Documente Academic
Documente Profesional
Documente Cultură
Currencies:
The main object of trading in the Foreign Exchange is the currency. Currencies
are written in Latin symbols (ISO codes), which have become a traditional
international practice .These codes have only 3 characters: the first two
characters stand for the country name and the last character stands for the
currency name.
Currency trading is implemented in the foreign market. In Forex market , all the currencies
are priced (quoted) and traded in pairs (like EUR/USD, GBP/USD), because in trading one
needs to sell one currency for buying another, or vice-versa. The first currency is known to
be the base currency, whereas the second one is the quote currency. In the notation it is
possible to write without a separating sign “/” .
For example, in USDINR (or USDINR), USD is the BC and INR is the quoted currency; and
what is quoted in the market is the price of USD expressed in INR. If you want the price of
INR expressed in USD, then you must specify the currency pair as INRUSD. Therefore if a
dealer quotes a price of USDINR as 45, it means that one unit of USD has a value of 45 INR.
Similarly, GBPUSD = 1.60 means that one unit of GBP is valued at 1.60 USD. Please note
that in case of USDINR, USD is base currency and INR is quotation currency while in case
of GBPUSD, USD is quotation currency and GBP is base currency.
In the interbank market, USD is the universal base currency other than quoted against
Euro (EUR), Sterling Pound (GBP), Australian Dollar (AUD), Canadian Dollar (CAD) and
New Zealand Dollar (NZD)
1
Currency Pairs traded in India
The most traded currency pairs in the world are called the Majors. The list
includes following currencies: Euro (EUR), US Dollar (USD), Japanese Yen
(JPY), Pound Sterling (GBP), Australian Dollar (AUD), Canadian Dollar
(CAD), and the Swiss Franc (CHF). These currencies follow free floating
method of valuation. Amongst these currencies the most active currency pairs
are: EURUSD, USDJPY, GBPUSD, AUDUSD, CADUSD and USDCHF.
In the interbank market, USD is the universal base currency other than quoted
against
Euro (EUR), Sterling Pound (GBP), Australian Dollar (AUD), Canadian Dollar
(CAD) and New Zealand Dollar (NZD). Lets see what is the value of currencies
accoding to 2017 ‘’
US Dollar
1.00 USD inv. 1.00 USD
2
Whereas for trading purpose in India , only 4 currency pairs are permitted -
USD-INR GBP-INR
1$=66.50 1£/₹
96.5865
JPY-INR
EUR-INR
100 ¥ / ₹
62.1500 1€/₹
76.3807
There are two distinct segment of OTC foreign exchange market. One segment is called as
“interbank” market and the other is called as “merchant” market. Interbank market is the
market between banks where dealers quote prices at the same time for both buying and
selling the currency. The mechanism of quoting price for both buying and selling is called as
market making.
Quotes
In interbank market, currency prices are always quoted with two way price. In a two
way quote, the prices quoted for buying is called bid price and the price quoted for
selling is called as offer or ask price. Suppose a bank quotes USDINR spot price as
64.05/64.06 to a merchant. In this quote, 64.05 is the bid price and 64.06 is the offer
price or ask price. This quotes means that the bank is willing to buy one unit of USD
for a price of INR 64.05 and is willing to sell one unit of USD for INR 64.06
3
Market timing
In India, OTC market is open from 9:00 AM to 5:00 PM. However, for merchants the market
is open from 9:00 AM to 4:30 PM and the last half hour is meant only for interbank dealings
for banks to square off excess positions
.
Spread
The difference between bid and offer price is called as “spread”. Spread is an important
parameter to note while assessing market liquidity, efficiency of market maker and
market direction. . In USDINR spot market, the spreads are wide at the time of opening
and gradually start narrowing as the market discovers the price.
3.2
NZDUSD 0.72351 0.72383
4
FACTORS INFLUENCING CURRENCY TRADING
Currency fluctuation is a major problem in foreign exchange
trading. These mainly occurs due to the following reason:
Inflation:
The rate of inflation in a country can have a major impact on the
value of the country's currency and the rates of foreign exchange it
has with the currencies of other nations Inflation is more likely to
have a significant negative effect, rather than a significant positive
effect, on a currency's value and foreign exchange rate. A very low
rate of inflation does not guarantee a favourable exchange rate for a
country, but an extremely high inflation rate is very likely to impact
the country's exchange rates with other nations negatively.
DEFLATION:
Deflation is a contraction in the supply of circulated money within
an economy, and therefore the opposite of inflation. In times of
deflation, the purchasing power of currency and wages are higher
than they otherwise would have been. This is distinct from but
similar to price deflation, which is a general decrease in the price
level, though the two terms are often mistaken for each other and
used interchangeably.
5
This Chart shows the inflation and deflation rate in currency market .The
black line represents the annual inflation rate .
How to control these problem and make money even when market is
falling?
6
What is Currency hedging ?
7
I. Currency can be hard to predict .
A portfolio's average annual returns are important—but they do not tell the full story. In the
example below, portfolios A and B both start out with $500,000. Although it may not look like it, they
both have average annual returns of 10%. After five years, however, portfolio A is worth just over
$804,000, while portfolio B is worth less than $772,000. Why? Volatility.
8
III. Volatility can cost us time :
Volatility can cost you not only money, but time as well. In fact, the more your portfolio drops, the
higher a return you will need and the longer it could take to get you back to where you were. For
example, a drop of 30% will take six years to recover from at 6% per year, nine years at 4%, or nearly 18
years at 2%. And that is simply to break even. If you want to get ahead, you need to earn much higher
returns or spend even more time.
Let us assume that Rohit’s Exports ltd has an export inward remittance that is
receivable on 30th September for $50000/- . While Rohit knows the dollar
amount that he will get on 30th sept, he is not too sure about how much INR
that will translate into as it will depend on the USD-INR exchange rate on that
particular date . Currently the exchange rate is Rs .64 /$. That means at this
will translate into a rupee inflow of INR 32lakhs on sept 30. Rohit has certain
commitments on October 10th and is comfortable with the exchange rate of
64/$ on settlement date .
10
Due to heavy FDI inflow into india , the INR may appreciate to 62/$ by sept .
That will mean that rohit exports will receive only Rs 31 lakhs in rupee terms.
Rohit exports is apprehensive that this will leave them with a shortfall in
meeting their outflow commitment on oct 10th , company therefore needs to
hedge its inward dollar risk.
How can Rohit’s export do this ?
Rohit’s export can hedge this risk by selling 50 lots( each lot size
worth 1000$) of the USD-INR Pair at a price of Rs 64. This will
give them a perfect protection. This is how it will work.. on the
inward date of 30th sept , let us assume that the INR has actually
appreciated to 62$. When Rohit’s Export receives its remittance
of 50000$on sept 30th, the converted value will be Rs. 31 lakhs .
However Rohit has also sold 50 lots of the USD-INR future at
Rs.64. since the price is now down to Rs 62. Rohit’s exports will
make a profit of Rs. 1 lakh on that position. Thus the total
receivable will now be Rs. 32 lakhs (Rs . 31 lakhs from
conversation and Rs 1 lakh from the short USD- INR futures. )
effectively , Rohit’s export has managed to hedge its conversion
price at Rs 64/$.
11
CASE OF TRAVELLERS
/TOURISTT
12
IMPORTER COMPANIES
AT RS. 64
Manufacturer EXPORTER
COMPANY COMPANY
AT RS .68
13
MERCHANT NAVY
5000$*64= 320000
5000$ *68=340000
14
Student Goes To Abroad for Study
Now- a- days every parents dreams of sending their children to
abroad for better opportunities and exposurers. But what will happen
if the course fees increases due to currency fluctuation. Such
situation cannot be eliminated totally but can be restricted through
Currency Hedging.
15
Suppose, A plans to send his son in US for persuing MBA after 2
years , lets say his course fees is 12000 dollars for 1 year which is
7,20,000 INR.
1$ = Rs. 60
12000$ * 60 = 7,20,000 ( Course fee for 1 yr)
16
Currency Hedging – methods and tools
Forward
Currency
Swaps Future
Hedging
Option
17
FORWARD
FUTURE CONTRACT
A tick is the minimum size of price change. The market price will change only
in multiples of the tick. For e.g. in the case of the USDINR currency futures contract
the tick size shall be 0.25 paise or 0.0025 Rupee
FutureTerminalogy
Some of the common terms used in the context of currency futures market
are given below:
• Spot price: The price at which the underlying asset trades in the spot
market.
• Futures price: The current price of the specified futures contract
18
• Contract value : The contract amount (or “market lot”) is the minimum
amount that can be traded. Therefore, the profit/loss associated with change of one
tick is: tick x contract amount
The value of one tick on each USDINR contract is Rupees 2.50 (1000 X 0.0025). So if
a trader buys 5 contracts and the price moves up by 4 ticks, he makes
Rupees 50.00 (= 5 X 4 X 2.5)
• Expiry date: Also called Last Trading Day, it is the day on which trading
ceases in the contract; and is two working days prior to the final settlement
date.
• Contract size: The amount of asset that has to be delivered under one
contract. Also called as lot size. In the case of USDINR it is USD 1000; EURINR
it is EUR 1000; GBPINR it is GBP 1000 and in case of JPYINR it is JPY 100,000.
• Initial margin: The amount that must be deposited in the margin account at
the time a futures contract is first entered into is known as initial margin.
• Marking-to-market: In the futures market, at the end of each trading day,
the margin account is adjusted to reflect the investor's gain or loss depending
upon the futures closing price. This is called marking-to-market.
Therefore one year future price of USDINR pair is 51.94 when spot price is 50. It
means that INR is at discount to USD and USD is at premium to INR. Intuitively to
understand why INR is called at discount to USD, think that to buy same 1 USD you
had to pay INR
50 and you have to pay 51.94 after one year i.e., you have to pay more INR to buy
same
1 USD. And therefore future value of INR is at discount to
USD.
Therefore in any currency pair, future value of a currency with high interest rate is
at a discount (in relation to spot price) to the currency with low interest rate.
19
2 Price conditions
A. Market price: Market orders are orders for which no price is specified at the
time the order is entered (i.e. price is market price). For such orders, the trading
system determines the price. For the buy order placed at market price, the
system matches it with the readily available sell order in the order book. For the
sell order placed at market price, the system matches it with the readily available
buy order in the order book.
B. Limit price: An order to buy a specified quantity of a security at or below a
specified price, or an order to sell it at or above a specified price (called the limit
price). This ensures that a person will never pay more for the futures contract
than whatever price is set as his/her limit. It is also the price of orders after
triggering from stop- loss book.
C. Stop-loss: This facility allows the user to release an order into the system, after
the market price of the security reaches or crosses a threshold price e.g. if for
stop-loss buy order, the trigger is Rs. 44.0025, the limit price is Rs. 44.2575 ,
then this order is released into the system once the market price reaches or
exceeds Rs. 44.0025. This order is added to the regular lot book with time of
triggering as the time stamp, as a limit order of Rs. 44.2575. Similarly, for a stop-
loss sell order, the trigger is 44.2575 and the limit price is 44.0025. This stop loss
sell order is released into the system once the market price is reaches or drops
below 44.2575. This order is added to the regular lot book with time of
triggering as the time stamp, as a limit order of
44.0025.
Thus, for the stop loss buy order, the trigger price has to be less than the limit price
and for the stop-loss sell order, the trigger price has to be greater than the limit price
20
USD-INR PRICE WATCH | 03/03/2018 - 03:39
USD-INR
Las Tota
Of
Pre t Per Bi Offe l
Bid fe Ope
viou Tra cen d r Tra
Qua r n
Contract s de t Pr Qua ded
ntit Pr Inte
Clos d Cha ic ntit Qua
y ic rest
e Pri nge e y ntit
e
ce y
FUTCURUSDIN 4957.0
66.67 66.89 0.32 66.69 51.00 66.85 27.00 108.00
R29OCT2018 0
FUTCURUSDIN 5119.0
67.02 66.97 -0.09 66.82 1.00 67 6.00 253.00
R28NOV2018 0
21
Las Tota
Of
Pre t Per Bi Offe l
Bid fe Ope
viou Tra cen d r Tra
Qua r n
Contract s de t Pr Qua ded
ntit Pr Inte
Clos d Cha ic ntit Qua
y ic rest
e Pri nge e y ntit
e
ce y
Option:
It is a contract between two parties to buy or sell a given amount
of asset at a pre- specified price on or before a given date To
explain the concept though an example, take a case where we want
to a buy a house and we finalize the house to be bought. On
September 1st 2010, we pay a token amount or a security
deposit of Rs 1,00,000 to the house seller to book the house at a
price of Rs 10,00,000 and agree to pay the full amount in three
months i.e., on November 30th 2010.
After making full payment in three months, we get the ownership
right of the house. During these three months, if we decide not to
buy the house, because of any reasons, our initial token amount
paid to the seller will be retained by him.
In the above example, at the expiry of three months we have the
option of buying or not buying the house and house seller is under
obligation to sell it to you. In case during these three months the
house prices drop, we may decide not to buy the house and lose
the initial token amount..
Option terminology
• The right to buy the asset is called call option and the right to
sell the asset is called put option.
22
• The pre-specified price is called as strike price and the date at
which strike price is applicable is called expiration date.
• The party which buys the rights but not obligation and pays
premium for buying the right is called as option buyer and
the party which sells the right and receives premium for
assuming such obligation is called option seller/ writer.
23
Currency Option Hedging Strategies:
Purchased call option – On Ist August 2010 , XYZ buys a USD call option
for covering its import transactions, at a strike rate of 45.50 The expiry
date is 3 months i.e, 31st October 2010 . The premium is 30 paisa on the
call gain or loss on expiry at various levels of exchange rate is
demonstrated below vide pay off table and graph.
When spot exchange rate rises above the strike price , there are gains.
When it falls below the strike price , there are losses which are maximum
to the extent of premium paid.
Purchased Put Option- On Ist August 2010, XYZ buys a USD Put option
for covering its export transactions at a strike rate of 45.50 . The expiry
date is 3 months i.e, 31st October 2010 . The premium is 30 paisa on the
put . Gain or loss on expiry at various levels of exchange rate is
demonstrated below vide payoff table and graph .
24
When spot exchange rate falls below the strike price , there are gains
when it rises above the strike price there are losses , which are maximum
to the extent of premium paid.
Intrinsic value
Time value
Time value is a little more complex. When the price of a put or call option
is greater than its intrinsic value, it is because the option has time value.
Time value is determined by: the spot price; the volatility of the
underlying currency; the exercise price; the time to expiration; and the
difference in the ‘risk-free’ rate of interest that can be earned by the two
currencies. The time value of the option contract will diminish over the
life of the option and at expiration will be zero. The time value portion of
an option is at its greatest when the option is “at-the-money, that is, the
strike (exercise) rate is equal to the market rate. This is because the entire
premium is equal to time value, as the option has no intrinsic value.
26
Shown in table form
Option type Spot exchange rate is Spot exchange rate is equal
greater than strike price to strike price
How It Works
Say it's January 2, 2010, and you think that the EUR/USD (euro vs. dollar) pair,
which is currently at 1.3000, is headed downward due to positive U.S. numbers;
however, there are some major reports coming out soon that could cause
significant volatility. You suspect this volatility will occur within the next two months,
but you don't want to risk a cash position, so you decide to use options You then go
to your broker and put in a request to buy a EUR put/USD call, commonly referred
to as a "EUR put option," set at a strike price of 1.2900 and an expiry of March 2,
2010. The broker informs you that this option will cost 10 pips, so you gladly decide
to buy.
27
28
This section gives the list of active options of currency on NSE and MCX SX under the title of Symbol of currenty, Expiry
Date, Last Trade Price, Bid Price, Offer Price, Bid Quantity, Offer Quantity, Percent Change and Total Traded Value. By
selecting particular currency and contract from drop down box same data can be fetched for that particular currency.
NSE MCXSX
26MAR201
USDINR 65.38 65.33 65.35 69.00 49.00 0.09% 8285.60
8
26MAR201
GBPINR 89.92 90.69 90.70 10.00 1.00 -0.94% 1076.22
8
26MAR201
EURINR 79.77 79.98 80.00 37.00 10.00 -0.21% 463.80
8
26MAR201
JPYINR 61.27 61.02 61.06 1.00 26.00 0.39% 235.92
8
29MAY201
USDINR 65.85 65.75 65.80 50.00 59.00 0.10% 177.59
8
38.30
JPYINR 25APR2018 61.59 61.32 61.37 18.00 10.00 0.40%
29
30
FUTCURUSDINR27JUL2018 66.17 66.23 0.11 66.16 85.00 66.18 50.00 1990.00 44796.00
FUTCURUSDINR29AUG2018 66.37 66.39 0.04 66.36 69.00 66.375 3.00 516.00 28456.00
FUTCURUSDINR26SEP2018 66.59 66.59 0.01 66.50 100.00 66.665 34.00 1019.00 7469.00
FUTCURUSDINR29OCT2018 66.67 66.89 0.32 66.69 51.00 66.85 27.00 108.00 4957.00
-
FUTCURUSDINR28NOV2018 67.02 66.97 66.82 1.00 67 6.00 253.00 5119.00
0.09
FUTCURUSDINR27DEC2018 67.06 67.20 0.22 67.06 2.00 67.195 53.00 371.00 19543.00
31