Future Markets Project

INTRODUCTION:
Finance is regarded as “THE LIFE BLOOD OF BUSINESS ENTERPRISE”. Finance

function has become so important that it has given birth to financial management as a separate
subject. So, this subject is acquiring universal applicability. Financial Management is that
managerial activity which is concerned with the planning and controlling of the firm’s financial
resources. As a separate activity or discipline is of recent origin it was a branch of Economics
till 1890 still today it has no unique knowledge of its own, and it draws heavily on economy for
its theoretical concepts.
The subject of financial management is of immense interest to both academicians and

practicing managers. It is of great interest to academicians because the subject is still
developing, and there are still certain areas where controversies exist for which no unanimous
solutions have been reached as yet. Practicing Managers are interested in this subject because
among the most crucial decisions of the firm are those which relate to finance and an
understanding of the theory of financial management provides them with conceptual and
analytical insights.
Firms create manufacturing capacities for production for goods; some provide services to
customers. They sell their goods or services to earn profits. They raise funds to acquire
manufacturing and other facilities. Thus, the three most important activities of a business firm
are:
 Production
 Marketing
 Finance
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Need for the study:-
Financial Derivatives are quite new to the Indian Financial Market, but the derivatives
market has shown an immense potential which is visible by the growth it has achieved in the
recent past, In the present changing financial environment and an increased exposure towards
financial risks, It is of immense importance to have a good working knowledge of Derivatives.
The Derivatives market in India is still in a budding stage, It is necessary to understand the
perception of investors in India and try to gather information regarding the behavior of investors
towards Derivatives. So that, the company can devises certain measures to improve the
Derivatives market in India.
Scope Of The Study:
The Study is limited to “Derivatives” with special reference to future in the Indian
context. The study can’t be said as totally perfect. Any alteration may come. The study has only
made a humble Attempt at evaluation derivatives market only in India context.
The main factor that affects any currency is the Demand/supply dynamics for the
individual currencies. However the Demand/supply dynamics is influenced by many other
factors such as interest rates, inflation, money supply, trade balance, growth in imports, exports,
capital flows, and overall economic growth in the country and global developments.
Objectives Of the Study:
1. To know about the currency market in India with the understanding of currency futures.
2. To know the awareness & penetration level of respondent about currency futures.
3. To know about the various usage of currency futures.
4. To determine the purpose of trading in currency futures.
5. To know the awareness level about hedging in currency futures.
6. To identify the most preferred currency pair for trading in currency futures.
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Methodology Of The Study:
This study is made through two sources.
METHODS
PRIMARY DATA SECONDARY DATA
1.Primary Data:
The primary data comprises information collected during discussions with Heads of
Departments and from the meeting with officials and staff.
2. Secondary Data:
The secondary data has been collected from information through Annual Reports, Public
Report, Bulletins and other Printed Materials supplied by the Company.
In the present study 1/4th of the total information is from primary data and the rest is from
the secondary data.
Research design:
A research design is the arrangement of condition for collection and analysis of data.
Actually it is the blue print of research project. The research design as follow:
1. Descriptive research
Sample size:
120 respondents have been selected across Hyderabad city.
Data analysis:
Data analysis will be done with the help of statistical tools….like pie chart, bar chart, etc.
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Limitations of the study:
1. Theoretical data are taken from internet; possibilities of wrong data can take in the report.
2. Shortage of time.
3. May small sample size doesn’t cover the all population characteristics.
4. Area of survey was limited to the city of Hyderabad only.
5. Respondent may have given biased answers for the required data.
6. Some of respondent did not like to respond.
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INDUSTRY PROFILE:
Broking Insights
The Indian broking industry is one of the oldest trading industries that have been around even
before the establishment of the BSE in 1875. Despite passing through a number of changes in
the post liberalization period, the industry has found its way towards sustainable growth.
With the purpose of gaining a deeper understanding about the role of the Indian stock
broking industry in the country’s economy, we present in this section some of the industry
insights gleaned from analysis of data received through primary research.
For the broking industry, we started with an initial database of over 1,800 broking firms that
were contacted, from which 464 responses were received. The list was further short listed
based on the number of terminals and the top 210 were selected for profiling. 394 responses,
that provided more than 85% of the information sought have been included for this analysis
presented here as insights. All the data for the study was collected through responses
received directly from the broking firms. The insights have been arrived at through an
analysis on various parameters, pertinent to the equity broking industry, such as region,
terminal, market, branches, sub brokers, products and growth areas.
Some key characteristics of the sample 394 firms are:
 On the basis of geographical concentration, the West region has the maximum
representation of 52%. Around 24% firms are located in the North, 13% in the South and
10% in the East
 3% firms started broking operations before 1950, 65% between 1950-1995 and 32% post
1995.
 On the basis of terminals, 40% are located at Mumbai, 12% in Delhi, 8% in Hyderabad,
7% in Kolkata, 4% in Chennai and 29% are from other cities
 From this study, we find that almost 36% firms trade in cash and derivatives and 27% are
into cash markets alone. Around 20% trade in cash, derivatives and commodities
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 In the cash market, around 34% firms trade at NSE, 14% at BSE and 52% trade at both
exchanges. In the derivative segment, 48% trade at NSE, 7% at BSE and 45% at both,
whereas in the debt market, 31% trade at NSE, 26% at BSE and 43% at both exchanges
 Majority of branches are located in the North, i.e. around 40%. West has 31%, 24% are
located in South and 5% in East
 In terms of sub-brokers, around 55% are located in the South, 29% in West, 11% in
North and 4% in East
 Trading, IPOs and Mututal Funds are the top three products offered with 90% firms
offering trading, 67% IPOs and 53% firms offering mutual fund transactions
 In terms of various areas of growth, 84% firms have expressed interest in expanding their
institutional clients, 66% firms intend to increase FII clients and 43% are interested in
setting up JV in India and abroad
 In terms of IT penetration, 62% firms have provided their website and around 94% firms
have email facility
Terminals
Almost 52% of the terminals in the sample are based in the Western region of India,
followed by 25% in the North, 13% in the South and 10% in the East. Mumbai has got the
maximum representation from the West, Chennai from the South, New Delhi from the North
and Kolkata from the East. Mumbai also has got the maximum representation in having the
highest number of terminals. 40% terminals are located in Mumbai while 12% are from
Delhi, 8% from Hyderabad, 7% from Kolkata, 4% from Chennai and 29% are from other
cities in India.
Branches & Sub-Brokers
The maximum concentration of branches is in the North, with as many as 40% of all
branches located there, followed by the Western region, with 31% branches. Around 24%
branches are located in the South and East constitutes for 5% of the total branches of the total
sample.
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In case of sub-brokers, almost 55% of them are based in the South. West and North follow,
with 30% and 11% sub-brokers respectively, whereas East has around 4% of total sub-
brokers.
Financial Markets
The financial markets have been classified as cash market, derivatives market, debt market
and commodities market. Cash market, also known as spot market, is the most sought after
amongst investors. Majority of the sample broking firms are dealing in the cash market,
followed by derivative and commodities. 27% firms are dealing only in the cash market,
whereas 35% are into cash and derivatives. Almost 20% firms trade in cash, derivatives and
commodities market. Firms that are into cash, derivatives and debt are 7%. On the other
hand, firms into cash and commodities are 3%, cash & debt market and commodities alone
are 2%. 4% firms trade in all the markets.
In the cash market, around 34% firms trade at NSE, 14% at BSE and 52% trade at both
exchanges. In the equity derivative market, 48% of the sampled broking houses are members
of NSE and 7% trade at BSE, while 45% of the sample operate in both stock exchanges.
Around 43% of the broking houses operating in the debt market, trade at both exchanges with
31% and 26% firms uniquely at NSE and BSE respectively. Of the brokers operating in the
commodities market, 57% firms operate at NCDEX and MCX. Around 20% and 21% firms
are solely in NCDEX and MCX respectively, whereas 2% firms trade in NCDEX, MCX and
NMCE.
Products
The survey also revealed that in the past couple of years, apart from trading, the firms have
started offering various investment related value added services. The sustained growth of the
economy in the past couple of years has resulted in broking firms offering many diversified
services related to IPOs, mutual funds, company research etc. However, the core trading
activity is still the predominant form of business, forming 90% of the firms in the sample.
67% firms are engaged in offering IPO related services. The broking industry seems to have
capitalised on the growth of the mutual fund industry, which was pegged at 40% in 2006.
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More than 50% of the sample broking houses deal in mutual fund investment services. The
average growth in assets under management in the last two years is almost 48%. Company
research is another lucrative area where the broking firms offer their services; more than 33%
of the firms are engaged in providing company research services. Additionally, a host of
other value added services such as fundamental and technical analysis, investment banking,
arbitrage etc. are offered by the firms at different levels. Of the total sample of broking
houses providing trading services, 52% are based in the West, followed by 25% from North,
13% from South and 10% from the East. Around 50% of the firms offering IPO related
services are based in the West as compared to 27% in North, 13% in South and 10% in East.
In providing mutual funds services, the Western region was dominant amounting to 49%
followed by 27% from North; The South and the East are almost at par with 13% and 11%
respectively.
Future Plans
68% of the firms from the sample have envisaged strategies for future growth. With the
middle class Indian investor as well as foreign investor willing to invest in the stock market,
majority of the firms preferred expansion of institutional and the Foreign Institutional
Investor clients in their areas of growth. Around 84% have shown interest in expanding their
institutional client base. Nearly 51% of such firms are located in the West, 25% in North,
15% are from South and 9% from East. Since the past couple of years, India, along with
Korea and Taiwan, has been one of the preferred destinations for the FIIs. With corporate
restructuring, rising market capitalization and sectoral friendly policies helping the FIIs,
more than two thirds of the firms are interested in increasing their FII client base. Amongst
these firms, West again has maximum representation of 53%, followed by North with 22%.
South has 15% firms and East makes up for 9%.
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COMPANY PROFILE
INDIABULLS
Indiabulls is one of India's largest and leading financial services companies. It is an

online stock trading company which has been a provider of India-based investment banking and
corporate finance service for over 80 years.
Indiabulls most of the prominent financial institutions, foreign and domestic, investing in
Indian equities. It has been valued for its strong research-led investment ideas, superior client
servicing track record and exceptional execution skills.
The key features of Indiabulls are as follows:
 You get freedom from paperwork.

 There are instant credit and money transfer facilities.
 You can trade from any net enabled PC.
 After hour orders facilities.
 You can go for online orders over the phone.
 Timely advice and research reports
 Real-time Portfolio tracking.
 Information and Price alerts.
Indiabulls provides assistance and the advice like no one else could. It has created special
information tools to help answer any queries. Indiabulls first step program, built specifically for
new investors, is testament to of its commitment to being your guide throughout your investing
life cycle.
INDIABULLS SERVICES:
The tag line of Indiabulls says that Quality On Time. As per the tag line there are many
amazing services that Indiabulls offers like technical research, fundamental research, share
shops, portfolio management, dial-n-trade, commodities trade, online services, depository
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services, equity and derivatives trading (including currency trading). With Indiabulls online
trading account, you can buy and sell shares at anytime and from anywhere you like.
With a physical presence in over 300 cities of India through more than 800 "Indiabulls
Shops" with more than 3000 employees, and an online presence through Indiabulls.com, India's
premier, it reaches out to more than 8, 00,000 trading customers.
A Indiabulls outlet online destination offers the following services:
 Online BSE and NSE executions (through BOLT & NEAT terminals)
 Free access to investment advice from Indiabulls Research team
 Indiabulls Value Line (a monthly publication with reviews of recommendations, stocks to
watch out for etc)
 Daily research reports and market review (High Noon & Eagle Eye)
 Pre-market Report (Morning Cuppa)
 Daily trading calls based on Technical Analysis
 Cool trading products (Daring Derivatives and Market Strategy)
 Personalized Advice
 Live Market Information
 Depository Services: Demat Transactions
 Derivatives Trading (Futures and Options)
 Commodities Trading
 IPOs & Mutual Funds Distribution
 Internet-based Online Trading: Speed Trade
Indiabulls has one of the best state-of-art web portals providing fundamental and
statistical information across equity, mutual funds and IPOs. Surfing can be done across 5,500
companies for in-depth information, details about more than 1,500 mutual fund schemes and IPO
data. Other market related details such as board meetings, result announcements, FII
transactions, buying/selling by mutual funds and much more can also be accessed.
It provides a complete life-cycle of investment solution in Equities, Derivatives,

Commodities, IPO, Mutual Funds, Depository Services, Portfolio Management Services and
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Insurance. It also offers personalized wealth management services for High Net worth
individuals.
ONLINE SERVICES
The online trading account can be chosen as per trading habits and preferences, that is the
classic account for most investors and speed trade for active day traders. Indiabulls
The Classic Account enables you to trade online for investing in Equities and
Derivatives on the NSE via Indiabulls.com; it gives access to all the research content and also
comes with a free Dial-n-Trade service enabling to buy shares using the telephone.
Its features are:
 Streaming quotes (using the applet based system)

 Multiple watch lists
 Integrated Banking, demat and digital contracts
 Instant credit and transfer
 Real-time portfolio tracking with price alerts and, of course, the assurance of secure
transactions
The Indiabulls is a next-generation online trading product that brings the power of the
broker's terminal to your PC. It's the perfect trading platform for active day traders. Its features
are:
 A single platform for multiple exchange BSE & NSE (Cash & F&O), MCX,
NCDEX, Mutual Funds, IPO’s
 Multiple Market Watch available on Single Screen
 Multiple Charts with Tick by Tick Intraday and End of Day Charting powered with
various Studies
 Graph Studies include Average, Band- Bollinger, Know Sure Thing, MACD, RSI,
etc
 Apply studies such as Vertical, Horizontal, Trend, Retracement & Free lines
 User can save his own defined screen as well as graph template, that is, saving the
layout for future use
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 User-defined alert settings on an input Stock Price trigger
 Tools available to gauge market such as Tick Query, Ticker, Market Summary,
Action Watch, Option Premium Calculator, Span Calculator
 Shortcut key for FAST access to order placements & reports
 Online fund transfer activated with 12 Banks
 Indiabulls provides you the facility to trade in Commodities through Indiabulls

Commodities Pvt. Ltd. It trades on two major commodity exchanges of the country:
 Multi Commodity Exchange of India Ltd, Mumbai (MCX) and
 National Commodity and Derivative Exchange, Mumbai (NCDEX).
For trading in any commodity, initial margin of around 10% on any commodity is to be
maintained. Indiabulls has launched its own commodity derivatives micro-site.
The site is available through the Indiabulls home page www.Indiabulls.com. Along with the site
Indiabulls has launched several commodity derivatives products (both research and trading) too.
The products have been listed below:
 Commodities Buzz: a daily view on precious metals and agro commodities.

 Commodities Beat: a summary of the days trading activity.
 Traders Corner: Under commodity trading calls, there are two types of trading calls:
 Rapid Fire: (short-term calls for 1 day to 5 days updated daily)
 Medium-term Plays: (medium-term calls for 1 month to 3 months updated
weekly or in between if needed)
 Indiabulls Xclusive: the commodity research reports and analyses (periodical).
 Market Scan: the daily commodity market data and statistics (end of day).
 All these products are both e-mailed as newsletters and published on the commodity
derivatives site
Indiabulls Securities Limited (ISL)
History
Indiabulls Securities Limited was originally incorporated in India on June 9, 1995, under the
Companies Act as a private limited company as GPF Securities Private Limited under certificate
of incorporation bearing number 55-69631. The name of the Company was changed to Orbis
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Securities Private Limited on December 15, 1995. The Company was subsequently converted
into a public limited company and its name was further changed to Orbis Securities Limited on
January 5, 2004. The name of the Company was again changed to Indiabulls Securities Limited
on February 16, 2004.
2011 -Indiabulls Securities is one of India's leading capital markets companies providing
securities broking and advisory services. Indiabulls Securities also provides depository services,
equity research services and IPO distribution to its clients and offers commodities trading
through a separate company. These services are provided both through on-line and off-line
distribution channels. Indiabulls Securities is a pioneer of on-line securities trading in India.
Indiabulls Securities' in-house trading platform is one of the fastest and most efficient trading
platforms in the country. Indiabulls Securities has been assigned the highest rating BQ-1 by
CRISIL.
The products and services offered include securities, credit services, demat account for
share trading, mutual fund news, commodity and review along with technical analysis of the
market. Indiabulls also provide commodity brokerage services under Indiabulls Commodities
Limited (ICL). It deals in research work and formation of reports on agri-commodites and
metals. ICL has one of the largest retail branch networks in the country.
Products offered
Equities and Derivatives
• Offers purchase and sale of securities (stock, bonds, debentures etc.)

• Broker assisted trade execution
• Automated online investing
• Access to all IPO's
Equity Analysis
• Helps to build ideal portfolio
• Satisfies need by rating stocks based on facts-based measures
• Free of cost for all securities clients
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Depository Services
• Depository participant with NSDL and CDSL.

• Helps in trading and settlement of dematerialized shares
• Performs clearing services for all securities transactions
• Offers platform to execute trade and settle transaction
Milestones Achieved
• Developed one of the first Internet trading platforms in India

Amongst the first to develop in-house real-time CTCL (computer to computer link) with
NSE
• Introduction of integrated accounts with automatic gateways to client bank accounts

• Development of Products such as Power Indiabulls for high volume traders
• Indiabulls Signature Account for self-directed investors
• Indiabulls Group Professional Network for information and trading service
• Indiabulls Securities Limited Is rated BQ1 by CRISIL for highest broker quality grading.
Elements Of Strong Business Model:
• All India Presence and extensive client base

• Cross selling opportunities due to range of products and services
• Technology as key business driver
• Unique sales model
• Expanding online presence
• Robust risk management systems
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Indiabulls Securities Ltd : Board of Directors
S.No Name Designation
1 Brig.Labh Singh Sitara Director

2 Mr.Karan Singh Director
3 Mr.Ashok Sharma Director

4 Mr.Aishwarya Katoch Director
5 Mr.Prem Prakash Mirdha Director

6 Mr.Divyesh B Shah Director
Indiabulls Securities Ltd. : Key Executives
S.No Name Designation
1 Mr.Divyesh B Shah Chief Executive Officer

2 Mr.R K Agarwal Company Secretary & Compliance Officer
Figure- II
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THEORITICAL FRAME WORK
Introduction to the Foreign Exchange market
Foreign Exchange:
The foreign exchange (currency or forex or FX) market exists wherever one currency is
traded for another. It is by far the largest market in the world, in terms of cash value traded,
and includes trading between large banks, central banks, currency speculators, multinational
corporations, governments, and other financial markets and institutions. The trade happening
in the forex markets across the globe exceeds $3.2 trillion/day (on an average) presently.
Retail traders (small speculators) are a small part of this market. A foreign exchange
transaction is still a shift of funds or short-term financial claims from one country and
currency to another.
History:
The history and evolution of the Foreign Exchange may be traced back to the early stages of
human history. In the early days the goods were exchanged between individuals and the
value of one good was expressed in terms of other goods. The limitations of this barter
system encouraged traders to use other mediums such as stones, teeth etc. to determine the
value of goods. These mediums soon to be replaced by precious metals in particular silver
and gold thus providing an accepted way of payment in exchange of goods. It also had the
many advantages such as storage and durability. The introduction of Roman gold coin
followed by the silver one played a key role in the development of the trade and foreign
exchange during the biblical times. Both coins gained a wide acceptance in Middle East and
other parts of the world forming an elementary international monetary system. By the middle
Ages, increased usage of bills encouraged the foreign exchange to become a function of
international banking.
However with the attempts of governments to create a more stable economic environment for
global trading and exchange, the last century witnessed some measures and events that
shaped the current foreign exchange markets.
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 The Gold Standard, 1816-1933 :-
The 'gold standard' used the physical weight of gold as the standard value for the money and
making it directly exchangeable in the form of the precious metal. In 1816 for instance, the
pound sterling was defined as 123.27 grains of gold on its way to becoming the foremost
reserve currency and was the principal component of the international capital market. This
led to the expression 'as good as gold' when applied to the Sterling, as the Bank of England at
the time gained stability and prestige as the premier monetary authority. Before the First
World War, most Central banks supported their currencies with convertibility to gold. Paper
money could always be exchanged for gold. For this type of gold exchange, a central bank
coverage backing up the government’s currency reserves was not necessarily needed. When a
group mindset fostered a disastrous notion of converting back to gold in mass, panic resulted
in so-called "Run on banks”.
The US dollar adopted the gold standard late in 1879 and became the standard-bearer
replacing the British Pound when Britain and the other European countries came off the
system with the outbreak of World War I in 1914. Eventually, though, the worsening
international depression lead even the dollar off the gold standard by 1933 marking the
period of collapse in international trade and financial flows prior to World War II.
 The Bretton Woods System, 1944-73:-
The Gold Standard partly, fixing the USD at $35.00 per ounce of Gold and fixing the other
main currencies to the dollar, initially intended to be on a permanent basis. The Bretton
Woods system formalized the role of the US dollar as the new 'global' reserve currency with
its value fixed into gold and the US assuming the responsibility of ensuring convertibility
while other currencies were pegged to the dollar.
In Asia, the lack of sustainability of fixed foreign exchange rates has gained new relevance
with the events in the latter part of 1997, where currencies were forced to float. Currency
after currency was devalued against the US dollar. The devaluation of currencies continued
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to plague the currency trading markets, and confidence in the open market of forex trading
was not sustained.
Leaving other fixed exchange rates in particular in South America also looking very
vulnerable. While commercial companies have had to face a much more volatile currency
environment in recent years, investors and financial institutions have discovered a new
playground. The size of the FOREX market now dwarfs any other investment market.
The last few decades have seen foreign exchange trading develop into the world’s largest
global market. Restrictions on capital flows have been removed in most countries, leaving
the market forces free to adjust foreign exchange rates according to their perceived values. In
the 1980s, cross-border capital movements accelerated with the advent of computers and
technology, extending market continuum through Asian, European and American time zones.
Transactions in foreign exchange rocketed from about $70 billion a day in the 1980s, to more
than $1.5 trillion a day two decades later.
OVERVIEW OF INTERNATIONAL CURRENCY MARKETS
During the past quarter century, the concept of a 24-hour market has become a reality.
Somewhere on the planet, financial centers are open for business; banks and other institutions
are trading the US Dollar and other currencies every hour of the day and night, except on
weekends. In financial centers around the world, business hours overlap; as some centers
close, others open and begin to trade. The foreign exchange market follows the sun around
the earth.
Business is heavy when both the US markets and the major European markets are open -that
is, when it is morning in New York and afternoon in London. In the New York market,
nearly two-thirds of the day’s activity typically takes place in the morning hours. Activity
normally becomes very slow in New York in the mid-to late afternoon, after European
markets have closed and before the Tokyo, Hong Kong, and Singapore markets have opened.
Given this uneven flow of business around the clock, market participants often will respond
less aggressively to an exchange rate development that occurs at a relatively inactive time of
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day, and will wait to see whether the development is confirmed when the major markets
open. Some institutions pay little attention to developments in less active markets.
Nonetheless, the 24-hour market does provide a continuous “real-time” market assessment of
the ebb and flow of influences and attitudes with respect to the traded currencies, and an
opportunity for a quick judgment of unexpected events. With many traders carrying pocket
monitors, it has become relatively easy to stay in touch with market developments at all
times.
The market consists of a limited number of major dealer institutions that are particularly
active in foreign exchange, trading with customers and (more often) with each other. Most of
these institutions, but not all, are commercial banks and investment banks. These institutions
are geographically dispersed, located in numerous financial centers around the world.
Wherever they are located, these institutions are in close communication with each other;
linked to each other through telephones, computers, and other electronic means.
Each nation’s market has its own infrastructure. For foreign exchange market operations as
well as for other connected matters, each country enforces its own laws, banking regulations,
accounting rules, taxation and operates its own payment and settlement systems. Thus, even
in a global foreign exchange market with currencies traded on essentially the same terms
simultaneously in many financial centers, there are different national financial systems and
infrastructures through which transactions are executed, and within which currencies are
held. With access to all of the foreign exchange markets generally open to participants from
all countries, and with vast amounts of market information transmitted simultaneously and
almost instantly to dealers throughout the world, there is an enormous amount of cross-
border foreign exchange trading among dealers as well as between dealers and their
customers.
At any moment, the exchange rates of major currencies tend to be virtually identical in all the
financial centers where there is active trading. Rarely are there such substantial price
differences among major centers as to provide major opportunities for arbitrage. In pricing,
the various financial centers that are open for business and active at any one time are
effectively integrated into a single market.
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MAJOR CURRENCIES OF THE WORLD
 US Dollar
Us dollar is by far the most widely traded currency. In part, the widespread use of the US
Dollar reflects its substantial international role as “investment” currency in many capital
markets, “reserve” currency held by many central banks, “transaction” currency in many
international commodity markets, “invoice” currency in many contracts, and “intervention”
currency employed by monetary authorities in market operations to influence their own
exchange rates.
In addition, the widespread trading of the US Dollar reflects its use as a “vehicle” currency in
foreign exchange transactions, a use that reinforces its international role in trade and finance.
For most pairs of currencies, the market practice is to trade each of the two currencies against
a common third currency as a vehicle, rather than to trade the two currencies directly against
each other. The vehicle currency used most often is the US Dollar, although very recently
euro also has become an important vehicle currency.
Thus, a trader who wants to shift funds from one currency to another, say from Indian
Rupees to Philippine Pesos, will probably sell INR for US Dollars and then sell the US
Dollars for Pesos. Although this approach results in two transactions rather than one, it may
be the preferred way, since the US Dollar/INR market and the US Dollar/Philippines Peso
market are much more active and liquid and have much better information than a bilateral
market for the two currencies directly against each other. By using the US Dollar or some
other currency as a vehicle, banks and other foreign exchange market participants can limit
more of their working Balances to the vehicle currency, rather than holding and managing
many currencies, and can concentrate their research and information sources on the vehicle
currency.
Use of a vehicle currency greatly reduces the number of exchange rates that must be dealt
with in a multilateral system. In a system of 10 currencies, if one currency is selected as the
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vehicle currency and used for all transactions, there would be a total of nine currency pairs or
exchange rates to be dealt with (i.e. one exchange rate for the vehicle currency against each
of the others), whereas if no vehicle currency were used, there would be 45 exchange rates to
be dealt with. In a system of 100 currencies with no vehicle currencies, potentially there
would be 4,950 currency pairs or exchange rates [the formula is: n(n-1)/2]. Thus, using a
vehicle currency can yield the advantages of fewer, larger, and more liquid markets with
fewer currencies Balances reduced informational needs, and simpler operations.
The US Dollar took on a major vehicle currency role with the introduction of the Breton
Woods par value system, in which most nations met their IMF exchange rate obligations by
buying and selling US Dollars to maintain a par value relationship for their own currency
against the US Dollar. The US Dollar was a convenient vehicle because of its central role in
the exchange rate system and its widespread use as a reserve currency.
The US Dollar’s vehicle currency role was also due to the presence of large and liquid US
Dollar money and other financial markets, and, in time, the Euro-US Dollar markets, where
the US Dollars needed for (or resulting from) foreign exchange transactions could
conveniently be borrowed (or placed).
 The Euro
Like the US Dollar, the Euro has a strong international presence and over the years has
emerged as a premier currency, second only to the US Dollar.
 The Japanese Yen
The Japanese Yen is the third most traded currency in the world. It has a much smaller
international presence than the US Dollar or the Euro. The Yen is very liquid around the
world, practically around the clock
 The British Pound
Until the end of World War II, the Pound was the currency of reference. The nickname Cable
is derived from the telegrams used to update the GBP/USD rates across the Atlantic. The
currency is heavily traded against the Euro and the US Dollar, but it has a spotty presence
22
against other currencies. The two-year bout with the Exchange Rate Mechanism, between
1990 and 1992, had a soothing effect on the British Pound, as it generally had to follow the
Deutsche Mark's fluctuations, but the crisis conditions that precipitated the pound's
withdrawal from the Exchange Rate Mechanism had a psychological effect on the currency. .
EXCHANGE RATE MECHANISM
“Foreign Exchange” refers to money denominated in the currency of another nation or a

group of nations. Any person who exchanges money denominated in his own nation’s
currency for money denominated in another nation’s currency acquires foreign exchange.
This holds true whether the amount of the transaction is equal to a few rupees or to billions of
rupees; whether the person involved is a tourist cashing a travellers’ cheque or an investor
exchanging hundreds of millions of rupees for the acquisition of a foreign company; and
whether the form of money being acquired is foreign currency notes, foreign currency-
denominated bank deposits, or other short-term claims denominated in foreign currency.
A foreign exchange transaction is still a shift of funds or short-term financial claims from one
country and currency to another. Thus, within India, any money denominated in any currency
other than the Indian Rupees (INR) is, broadly speaking, “foreign exchange.” Foreign
Exchange can be cash, funds available on credit cards and debit cards, travellers’ cheques,
bank deposits, or other short-term claims. It is still “foreign exchange” if it is a short-term
negotiable financial claim denominated in a currency other than INR. Almost every nation
has its own national currency or monetary unit - Rupee, US Dollar, Peso etc.- used for
making and receiving payments within its own borders. But foreign currencies are usually
needed for payments across national borders. Thus, in any nation whose residents conduct
business abroad or engage in financial transactions with persons in other countries, there
must be a mechanism for providing access to foreign currencies, so that payments can be
made in a form acceptable to foreigners. In other words, there is need for “foreign exchange”
transactions—exchange of one currency for another.
The exchange rate is a price - the number of units of one nation’s currency that must be
surrendered in order to acquire one unit of another nation’s currency. There are scores of
“exchange rates” for INR and other currencies, say US Dollar. In the spot market, there is an
23
exchange rate for every other national currency traded in that market, as well as for various
composite currencies or constructed monetary units such as the Euro or the International
Monetary Fund’s “SDR”. There are also various “trade-weighted” or “effective” rates
designed to show a currency’s movements against an average of various other currencies (for
eg US Dollar index, which is a weighted index against world major currencies like Euro,
Pound Sterling, Yen, and Canadian Dollar). Apart from the spot rates, there are additional
exchange rates for other delivery dates in the forward markets.
The market price is determined by the interaction of buyers and sellers in that market, and a
market exchange rate between two currencies is determined by the interaction of the official
and private participants in the foreign exchange rate market. For a currency with an exchange
rate that is fixed, or set by the monetary authorities, the central bank or another official body
is a participant in the market, standing ready to buy or sell the currency as necessary to
maintain the authorized pegged rate or range. But in countries like the United States, which
follows a complete free floating regime, the authorities are not known to intervene in the
foreign exchange market on a continuous basis to influence the exchange rate. The market
participation is made up of individuals, non-financial firms, banks, official bodies, and other
private institutions from all over the world that are buying and selling US Dollars at that
particular time.
The participants in the foreign exchange market are thus a heterogeneous group. The various
investors, hedgers, and speculators may be focused on any time period, from a few minutes
to several years. But, whatever is the constitution of participants, and whether their motive is
investing, hedging, speculating, arbitraging, paying for imports, or seeking to influence the
rate, they are all part of the aggregate demand for and supply of the currencies involved, and
they all play a role in determining the market price at that instant. Given the diverse views,
interests, and time frames of the participants, predicting the future course of exchange rates is
a particularly complex and uncertain exercise. At the same time, since the exchange rate
influences such a vast array of participants and business decisions, it is a pervasive and
singularly important price in an open economy, influencing consumer prices, investment
decisions, interest rates, economic growth, the location of industry, and much more. The role
of the foreign exchange market in the determination of that price is critically important.
24
ECONOMIC VARIABLES IMPACTING EXCHANGE RATE MOVEMENTS
Various economic variables impact the movement in exchange rates. Interest rates, inflation
figures, GDP are the main variables; however other economic indicators that provide
direction regarding the state of the economy also have a significant impact on the movement
of a currency. These would include employment reports, balance of payment figures,
manufacturing indices, consumer prices and retail sales amongst others. Indicators which
suggest that the economy is strengthening are positively correlated with a strong currency
and would result in the currency strengthening and vice versa.
Currency trader should be aware of government policies and the central bank stance as
indicated by them from time to time, either by policy action or market intervention.
Government structures its policies in a manner such that its long term objectives on
employment and growth are met. In trying to achieve these objectives, it sometimes has to
work around the economic variables and hence policy directives and the economic variables
are entwined and have an impact on exchange rate movements.
Currency futures in Indian Context
Introduction Of currency Futures on Indian exchange
The foreign exchange market in India started in earnest less than three decades ago when in
1978 the government allowed banks to trade foreign exchange with one another. Today over
70% of the trading in foreign exchange continues to take place in the inter-bank market. The
market consists of over 90 Authorized Dealers (mostly banks) who transact currency among
themselves and come out “square” or without exposure at the end of the trading day. Trading
is regulated by the Foreign Exchange Dealers Association of India (FEDAI), a self-
regulatory association of dealers. Since 2001, clearing and settlement functions in the foreign
exchange market are largely carried out by the Clearing Corporation of India Limited (CCIL)
that handles transactions of approximately 3.5 billion US dollars a day, about 80% of the
total transactions.
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The liberalization process has significantly boosted the foreign exchange market in the
country by allowing both banks and corporations greater flexibility in holding and trading
foreign currencies. The Sodhani Committee set up in 1994 recommended greater freedom to
participating banks, allowing them to fix their own trading limits, interest rates on FCNR
deposits and the use of derivative products.
The growth of the foreign exchange market in the last few years has been nothing less than
momentous. In the last 5 years, from 2000-01 to 2005-06, trading volume in the foreign
exchange market (including swaps, forwards and forward cancellations) has more than
tripled, growing at a compounded annual rate exceeding 25%. Figure 1 shows the growth of
foreign exchange trading in India between 1999 and 2006. The inter-bank forex trading
volume has continued to account for the dominant share (over 77%) of total trading over this
period, though there is an unmistakable downward trend in that proportion. This is in keeping
with global patterns.
In March 2006, about half (48%) of the transactions were spot trades, while swap
transactions (essentially repurchase agreements with a one-way transaction – spot or forward
– combined with a longer- horizon forward transaction in the reverse direction) accounted for
34% and forwards and forward cancellations made up 11% and 7% respectively. About two-
thirds of all transactions had the rupee on one side. In 2004, according to the triennial central
bank survey of foreign exchange and derivative markets conducted by the Bank for
International Settlements (BIS (2005a)) the Indian Rupee featured in the 20th position among
all currencies in terms of being on one side of all foreign transactions around the globe and
its share had tripled since 1998. As a host of foreign exchange trading activity, India ranked
23rd among all countries covered by the BIS survey in 2004 accounting for 0.3% of the
world turnover. Trading is relatively moderately concentrated in India with 11 banks
accounting for over 75% of the trades covered by the BIS 2004 survey.
The foreign exchange market has acquired a distinct vibrancy as evident from the range of
products, participation, liquidity and turnover. The average daily turnover in the foreign
exchange market increased from US $ 23.7 billion in March 2006 to US $ 33.0 billion in
March 2007 in consonance with the increase in foreign exchange transactions. Although
liberalization helped Indian forex market in various ways, extensive fluctuations of exchange
26
rate also took place in Indian forex market. These issues have attracted a great deal of interest
from policy-makers and investors. While some flexibility in foreign exchange markets and
exchange rate determination is desirable, excessive volatility can have 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 well- developed foreign exchange derivative market (both OTC as well as Exchange
traded) is required.
Need for Exchange Traded Currency Futures

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.
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,
marks to market obligations are 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
irrespective of their size. Other advantages of an Exchange traded market would be greater
transparency, efficiency and accessibility.
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Over-the-counter v/s Exchange traded
A. Over-the-counter trading:
1. Over-The-Counter:
Over-the-counter (OTC) or off-exchange trading is to trade financial instruments such as

stocks, bonds, commodities or derivatives directly between two parties. It is contrasted with
exchange trading, which occurs via facilities constructed for the purpose of trading (i.e.,
exchanges), such as futures exchanges or stock exchanges.
2. OTC Contract:
An over-the-counter contract is a bilateral contract in which two parties agree on how a
particular trade or agreement is to be settled in the future. It is usually from an investment
bank to its clients directly. Forwards and swaps are prime examples of such contracts. It is
mostly done via the computer or the telephone. For derivatives, these agreements are usually
governed by an International Swaps and Derivatives Association agreement
3. The OTC markets have the following features:

a) The management of counter-party (credit) risk is decentralized and located within
individual institutions,
b) There are no formal centralized limits on individual positions, leverage, or margining;
limits are determined as credit lines by each of the counterparties entering into these
contracts
c) There are no formal rules for risk and burden-sharing,
d) There are no formal rules or mechanisms for ensuring market stability and integrity, and
for safeguarding the collective interests of market participants, and
e) Although OTC contracts are affected indirectly by national legal systems, banking
supervision and market surveillance, they are generally not regulated by a regulatory
authority.
B. Exchange trading:
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1. Exchange
A futures exchange or derivatives exchange is a central financial exchange where people can
trade standardized futures contracts; that is, a contract to buy specific quantities of a
commodity or financial instrument at a specified price with delivery set at a specified time in
the future.
2. Nature of contracts
a) Exchange-traded contracts are standardized by the exchanges where they trade.
b) The contract details what asset is to be bought or sold, and how, when, where and in what
quantity it is to be delivered.
c) The terms also specify the currency in which the contract will trade, minimum tick value,
and the last trading day and expiry or delivery month.
d) The contracts ultimately are not between the original buyer and the original seller, but
between the holders at expiry and the exchange.
e) The contracts traded on futures exchanges are always standardized. To make sure liquidity
is high, there is only a limited number of standardized contracts.
Formation of committee
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 Committee is constituted with the officials from RBI and SEBI.
 The Committee was given the following terms of reference:
i. To coordinate the regulatory roles of RBI and SEBI in regard to trading of Currency
and Interest Rate Futures on the Exchanges.
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ii. To suggest the eligibility norms for existing and new Exchanges for Currency and
Interest Rate Futures trading.
iii. To suggest eligibility criteria for the members of such exchanges.
Iv. To review product design, margin requirements and other risk mitigation measures on
an ongoing basis
v. To suggest surveillance mechanism and dissemination of market information
vi. To consider microstructure issues, in the overall interest of financial stability.
Contract Specification of currency futures
A. USD/INR Contract
1. Underlying
Initially, currency futures contracts on US Dollar – Indian Rupee (US$-INR) would be

permitted.
2. Trading Hours
The trading on currency futures would be available from 9 a.m. to 5 p.m.
3. 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.
4. Quotation
The currency futures contract would be quoted in rupee terms. However, the outstanding
positions would be in dollar terms.
5. Tenor of the contract
The currency futures contract shall have a maximum maturity of 12 months.
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6. Available contracts
All monthly maturities from 1 to 12 months would be made available.
7. Settlement mechanism
The currency futures contract shall be settled in cash in Indian Rupee.
8. 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.
9. 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.
B. EURO-INR CONTRACT (EUR-INR)
1. Underlying
Euro-Indian Rupee (EUR-INR)
2. Trading Hours
9 a.m. to 5 p.m.
The contract size would be Euro 1000.
4. Quotation
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The contract would be quoted in rupee terms. However, the outstanding positions would be
in Euro terms.
The maximum maturity of the contract would be 12 months.
The contract would be settled in cash in Indian Rupee.
8. Settlement price
The settlement price would be the Reserve Bank Reference Rate on the date of expiry.
The 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
declare holiday’ would be those as laid down by FEDAI
10. Initial Margin
The Initial Margin requirement would be based on a worst case loss of a portfolio of an
individual client across various scenarios of price changes. The various scenarios of price
changes would be so computed so as to cover a 99% VaR over a one day horizon. In order to
achieve this, the price scan range shall be fixed at 3.5 standard deviation. The initial margin
so computed would be subject to a minimum of 2.80% on the first day of trading and 2%
thereafter. The initial margin shall be deducted from the liquid net worth of the clearing
member on an online, real time basis.
11. Calendar spread margin
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A currency futures position at one maturity which is hedged by an offsetting position at a
different maturity would be treated as a calendar spread. The calendar spread margin shall be
at a value of Rs. 700 for a spread of 1 month; Rs 1000 for a spread of 2 months and Rs 1500
for a spread of 3 months or more. The benefit for a calendar spread would continue till expiry
of the near month contract.
12. Extreme Loss margin
Extreme loss margin of 0.3% on the mark to market value of the gross open positions shall be
deducted from the liquid assets of the clearing member on an on line, real time basis.
13. Position Limits
a) Client Level:
The gross open positions of the client across all contracts shall not exceed 6% of the total
open interest or EUR 5 million whichever is higher. The Exchange will disseminate alerts
whenever the gross open position of the client exceeds 3% of the total open interest at the
end of the previous day’s trade.
b) Trading Member Level:
The gross open positions of the trading member across all contracts shall not exceed 15%
of the total open interest or EUR 25 million whichever is higher.
c) Bank:
The gross open positions of the bank across all contracts shall not exceed 15% of the total
open interest or EUR 50 million whichever is higher
d) Clearing Member Level:
No separate position limit is prescribed at the level of clearing member. However, the
clearing member shall ensure that his own trading position and the positions of each
trading member clearing through him is within the limits specified above.
C. POUND STERLINGINR CONTRACT (GBP-INR)
33
1. Underlying
Pound Sterling Indian Rupee (GBP-INR)
2. Trading Hours
9 a.m. to 5 p.m.
The contract size would be Pound Sterling 1000.
4. Quotation
in Pound Sterling terms.
8. Settlement price
Exchange rate published by the Reserve Bank in its Press Release captioned RBI Reference
Rate for US$ and Euro.
declared holiday’ would be those as laid down by FEDAI.
34
10. Initial Margin
so computed would be subject to a minimum of 3.20% on the first day of trading and 2%

13. Position Limits
a) Client Level:
open interest or GBP 5 million whichever is higher. The Exchange will disseminate alerts
whenever the gross open position of the client exceeds 3% of the total open interest at the
end of the previous day’s trade.
of the total open interest or GBP 25 million whichever is higher.
35
c) Bank:
The gross open positions of the bank across all contracts shall not exceed 15% of the total
open interest or GBP 50 million whichever is higher.
D. JAPANESE YEN-INR CONTRACT (JPY-INR)
1. Underlying
Japanese Yen – Indian Rupee (JPY-INR)
2. Trading Hours
9 a.m. to 5 p.m
The contract size would be Japanese Yen 1,00,000
4. Quotation
in Japanese Yen terms.
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8. Settlement price
Exchange rate published by the Reserve Bank in its Press Release captioned RBI Reference
Rate for US$ and Euro.
declared holiday’ would be those as laid down by FEDAI.
10. Initial Margin
so computed would be subject to a minimum of 4.50% on the first day of trading and 2.30%

37
13. Position Limits
a) Client Level:
open interest or JPY 200 million whichever is higher. The Exchange will disseminate
alerts whenever the gross open position of the client exceeds 3% of the total open interest
at the end of the previous day’s trade.
of the total open interest or JPY 1000 million whichever is higher.
c) Bank:
of the total open interest or JPY 2000 million whichever is higher.
Strategies used in currency futures
1. SPECULATION IN FUTURES MARKETS
Speculators play a vital role in the futures markets. Futures are designed primarily to assist
hedgers in managing their exposure to price risk; however, this would not be possible
without the participation of speculators. Speculators, or traders, assume the price risk that
hedgers attempt to lay off in the markets. In other words, hedgers often depend on
speculators to take the other side of their trades (i.e. act as counter party) and to add depth
and liquidity to the markets that are vital for the functioning of a futures market. The
speculators therefore have a big hand in making the market. Speculation is not similar to
manipulation. A manipulator tries to push prices in the reverse direction of the market
38
equilibrium while the speculator forecasts the movement in prices and this effort eventually
brings the prices closer to the market equilibrium. If the speculators do not adhere to the
relevant fundamental factors of the spot market, they would not survive since their
correlation with the underlying spot market would be nonexistent.
2. LONG POSITION IN FUTURES
Long position in a currency futures contract without any exposure in the cash market is
called a speculative position. Long position in futures for speculative purpose means buying
futures contract in anticipation of strengthening of the exchange rate (which actually means
buy the base currency (USD) and sell the terms currency (INR) and you want the base
currency to rise in value and then you would sell it back at a higher price). If the exchange
rate strengthens before the expiry of the contract then the trader makes a profit on squaring
off the position, and if the exchange rate weakens then the trader makes a loss.
The graph above depicts the pay-off of a long position in a future contract, which does
demonstrate that the pay-off of a trader is a linear derivative, that is, he makes unlimited
profit if the market moves as per his directional view, and if the market goes against, he has
equal risk of making unlimited losses if he doesn’t choose to exit out his position.
Hypothetical Example – Long positions in futures
On May 1, 2008, an active trader in the currency futures market expects INR will depreciate
against USD caused by India’s sharply rising import bill and poor FII equity flows. On the
basis of his view about the USD/INR movement, he buys 1 USD/INR August contract at the
prevailing rate of Rs. 40.5800. He decides to hold the contract till expiry and during the
holding period USD/INR futures actually moves as per his anticipation and the RBI
Reference rate increases to USD/INR 42.46 on May 30, 2008. He squares off his position and
books a profit of Rs. 1880 (42.4600x1000 - 40.5800x1000) on 1 contract of USD/INR
futures contract.
3. SHORT POSITION IN FUTURES
Short position in a currency futures contract without any exposure in the cash market is
called a speculative transaction. Short position in futures for speculative purposes means
39
selling a futures contract in anticipation of decline in the exchange rate (which actually
means sell the base currency (USD) and buy the terms currency (INR) and you want the base
currency to fall in value and then you would buy it back at a lower price). If the exchange
rate weakens before the expiry of the contract, then the trader makes a profit on squaring off
the position, and if the exchange rate strengthens then the trader makes loss.
Example – Short positions in futures
On August 1, 2008, an active trader in the currency futures market expects INR will
appreciate against USD, caused by softening of crude oil prices in the international market
and hence improving India’s trade balance.
On the basis of his view about the USD/INR movement, he sells 1 USD/INR August contract
at the prevailing rate of Rs. 42.3600.
On August 6, 2008, USD/INR August futures contract actually moves as per his anticipation
and declines to 41.9975. He decides to square off his position and earns a profit of Rs. 362.50
(42.3600x1000 – 41.9975x1000) on squaring off the short position of 1 USD/INR August
futures contract.
Observation:
The trader has effectively analysed the market conditions and has taken a right call by going
short on futures and thus has made a gain of Rs. 362.50 per contract with small investment (a
margin of 3%, which comes to Rs. 1270.80) in a span of 6 days.
HEDGING USED IN CURRENCY FUTURES
Hedging:
Hedging means taking a position in the future market that is opposite to a position in the
physical market with a view to reduce or limit risk associated with unpredictable changes in
exchange rate.
A hedger has an Overall Portfolio (OP) composed of (at least) 2 positions:
40
1. Underlying position
2. Hedging position with negative correlation with underlying position
Value of OP = Underlying position + Hedging position; and in case of a Perfect hedge, the
Value of the OP is insensitive to exchange rate (FX) changes.
Types of FX Hedgers using Futures
Long hedge:
· Underlying position: short in the foreign currency
· Hedging position: long in currency futures
Short hedge:
· Underlying position: long in the foreign currency
· Hedging position: short in currency futures
The proper size of the Hedging position
· Basic Approach: Equal hedge
· Modern Approach: Optimal hedge
Equal hedge:
In an Equal Hedge, the total value of the futures contracts involved is the same as the value
of the spot market position. As an example, a US importer who has an exposure of £ 1
million will go long on 16 contracts assuming a face value of £62,500 per contract. Therefore
in an equal hedge: Size of Underlying position = Size of Hedging position.
Optimal Hedge:
An optimal hedge is one where the changes in the spot prices are negatively correlated with
the changes in the futures prices and perfectly offset each other. This can generally be
41
described as an equal hedge, except when the spot-future basis relationship changes. An
Optimal Hedge is a hedging strategy which yields the highest level of utility to the hedger.
Corporate Hedging
Before the introduction of currency futures, a corporate hedger had only Over-the-Counter
(OTC) market as a platform to hedge his currency exposure; however now he has an
additional platform where he can compare between the two platforms and accordingly decide
whether he will hedge his exposure in the OTC market or on an exchange or he will like to
hedge his exposures partially on both the platforms.
Example 1: Long Futures Hedge Exposed to the Risk of Strengthening USD
Unhedged Exposure: Let’s say on January 1, 2008, an Indian importer enters into a contract
to import 1,000 barrels of oil with payment to be made in US Dollar (USD) on July 1, 2008.
The price of each barrel of oil has been fixed at USD 110/barrel at the prevailing exchange
rate of 1 USD = INR 39.41; the cost of one barrel of oil in INR works out to be Rs. 4335.10
(110 x 39.41). The importer has a risk that the USD may strengthen over the next six months
causing the oil to cost more in INR; however, he decides not to hedge his position.
On July 1, 2008, the INR actually depreciates and now the exchange rate stands at 1 USD =
INR 43.23. In dollar terms he has fixed his price, that is USD 110/barrel, however, to make
payment in USD he has to convert the INR into USD on the given date and now the
exchange rate stands at 1USD = INR43.23.
Therefore, to make payment for one dollar, he has to shell out Rs. 43.23. Hence the same
barrel of oil which was costing Rs. 4335.10 on January 1, 2008 will now cost him Rs.
4755.30, which means 1 barrel of oil ended up costing Rs. 4755.30 - Rs. 4335.10 = Rs.
420.20 more and hence the 1000 barrels of oil has become dearer by INR 4,20,200.
When INR weakens, he makes a loss, and when INR strengthens, he makes a profit. As the
importer cannot be sure of future exchange rate developments, he has an entirely speculative
42
position in the cash market, which can affect the value of his operating cash flows, income
statement, and competitive position, hence market share and stock price.
Hedged:
Let’s presume the same Indian Importer pre-empted that there is good probability that INR
will weaken against the USD given the current macro-economic fundamentals of increasing
Current Account deficit and FII outflows and decides to hedge his exposure on an exchange
platform using currency futures.
Since he is concerned that the value of USD will rise he decides go long on currency futures,
it means he purchases a USD/INR futures contract. This protects the importer because
strengthening of USD would lead to profit in the long futures position, which would
effectively ensure that his loss in the physical market would be mitigated.
The following figure and Exhibit explain the mechanics of hedging using currency futures.
Observation:
Following a 9.7% rise in the spot price for USD, the US dollars are purchased at the new,
higher spot price, but profits on the hedge foster an effective exchange rate equal to the
original hedge price.
Example 2: Short Futures Hedge Exposed to the Risk of Weakening USD
Unhedged Exposure: Let’s say on March 1, 2008, an Indian refiner enters into a contract to
export 1000 barrels of oil with payment to be received in US Dollar (USD) on June 1, 2008.
The price of each barrel of oil has been fixed at USD 80/barrel at the prevailing exchange
rate of 1 USD = INR 44.05; the price of one barrel of oil in INR works out to be is Rs. 3524
(80 x 44.05). The refiner has a risk that the INR may strengthen over the next three months
causing the oil to cost less in INR; however he decides not to hedge his position.
On June 1, 2008, the INR actually appreciates against the USD and now the exchange rate
stands at 1 USD = INR 40.30. In dollar terms he has fixed his price, that is USD 80/barrel;
however, the dollar that he receives has to be converted in INR on the given date and the
exchange rate stands at 1USD = INR40.30. Therefore, every dollar that he receives is worth
43
Rs. 40.30 as against Rs. 44.05. Hence the same barrel of oil that initially would have
garnered him Rs. 3524 (80 x 44.05) will now realize Rs. 3224, which means 1 barrel of oil
ended up selling Rs. 3524 – Rs. 3224 = Rs. 300 less and hence the 1000 barrels of oil has
become cheaper by INR 3,00,000.
When INR strengthens, he makes a loss and when INR weakens, he makes a profit. As the
refiner cannot be sure of future exchange rate developments, he has an entirely speculative
position in the cash market, which can affect the value of his operating cash flows, income
statement, and competitive position, hence market share and stock price. Hedged: Let’s
presume the same Indian refiner pre-empted that there is good probability that INR will
strengthen against the USD given the current macroeconomic fundamentals of reducing
fiscal deficit, stable current account deficit and strong FII inflows and decides to hedge his
exposure on an exchange platform using currency futures.
Since he is concerned that the value of USD will fall he decides go short on currency futures,
it means he sells a USD/INR future contract. This protects the importer because weakening
of USD would lead to profit in the short futures position, which would effectively ensure that
his loss in the physical market would be mitigated.
The following figure and exhibit explain the mechanics of hedging using currency futures.
Observation:
Following an 8.51% fall in the spot price for USD, the US dollars are sold at the new, lower
spot price; but profits on the hedge foster an effective exchange rate equal to the original
hedge price.
Example 3 (Variation of Example 1): Long Futures Hedge Exposed to the Risk of
Contract Expiry and Liquidation on the Same Day.
Observation: The size of the exposure is USD 110000 and the desired value date is precisely
the same as the futures delivery date (June 30). Following a 9.5% rise in the spot price for
USD against INR, the US dollars are purchased at the new, higher spot price; but profits on
the hedge foster an effective exchange rate equal to the original futures price because on the
date of expiry the spot price and the future price tend to converge.
44
DATA ANALYSIS AND INTERPRETATION
1. People involved with share market.
TRADE/INVEST IN SHARE MARKET
YES NO
93 27
Analysis:
According to the survey, 77% people of total respondents are involved with share market.
They are active in the share market either for doing any trading or long term investment
purpose. The rest of 23% are not active in share market.
45
2. Awareness about currency futures among respondents.
AWARENSS OF CURRENCY FUTURES AMONG

RESPONDENTS.
YES NO
91 29
Analysis:
76% among all respondent are aware about the currency futures and they know that the
currency is used as an instrument to trade. But 24% respondents are not having any
knowledge about currency futures.
This 76% (i.e. 91) people also include 12 people who are not active in stock market but still
aware about the currency market.
46
3. Traders in currency futures market.
TRADING IN CURRENCY FUTURES
YES NO
22 98
Analysis:
According to the survey 18% people among the respondent are trading in currency market
and they are having sound knowledge about the currency market. The rest of 82% are do not
trade in currency market and they are not much familiar with currency market.
47
4. Reasons for not trading in currency futures.
REASONS NO. PERCENTAGE
Lack of knowledge 54 45.00

Less interest 33 27.50
Past losses 10 8.34
Other 23 19.16
Total 120 100
60
50
40
30 NO.
20 PERCENTAGE
10
0
Lack of Less interest Past losses Other
knowledge
Analysis:
There are different reasons of not trading in currency futures market by the respondents.
Main reason for not trading is lack of knowledge about the mechanism of currency futures.
From survey we can find that 45% respondents are not trading in currency futures because of
insufficient knowledge about working of currency futures. About 27.50% respondents are not
trading in currency futures because of their less interest toward currency futures.
About 8.34% respondents are not trading in currency futures because of losses occurred in
past. 19.16% respondents are not trading because of many other reasons like…. Investing in
stock market, investing in real-estate and insufficient fund with respondents.
48
5. Ready to trade in currency futures if appropriate knowledge and advisory
services are provided.
READY TO TRADE PERCENTAGE
YES 81 67.50
NO 39 32.50
Total 120 100
90
80
70
60
50 YES
40
30 NO
20
10
0
No .of Respondents PERCENTAGE
Analysis:
Out of 120 respondents 81 respondents are not trading because of lack of knowledge
about mechanism of currency futures and 39 respondents are ready to trade in currency futures if
they would be provided with knowledge of currency futures mechanism
This shows that if appropriate knowledge and advisory services are provided then people are
ready to get involved with this area also.
49
6. Sources of information for awareness about currency futures.
SOURCE NO. PERCENTAGE
Seminar 3 3.29
Leaflet 4 4.40
Newspaper/magazines 37 29.67
Friends/relatives 13 15.38
Brokers 46 28.57
Other 17 18.68
50
40
30
20
10 NO.
0
PERCENTAGE
Analysis:
People use different source of information to acquire knowledge about currency futures. Here
we used 5 major sources of information point which may be used by them through which
they get information about the currency futures.
29.67% respondents got the information from newspaper, 28.57% persons get the
information from brokers, 15.38% respondents got it from friends and relatives, 4.40 got it
from leaflets, 3.29% got it from the seminar on currency futures and rest 18.68% respondents
got the information from other sources.
50
7. Purpose of trading in currency futures.
PURPOSE NO. PERCENTAGE
Hedging 85 70.83
Speculation 22 18.33
Arbitrage 8 6.66
Other 5 4.16
100
80
60
NO.
40 PERCENTAGE
20
0
Hedging Speculation Arbitrage Other
Analysis:
People who are trading in currency market have different purposes. Main purpose of trading
is hedging in currency futures. There are also other purposes like speculation, arbitrage and
different other purposes like swapping, warrants etc.
70.83% traders use hedging strategy for foreign exposure and through this they can minimize
their risk and maximize the loss. 18.33% Trader use speculation strategy and it includes the
maximum risk maximum profit. 6.66% respondent use arbitrage for their forex exposure and
they minimize their risk and try to maximize its profit. In that case the trader take two
different positions at the same time. The trader takes position of selling and buying both. And
then by closing both the positions they may make overall profit. 4.16% Use swap, warrants
and other techniques for foreign exposure and try to maximize its profit. But at the same time
the loss and risk is also at the maximum point.
51
8. Preference of respondent for exchange.
Exchange No. of Respondents Percentage
MCX’SX 50 41.66
NSE 40 33.34
BSE 30 25.00
60
50
40
30 No. of Respondents
Percentage
20
10
0
MCX’SX NSE BSE
Analysis:
MCX’SX is the most preferred exchange by majority of the respondents. 2nd most preferred
exchange is NSE and 3rd preference goes to BSE.
52
9. Preferred currency pair for trading in currency market.
Currency Pair No. of respondents Percentage
USD/INR 72 60.00
EUR/INR 23 19.16
JPY/INR 15 12.50
GBP/INR 10 8.34
80
70
60
50
40 No. of respondents
30 Percentage
20
10
0
USD/INR EUR/INR JPY/INR GBP/INR
Analysis:
There are 4 currencies permissible in India to trade upon and the rank in which they are
preferred is like this. Dollar is the most preferred currency to trade, 2nd rank has been given
to British Pound.
53
10. Preferred brokerage house.
Brokerage House NO. Of Respondents Percentage
Anagram 20 16.66
Sharekhan 24 20.00
Religare 36 30.00
Motilal oswal 26 21.66
Others 14 11.66
40
35
30
25
20 NO. Of Respondents
15
Percentage
10
5
0
Anagram Sharekhan Religare Motilal Others
oswal
Analysis:
There is a large number of Broking firms involved in this industry so people have lot of
options to choose among them.
In the survey we have found that Religare is the most favored broking house. Motilal oswal
has secured 2nd position, Sharekhan stands at 3rd position and Anagram at the 4th position.
54
11. Criteria for selecting brokerage house.
Selection NO. Of Respondents Percentage

BROKERAGE 31 25.83
ONLINE/OFF LINE 19 15.83
REASERCH 27 22.50
SERVICES 23 19.16
OTHER 20 16.66
35
30
25
20
15
10 NO. Of Respondents
5
0 Percentage
Analysis:
There are various reasons for selecting a particular Broking firm. We have noted few of those
reasons and asked respondents to rank them.
Brokerage became the prime most reason for selecting a particular broking firm.
Research facility and the tips which came out from that research became the 2nd reason.
Services are the 3rd reason. Online/offline trading facility is the 4th reason.
Few other reasons are also accountable for selecting a broking firm such as personal relation
with the company etc.
55
Findings
1. USA and Briton are among the top Exporter and importer and one Asian country Japan is
considered as a top place for trading.
2. Exporter and importers use Dollar as main currency in Payment and Remittance. From
our analysis it is shown that 30.55% traders use Dollar in their payment and remittance
system and pound is used by 29.45% of traders
3. Speculation, swap and Arbitrage are less consider by the traders because it includes more
risk as compare to hedging techniques.
4.Stock Futures are Most Preferred For Investing In derivatives are high returns.
5.Main Factors that led to growth of derivatives are high returns.
56
Suggestions
1. The company can conduct seminars to promote their services along with educating them about
the products they offer. Initially they can start off with existing demat account holders.
2. The company has to create and maintain a database of prospective customers from time to
time, to keep track of the people falling in different income levels and their investing patterns.
This is possible if continuous contacts are maintained with the customers.
3. The awareness about derivatives among investors should be increased by conducting various
awareness and educational programs.
4. The company can think of tapping the existing demat account holders and provide them
enough information on derivatives and enable them to trade in the same. This will help the
company to increase its earnings of brokerage income.
57
BIBLIOGRAPHY
Books:
1. Primary Securities Markets, Anthony H. Aylward, Jack D. Glen, Cross Country

Findings
2. Foundations of Financial Markets and Institutions, Fabozzi, Pearson Education India
3. Promoting access to primary equity markets, Felice Betsy Friedman, Claire Grose
4. Madhumathi.R, “Investment Analysis and Portfolio Management” Pearson Pvt Lt.,
5. Preeti Singh, “Security Analysis and Portfolio Management”, 17th Revised Edition,
Himalayas Publications.
6. Reily Brown, “Analysis of Investments and Management of Portfolios”, 10th Edition,
Cleanage Learning Publishers
58
ANNEXURE
1. Questionnaire
1. Do you Invest/Trade in share market?
 Yes
 No
2. Have you heard about currency futures?
 Yes
 No
3. Do you invest in currency futures?
 Yes
 No
If yes, then go to Q-6.
4. If no, what are the reasons for not investing in currency futures?
[Please give the rank accordingly]
 Lack of knowledge about mechanism of currency futures.

 Less interest in currency market.
 Due to past losses.
 Any other please specify.
______________________________________________________
5. Would you like to trade in currency futures if appropriate knowledge and advisory
services are provided?
 Yes
 No
59
6. Through which marketing channel did you get the information?
 Seminar
 Leaflet
 Newspaper/magazines
 Friends/relatives
 Brokers
 Any other please specify__________________
7. What is the purpose of trading in currency futures?
 Hedging
 Speculation
 Arbitrage
 Any other please specify__________________
8. Which stock exchange do you prefer to do the transactions in currency futures?
 BSE.
 NSE.
 MCX’SX.
9. Which is the most preferred currency pair for trading in currency market?
 Dollar (USD)/INR
 Euro (EURO)/INR
 Japanese yen (JPY)/INR
 British Pound (GBP)/INR
60
10. Which is your preferred brokerage house?
 Anagram
 Sharekhan
 Motilal oswal
 Religare
 Any other please specify___________________
11. According to you which of the following is the most important criteria for selecting the
brokerage house?
 Brokerage
 Online/Offline facility
 Research
 Service.
 Any other please specify___________________
61
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INTRODUCTION:

Finance is regarded as “THE LIFE BLOOD OF BUSINESS ENTERPRISE”. Finance

The subject of financial management is of immense interest to both academicians and

Scope Of The Study:

3. To know about the various usage of currency futures.

4. To determine the purpose of trading in currency futures.

5. To know the awareness level about hedging in currency futures.

PRIMARY DATA SECONDARY DATA

120 respondents have been selected across Hyderabad city.

Some key characteristics of the sample 394 firms are:

Branches & Sub-Brokers

Indiabulls is one of India's largest and leading financial services companies. It is an

The key features of Indiabulls are as follows:

 You get freedom from paperwork.

A Indiabulls outlet online destination offers the following services:

It provides a complete life-cycle of investment solution in Equities, Derivatives,

Its features are:

 Streaming quotes (using the applet based system)

 Indiabulls provides you the facility to trade in Commodities through Indiabulls

 Commodities Buzz: a daily view on precious metals and agro commodities.

• Offers purchase and sale of securities (stock, bonds, debentures etc.)

• Depository participant with NSDL and CDSL.

• Developed one of the first Internet trading platforms in India

• Introduction of integrated accounts with automatic gateways to client bank accounts

Elements Of Strong Business Model:

• All India Presence and extensive client base

S.No Name Designation

1 Brig.Labh Singh Sitara Director

3 Mr.Ashok Sharma Director

5 Mr.Prem Prakash Mirdha Director

Indiabulls Securities Ltd. : Key Executives

S.No Name Designation

1 Mr.Divyesh B Shah Chief Executive Officer

 The Bretton Woods System, 1944-73:-

OVERVIEW OF INTERNATIONAL CURRENCY MARKETS

 The Japanese Yen

 The British Pound

EXCHANGE RATE MECHANISM

“Foreign Exchange” refers to money denominated in the currency of another nation or a

Currency futures in Indian Context

Introduction Of currency Futures on Indian exchange

Need for Exchange Traded Currency Futures

Over-the-counter (OTC) or off-exchange trading is to trade financial instruments such as

3. The OTC markets have the following features:

 The Committee was given the following terms of reference:

iii. To suggest eligibility criteria for the members of such exchanges.

v. To suggest surveillance mechanism and dissemination of market information

vi. To consider microstructure issues, in the overall interest of financial stability.

Contract Specification of currency futures

Initially, currency futures contracts on US Dollar – Indian Rupee (US$-INR) would be

The trading on currency futures would be available from 9 a.m. to 5 p.m.

3. Size of the contract

5. Tenor of the contract

The currency futures contract shall have a maximum maturity of 12 months.

All monthly maturities from 1 to 12 months would be made available.

The currency futures contract shall be settled in cash in Indian Rupee.

9. Final settlement day

B. EURO-INR CONTRACT (EUR-INR)

Euro-Indian Rupee (EUR-INR)

3. Size of the contract

The contract size would be Euro 1000.

5. Tenor of the contract

The maximum maturity of the contract would be 12 months.