn
customers account are also required to be maintained at a certain level,

usually about 75 percent of the initial margin, is called the maintenance
margin. This is somewhat lower than the initial margin.
This is set to ensure that the balance in the margin account never becomes
negative. If the balance in the margin account falls below the maintenance
margin, the investor receives a margin call and is expected to top up the
margin account to the initial margin level before trading commences on the
next day.
USES OF CURRENCY FUTURES

Hedging:
Presume Entity A is expecting a remittance for USD 1000 on 27 August 08
wants to lock in the foreign exchange rate today so that the value of
inflow in Indian rupee terms is safeguarded. The entity can do so by
selling one contract of USDINR futures since one contract is for USD
1000.
Presume that the current spot rate is Rs.43 and USDINR 27 Aug 08
contract is trading at Rs.44.2500. Entity A shall do the following:
Sell one August contract today. The value of the contract is Rs.44,250.
Let us assume the RBI reference rate on August 27, 2008 is Rs.44.0000.
The entity shall sell on August 27, 2008, USD 1000 in the spot market
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and get Rs. 44,000. The futures contract will settle at Rs.44.0000 (final
settlement price = RBI reference rate).
The return from the futures transaction would be Rs. 250, i.e. (Rs. 44,250
Rs. 44,000). As may be observed, the effective rate for the remittance
received by the entity A is Rs.44. 2500 (Rs.44,000 + Rs.250)/1000, while
spot rate on that date was Rs.44.0000. The entity was able to hedge its
exposure .
Speculation: Bullish, buy futures

Take the case of a speculator who has a view on the direction of the market.
He would like to trade based on this view. He expects that the USD-INR
rate presently at Rs.42, is to go up in the next two-three months. How can
he trade based on this belief? In case he can buy dollars and hold it, by
investing the necessary capital, he can profit if say the Rupee depreciates
to Rs.42.50. Assuming he buys USD 10000, it would require an investment
of Rs.4,20,000. If the exchange rate moves as he expected in the next
three months, then he shall make a profit of around Rs.10000. This works
out to an annual return of around 4.76%. It may please be noted that the
cost of funds invested is not considered in computing this return.
A speculator can take exactly the same position on the exchange rate by
using futures contracts. Let us see how this works. If the INR- USD is
Rs.42 and the three month futures trade at Rs.42.40. The minimum
contract size is USD 1000. Therefore the speculator may buy 10 contracts.
The exposure shall be the same as above USD 10000. Presumably, the
margin may be around Rs.21, 000. Three months later if the Rupee
depreciates to Rs. 42.50 against USD, (on the day of expiration of the
contract), the futures price shall converge to the spot price (Rs. 42.50) and he
makes a profit of Rs.1000 on an investment of Rs.21, 000. This works out to
an annual return of 19 percent. Because of the leverage they provide,
futures form an attractive option for speculators.
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Speculation: Bearish, sell futures

Futures can be used by a speculator who believes that an underlying is overvalued and is likely to see a fall in price. How can he trade based on his
opinion? In the absence of a deferral product, there wasn 't much he could do
to profit from his opinion. Today all he needs to do is sell the futures.
Let us understand how this works. Typically futures move correspondingly
with the underlying, as long as there is sufficient liquidity in the market. If
the underlying price rises, so will the futures price. If the underlying price
falls, so will the futures price. Now take the case of the trader who expects
to see a fall in the price of USD-INR. He sells one two-month contract of
futures on USD say at Rs. 42.20 (each contact for USD 1000). He pays a
small margin on the same. Two months later, when the futures contract
expires, USD-INR rate let us say is Rs.42. On the day of expiration, the spot
and the futures price converges. He has made a clean profit of 20 paise per
dollar. For the one contract that he sold, this works out to be Rs.2000.
Arbitrage:
Arbitrage is the strategy of taking advantage of difference in price of the
same or similar product between two or more markets. That is, arbitrage is
striking a combination of matching deals that capitalize upon the imbalance,
the profit being the difference between the market prices. 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.
If in one of the markets the product is trading at higher price, then the
entity shall buy the product in the cheaper market and sell in the costlier
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market and thus benefit from the price differential without any additional
risk.
One of the methods of arbitrage with regard to USD-INR could be a trading
strategy between forwards and futures market. As we discussed earlier, the
futures price and forward prices are arrived at using the principle of cost of
carry. Such of those entities who can trade both forwards and futures shall
be able to identify any mis-pricing between forwards and futures. If one of
them is priced higher, the same shall be sold while simultaneously buying
the other which is priced lower. If the tenor of both the contracts is same,
since both forwards and futures shall be settled at the same RBI reference
rate, the transaction shall result in a risk less profit.
TRADING PROCESS AND SETTLEMENT PROCESS

Like other future trading, the future currencies are also traded at organized
exchanges. The following diagram shows how operation take place on
currency future market:
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TRADER
( BUYER )
TRADER
( SELLER )
Sales order
Purchase order
MEMBER
( BROKER )
Transaction on the floor (Exchange)
MEMBER
( BROKER )
Informs
CLEARING
HOUSE
It has been observed that in most futures markets, actual physical delivery of the
underlying assets is very rare and it hardly ranges from 1 percent to 5 percent.
Most often buyers and sellers offset their original position prior to delivery date
by taking an opposite positions. This is because most of futures contracts in
different products are predominantly speculative instruments. For example, X
purchases American Dollar futures and Y sells it. It leads to two contracts, first, X
party and clearing house and second Y party and clearing house. Assume next
day X sells same contract to Z, then X is out of the picture and the clearing
house is seller to Z and buyer from Y, and hence, this process is goes on.
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REGULATORY FRAMEWORK FOR CURRENCY FUTURES

currency forwards,
swaps and options in the OTC market. At the same time, RBI also set up an
Internal Working Group to explore the advantages of introducing currency
futures. The Report of the Internal Working Group of RBI submitted in April
2008, recommended the introduction of exchange traded currency futures. With
the expected benefits of exchange traded currency futures, it was decided in a
joint meeting of RBI and SEBI on February 28, 2008, that an RBI-SEBI Standing
Technical Committee on Exchange Traded Currency and Interest Rate Derivatives
would be constituted. To begin with, the Committee would evolve norms and
oversee the implementation of Exchange traded currency futures. The Terms of
Reference to the Committee was as under:
1. To coordinate the regulatory roles of RBI and SEBI in regard to trading of
Currency and Interest Rate Futures on the Exchanges.
2. To suggest the eligibility norms for existing and new Exchanges for
Currency and Interest Rate Futures trading.
3. To suggest eligibility criteria for the members of such exchanges.
4. To review product design, margin requirements and other risk mitigation
measures on an ongoing basis.
5. To
suggest
surveillance
mechanism
and
dissemination
of
market
information.
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6. To consider microstructure issues, in the overall interest of financial

stability.
COMPARISION OF FORWARD AND FUTURES CURRENCY

CONTRACT
BASIS
Size
FORWARD
Structured as per
FUTURES
Standardized
requirement of the
parties
Tailored on individual
Standardized
date
Method of
needs
Established by the bank
Open auction among buyers and
transaction
or broker through
seller on the floor of recognized
Participants
electronic media
Banks, brokers, forex
exchange.
Banks, brokers, multinational
dealers, multinational
companies, institutional investors,
companies, institutional
small traders, speculators,
investors, arbitrageurs,
arbitrageurs, etc.
traders, etc.
None as such, but
Margin deposit required
Delivery
Margins
compensating bank
balanced may be
Maturity
required
Tailored to needs: from
Standardized
Settlement
one week to 10 years

Actual delivery or offset
Daily settlement to the market and
with cash settlement.
variation margin requirements
No separate clearing
Market
house
Over the telephone
At recognized exchange floor with

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place
worldwide and computer
networks
Accessibility Limited to large
Delivery
Secured
worldwide communications
Open to any one who is in need of
customers banks,
hedging facilities or has risk capital
institutions, etc.
More than 90 percent
to speculate
Actual delivery has very less even
settled by actual
below one percent
delivery
Risk is high being less
Highly secured through margin
secured
deposit.
ANALYSIS
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INTEREST RATE PARITY PRINCIPLE
For currencies which are fully convertible, the rate of exchange for any date
other than spot is a function of spot and the relative interest rates in each
currency. The assumption is that, any funds held will be invested in a time
deposit of that currency. Hence, the forward rate is the rate which neutralizes
the effect of differences in the interest rates in both the currencies. The
forward rate is a function of the spot rate and the interest rate differential
between the two currencies, adjusted for time. In the case of fully convertible
currencies, having no restrictions on borrowing or lending of either currency
the forward rate can be calculated as follows;
Future Rate = (spot rate) {1 + interest rate on home currency * period} /

{1 + interest rate on foreign currency * period}
For example,
Assume that on January 10, 2002, six month annual interest
rate was 7 percent p.a. on Indian rupee and US dollar six month rate was 6
percent p.a. and spot ( Re/$ ) exchange rate was 46.3500. Using the above
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equation the theoretical future price on January 10, 2002, expiring on June 9,
2002 is: the answer will be Rs.46.7908 per dollar. Then, this theoretical price
is compared with the quoted futures price on January 10, 2002 and the
relationship is observed.
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PRODUCT DEFINITIONS OF CURRENCY FUTURE ON

NSE/BSE
Underlying
Initially, currency futures contracts on US Dollar Indian Rupee (US$INR) would be permitted.
Trading Hours
The trading on currency futures would be available from 9 a.m. to 5 p.m.
Size of the contract

The minimum contract size of the currency futures contract at the time of
introduction would be US$ 1000. The contract size would be periodically
aligned to ensure that the size of the contract remains close to the
minimum size.
Quotation
The currency futures contract would be quoted in rupee terms. However,
the outstanding positions would be in dollar terms .
Tenor of the contract

The currency futures contract shall have a maximum maturity of 12
months.
Available contracts
All monthly maturities from 1 to 12 months would be made available.
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SIES College of Commerce and Economics ,Mumbai
TYBFM
Settlement mechanism
The currency futures contract shall be settled in cash in Indian Rupee.
Settlement price
The settlement price would be the Reserve Bank Reference Rate on the
date of expiry. The methodology of computation and dissemination of the
Reference Rate may be publicly disclosed by RBI.
Final settlement day

The currency futures contract would expire on the last working day
(excluding Saturdays) of the month. The last working day would be taken
to be the same as that for Interbank Settlements in Mumbai. The rules for
Interbank
Settlements,
including
those
for
known
holidays
and
subsequently declared holiday would be those as laid down by FEDAI.

The contract specification in a tabular form is as under:
Underlying
Rate of exchange between one USD
Trading Hours
and
09:00 a.m. to 05:00 p.m.
(Monday to Friday)
Contract Size
USD 1000
Tick Size
0.25 paisa or INR 0.0025

Maximum expiration period of 12
Trading Period
months
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Contract Months
12 near calendar months
Final
Last working day of the month (subject
Settlement date/
Value date
Last Trading Day
to
Two working days prior to Final
Settlement
Settlement
Final Settlement Price
Cash settled
The referencerate fixed by RBI two
working days prior to the final
settlement
date will be used for final settlement
CURRENCY FUTURES PAYOFFS

A payoff is the likely profit/loss that would accrue to a market participant
with change in the price of the underlying asset. This is generally depicted
in the form of payoff diagrams which show the price of the underlying
asset on the X-axis and the profits/losses on the Y-axis. Futures contracts
have linear payoffs. In simple words, it means that the losses as well as
profits for the buyer and the seller of a futures contract are unlimited.
Options do not have linear payoffs. Their pay offs are non-linear. These
linear payoffs are fascinating as they can be combined with options and
the underlying to generate various complex payoffs. However, currently
only payoffs of futures are discussed as exchange traded foreign currency
options are not permitted in India.
Payoff for buyer of futures: Long futures

The payoff for a person who buys a futures contract is similar to the
payoff for a person who holds an asset. He has a potentially unlimited
upside as well as a potentially unlimited downside. Take the case of a
speculator who buys a two-month currency futures contract when the
USD stands at say Rs.43.19. The underlying asset in this case is the
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currency, USD. When the value of dollar moves up, i.e. when Rupee
depreciates, the long futures position starts making profits, and when the
dollar depreciates, i.e. when rupee appreciates, it start making losses.
Figure 4.1 shows the payoff diagram for the buyer of a futures contract.
Payoff for buyer of future:

The figure shows the profits/losses for a long futures position. The
investor bought futures when the USD was at Rs.43.19. If the price
goes up, his futures position starts making profit. If the price falls,
his futures position starts showing losses.
P
R
O
F
I
T
43.19
0
USD
L
O
S
S
Payoff for seller of futures: Short futures
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The payoff for a person who sells a futures contract is similar to the
payoff for a person who shorts an asset. He has a potentially unlimited
upside as well as a potentially unlimited downside. Take the case of a
speculator who sells a two month currency futures contract when the USD
stands at say Rs.43.19. The underlying asset in this case is the currency,
USD. When the value of dollar moves down, i.e. when rupee appreciates,
the short futures position starts 25 making profits, and when the dollar
appreciates, i.e. when rupee depreciates, it starts making losses. The
Figure below shows the payoff diagram for the seller of a futures contract.
Payoff for seller of future:

The figure shows the profits/losses for a short futures position. The
investor sold futures when the USD was at 43.19. If the price goes
down, his futures position starts making profit. If the price rises, his
futures position starts showing losses
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P
R
O
F
I
T
43.19
0
USD
D
L
O
S
S
PRICING FUTURES COST OF CARRY MODEL
Pricing of futures contract is very simple. Using the cost-of-carry logic, we

calculate the fair value of a futures contract. Every time the observed
price deviates from the fair value, arbitragers would enter into trades to
capture the arbitrage profit. This in turn would push the futures price
back to its fair value.
The cost of carry model used for pricing futures is given below:
F=Se^(r-rf)T
where:
r=Cost of financing (using continuously compounded interest rate)
rf= one year interest rate in foreign
T=Time till expiration in years
E=2.71828
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The relationship between F and S then could be given as

F Se^(r rf )T - =
This relationship is known as interest rate parity relationship and is used
in international finance. To explain this, let us assume that one year
interest rates in US and India are say 7% and 10% respectively and the
spot rate of USD in India is Rs. 44.
From the equation above the one year forward exchange rate should be
F = 44 * e^(0.10-0.07 )*1=45.34
It may be noted from the above equation, if foreign interest rate is
greater than the domestic rate i.e. rf > r, then F shall be less than S. The
value of F shall decrease further as time T increase. If the foreign interest
is lower than the domestic rate, i.e. rf < r, then value of F shall be greater
than S. The value of F shall increase further as time T increases.
HEDGING WITH CURENCY FUTURES

Exchange rates are quite volatile and unpredictable, it is possible that
anticipated profit in foreign investment may be eliminated, rather even
may incur loss. Thus, in order to hedge this foreign currency risk, the
traders oftenly use the currency futures. For example, a long hedge
(I.e.., buying currency futures contracts) will protect against a rise in a
foreign currency value whereas a short hedge (i.e., selling currency
futures contracts) will protect against a decline in a foreign currencys
value.
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It is noted that corporate profits are exposed to exchange rate risk in

many situation. For example, if a trader is exporting or importing any
particular product from other countries then he is exposed to foreign
exchange risk.
Similarly, if the firm is borrowing or lending or investing for short or long

period from foreign countries, in all these situations, the firms profit will
be affected by change in foreign exchange rates. In all these situations,
the firm can take long or short position in futures currency market as per
requirement.
The general rule for determining whether a long or short futures position
will hedge a potential foreign exchange loss is:
Loss from appreciating in Indian rupee= Short hedge
Loss form depreciating in Indian rupee= Long hedge
The choice of underlying currency

The first important decision in this respect is deciding the currency in
which futures contracts are to be initiated. For example, an Indian
manufacturer wants to purchase some raw materials from Germany then
he would like future in German mark since his exposure in straight
forward in mark against home currency (Indian rupee). Assume that
there is no such future (between rupee and mark) available in the market
then the trader would choose among other currencies for the hedging in
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TYBFM
futures. Which contract should he choose? Probably he has only one

option rupee with dollar. This is called cross hedge.
Choice of the maturity of the contract

The second important decision in hedging through currency futures is
selecting the currency which matures nearest to the need of that
currency. For example, suppose Indian importer import raw material of
100000 USD on 1st November 2008. And he will have to pay 100000 USD
on 1st February 2009. And he predicts that the value of USD will increase
against Indian rupees nearest to due date of that payment. Importer
predicts that the value of USD will increase more than 51.0000.
So what he will do to protect against depreciating in Indian rupee?

Suppose spots value of 1 USD is 49.8500. Future Value of the 1USD on
NSE as below:
Price Watch
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TYBFM
Order
Book
Contr Best
act
Buy
Qty
USDI
464
NR
2611
08
USDI
189
NR
2912
08
USDI
1
NR
2801
09
USDI
100
NR
2502
09
USDI
100
NR
2703
09
USDI
1
NR
2804
09
USDI
NR
2705
09
USDI
25
NR
2606
09
Best
Best
Best
LTP
Buy
Sell
Sell
Price
Price
Qty
49.855 49.857
712 49.85
0
5
50
Volu
me
49.692 49.700
5
0
612 49.73
00
1764 11183
53
0
49.885 49.925
0
0
2 49.94
50
5598 16809
50.100 50.227
0
5
1 50.19
25
3771
6367
49.922 50.500
5
0
5 49.91
25
311
892
50.000 51.000
0
0
5 50.50
00
278
- 51.000
0
5 47.10
00
506
- 50.00
00
116
49.000
0
Open
Inter
est
5850 43785
6
Page | 51
TYBFM
USDI
1 48.087
NR
5
2907
09
USDI
2 48.162 50.500
NR
5
0
2708
09
USDI
1 48.237
NR
5
2809
09
USDI
1 48.310 53.190
NR
0
0
2810
09
USDI
1 48.382
NR
5
2611
09
Volume As On 26-NOV-2008
17:00:00 Hours IST
No. of Contracts
244645
Archives
As On 26-Nov-2008 12:00:00
Hours IST
RBI
Underlying reference
rate
USDINR
49.8500
- 49.15
00
44
1 50.30
00
2215
- 51.20
00
79
2 50.99
00
- 50.92
75
Rules, Byelaws &

Regulations
Membership
Circulars
List of Holidays
Solution:
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TYBFM
He should buy ten contract of USDINR 28012009 at the rate of 49.8850.

Value of the contract is (49.8850*1000*100) =4988500. (Value of
currency future per USD*contract size*No of contract).
For that he has to pay 5% margin on 5988500. Means he will have to pay
Rs.299425 at present.
And suppose on settlement day the spot price of USD is 51.0000. On
settlement date payoff of importer will be (51.0000-59.8850) =1.115 per
USD. And (1.115*100000) =Rs. 111500.
Choice of the number of contracts (hedging ratio)

Another important decision in this respect is to decide hedging ratio HR.
The value of the futures position should be taken to match as closely as
possible the value of the cash market position. As we know that in the
futures markets due to their standardization, exact match will generally
not be possible but hedge ratio should be as close to unity as possible. We
may define the hedge ratio HR as follows:
HR= VF / Vc
Where, VF is the value of the futures position and Vc is the value of the
cash position.
Suppose value of contract dated 28th January 2009 is 49.8850.
And spot value is 49.8500.
HR=49.8850/49.8500=1.001.
FINDINGS
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Cost of carry model and Interest rate parity model are useful tools
to find out standard future price and also useful for comparing
standard with actual future price.
And its also a very help full in
Arbitraging.
New concept of Exchange traded currency future trading is
regulated by higher authority and regulatory. The whole function of
Exchange traded currency future is regulated by SEBI/RBI, and they
established rules and regulation so there is very safe trading is
emerged and counter party risk is minimized in currency Future
trading. And also time reduced in Clearing and Settlement process
up to T+1 days basis.
Larger exporter and importer has continued to deal in the OTC
counter, even exchange traded currency future is available in
markets.
There is a limit of USD 100 million on open interest applicable to
trading member who are banks. And the USD 25 million limit for
other trading members so larger exporter and importer might
continue to deal in the OTC market where there is no limit on
hedges.
In India RBI and SEBI has restricted other currency derivatives
except Currency future, at this time if any person wants to use
other instrument of currency derivatives in this case he has to use
OTC.
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SUGGESTIONS
Currency Future need to change some restriction it imposed such

as cut off limit of 5 million USD, Ban on NRIs and FIIs and
Mutual Funds from Participating.
Now in exchange traded currency future segment only one pair

USD-INR is available to trade so there is also one more demand
by the exporters and importers to introduce another pair in
currency trading. Like POUND-INR, CAD-INR etc.
In OTC there is no limit for trader to buy or short Currency

futures so there demand arises that in Exchange traded
currency future should have increase limit for Trading Members
and also at client level, in result OTC users will divert to
Exchange traded currency Futures.
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In India the regulatory of Financial and Securities market (SEBI)

has Ban on other Currency Derivatives except Currency Futures,
so
this
restriction
seem
unreasonable
to
exporters
and
importers. And according to Indian financial growth now its

become necessary to introducing other currency derivatives in
Exchange traded currency derivative segment.
CONCLUSIONS
By far the most significant event in finance during the past decade has
been the extraordinary development and expansion of
financial
derivativesThese instruments enhances the ability to differentiate risk

and allocate it to those investors most able and willing to take it- a
process that has undoubtedly improved national productivity growth and
standards of livings.
The currency future gives the safe and standardized contract to its
investors and individuals who are aware about the forex market or predict
the movement of exchange rate so they will get the right platform for the
trading in currency future. Because of exchange traded future contract
and its standardized nature gives counter party risk minimized.
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Initially only NSE had the permission but now BSE and MCX has also
started currency future.
It is shows that how currency future covers
ground in the compare of other available derivatives instruments.
Not
only big businessmen and exporter and importers use this but individual
who are interested and having knowledge about forex market they can
also invest in currency future.
Exchange between USD-INR markets in India is very big and these
exchange traded contract will give more awareness in market and attract
the investors.
BIBLIOGRAPHY
Financial Derivatives (theory, concepts and problems) By: S.L. Gupta.
NCFM: Currency future Module.
BCFM: Currency Future Module.
Center for social and economic research) Poland
Recent Development in International Currency Derivative Market by:
Lucjan T. Orlowski)
Page | 57
TYBFM
Report of the RBI-SEBI standing technical committee on exchange traded

currency futures) 2008
Report of the Internal Working Group on Currency Futures (Reserve Bank
of India, April 2008)
Websites:
www.sebi.gov.in
www.rbi.org.in
www.frost.com
www.economywatch.com
www.bseindia.com
www.nseindia.com
Page | 58

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SIES College of Commerce and Economics,Mumbai

B.Com-Financial Markets Semester V (20152016) has successfully completed the project on

SIES College of Commerce and Economics,Mumbai

Financial Markets Semester V (2015

hereby declare that I have completed the

Signature of the Student

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I am deeply indebted to my Professor and guide Mrs. Reema

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1. Introduction to Financial Derivatives7

3.1 Over the Counter Products......10

Types of Trades in Currency Derivatives29

SIES College of Commerce and Economics,Mumbai

SIES College of Commerce and Economics,Mumbai

INTRODUCTION TO FINANCIAL DERIVATIVES

instruments enhances the ability to differentiate risk and allocate it to those

As a result, the demand for the international

money and financial instruments increased significantly at the global level. In

It is therefore, to manage such risks; the new financial

SIES College of Commerce and Economics,Mumbai

It means, this word has been arisen by

The Underlying Securities for Derivatives are :

TYPES OF FINANCIAL DERIVATIVES

SIES College of Commerce and Economics,Mumbai

Presently there are

Complex varieties of derivatives already in existence and the markets are

Due to complexity in nature, it is very difficult to

SIES College of Commerce and Economics,Mumbai

One form of classification of derivative instruments is between commodity

In fact, such derivatives are

effectively derivatives of derivatives.

Derivatives are traded at organized exchanges and in the

Options (stock and index)

SIES College of Commerce and Economics,Mumbai

Derivatives traded at exchanges are standardized contracts having standard

OTC derivatives are customized contracts

A major difference between the two is that of counterparty riskthe risk of

With the exchange traded derivatives, the risk is

controlled by exchanges through clearing house which act as a contractual

In contrast, OTC derivatives

signify greater vulnerability.

DERIVATIVES INTRODUCTION IN INDIA

The trading in index options

commenced in June 2001 and the trading in options on individual securities

HISTORY OF CURRENCY DERIVATIVES

SIES College of Commerce and Economics,Mumbai

UTILITY OF CURRENCY DERIVATIVES

SIES College of Commerce and Economics,Mumbai

lower conversion rate. Investors in foreign currency denominated securities

SIES College of Commerce and Economics,Mumbai

similar foreign currency forward selling contract is obtained by investors in

INTRODUCTION TO CURRENCY DERIVATIVES

All the international business

transactions involve an exchange of one currency for another.

currency units of a country involve an exchange of one currency for another.

SIES College of Commerce and Economics,Mumbai

As a result the assets or

liability or cash flows of a firm which are denominated in foreign currencies

As a result, these firms are

increasingly turning to various risk hedging products like foreign currency

INTRODUCTION TO CURRENCY FUTURE

commodity futures contract. When the

underlying is an exchange rate, the contract is termed a currency futures