A DISSERTATION REPORT

ON
“A Comprehensive Study of Currency Market in
INDIA.”

SUBMITTED IN PARTIAL FULFILLMENT OF REQUIREMENT FOR THE DEGREE OF MASTER OF

BUSINESS ADMINISTRATION (M.B.A)

UNDER THE GUIDANCE OF SUBMITTED BY:

Prof. Dharam Vir Sardana Mohd Asjad

SESSION: 2012-2014

JAMIA HAMDARD

NEW DELHI

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 DEPARTMENT OF MANAGEMENT
JAMIA HAMDARD
(HAMDARD UNIVERSITY)
HAMDARD NAGAR, NEW DELHI-110062

Date………………..

CERTIFICATE

This is to certify that the dissertation report titled,” A Comprehensive

Study Of Currency Market in INDIA” is a study undertaken by Mr.
Mohd Asjad MBA (Gen)-Finance (2012-2014).

The dissertation report is the result of his own work as declared by the
student in “Declaration from Student of Authentic Work” which is
attached in this dissertation report.

Prof. Dharam Vir Sardana

(Supervisor)

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 Declaration

I hereby declare that the dissertation work entitled,” A Comprehensive

Study of Currency Market in INDIA” is my original and exclusively
my own work. I further declare that my work is my own authentic piece
of work and has not been submitted at any Organization/Institution/
University for personal/academic gains and benefits or award of any
Degree/Diploma/Certificate.

Name: …………………………

Signature: ………………………

Dare: ……………………………

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 Acknowledgement

I owe thanks to Prof. Dharam Vir Sardana and also extend my sincere gratitude
for the excellent guidance and tremendous support provided by him to accomplish
our project successfully. The project specific discussions were extremely beneficial
and guided me on how to go about this project.

The knowledge about the various sectors of economy has enabled us to analyze in
the right prospective.

The teachings through this project will be a lifetime investment and it has surely
provided us with an insight into the Currency Market.

Mohd Asjad
MBA (Gen)-Finance
4th Semester.
Jamia Hamdard
Delhi.

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 EXECUTIVE SUMMARY:
With over 25 million shareholders, India has the third largest investor base in the world after
USA and Japan. Over 7500 companies are listed on the Indian stock exchanges (more than the
number of companies listed in developed markets of Japan, UK, Germany, France, Australia,
Switzerland, Canada and Hong Kong.). The Indian capital market is significant in terms of the
degree of development, volume of trading, transparency and its tremendous growth potential.

Derivatives trading in the stock market have been a subject of enthusiasm of research in the field
of finance the most desired instruments that allow market participants to manage risk in the
modern securities trading are known as derivatives. The derivatives are defined as the future
contracts whose value depends upon the underlying assets. If derivatives are introduced in the
stock market, the underlying asset may be anything as component of stock market like, stock
prices or market indices, interest rates, etc. The main logic behind derivatives trading is that
derivatives reduce the risk by providing an additional channel to invest with lower trading cost
and it facilitates the investors to extend their settlement through the future contracts. It provides
extra liquidity in the stock market

.The Currency Market or Forex Market is a place where banks and other authorized
establishments trade the currencies of various nations. The purpose of the foreign exchange
market is to help international trade and investment. Floating Exchange System is used these
days by almost all the countries. The Indian Currency Market is highly dynamic and volatile.
Bygone are the days of fixed exchange rate system, India now follows Liberalised Exchange
Rate Management System (LERMS). This system was implemented post 1991 when India was
on the spree of globalization. Comprehensive analysis of the major factors influencing the Indian
Currency Market is also undertaken.

The key elements of forex market are:

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  Market Size and Liquidity
 Market Participants
 Determinants of FX rates
 Trading and Analysis in Foreign Exchange
 Financial Instruments involved
 Working of the Forex Market
 Benefits and drawbacks of Forex Market

Currency futures trading started in India on August 29, 2008 on National Stock Exchange.
Currency futures are standardised foreign exchange contracts traded on approved stock
exchanges to buy or sell one currency against another on a specified date in the future at a
specified price (exchange rate). . The BSE has failed to generate enough interest in this segment
and the volumes remain abysmally low on the exchange. Although volatility has ensured that
volumes surged after the launch, trading has been concentrated on front-month contracts as
majority of users are traders, small exporters and brokers/banks.

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 Table of Contents

S.NO Chapters Page. No

1 Acknowledgement. 3

2 Executive Summary. 4-5

3 Overview. 7-12

4 Literature Review. 13-15

5 Research Methodology. 16

6 Introduction about the Topic. 17-31

7 Analysis. 32-35

8 Findings. 36

9 Recommendations. 37

10 Limitations of the study. 38

11 Conclusions. 39-40

12 Questionnaire. 41-58

13 Bibliography. 59-60

14 Appendices. 61-64

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 .

OVERVIEW:

The term ‘Derivative’ stands for a contract whose price is derived from or is dependent upon

an underlying asset. The underlying asset could be a financial asset such as currency, stock

and market index, an interest bearing security or a physical commodity. Today, around the

world, derivative contracts are traded on electricity, weather, temperature and even volatility.

According to the Securities Contract Regulation Act, (1956) the term “derivative” includes:

(i) A security derived from a debt instrument, share, loan, whether secured or unsecured,

risk instrument or contract for differences or any other form of security;

(ii) A contract which derives its value from the prices, or index of prices, of underlying

securities.

An equity derivative is a financial instrument referencing an underlying equity asset or other

variable, from which the financial instrument’s price or value is derived, entered into by the
parties for a purpose.

The derivatives market is the financial market for derivatives, financial instruments like futures

contracts or options, which are derived from other forms of assets.

The market can be divided into two, that for exchange-traded derivatives and that for over-the-
counter derivatives. The legal nature of these products is very different as well as the way they
are traded, though many market participants are active in both.

Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated)

directly between two parties, without going through an exchange or other intermediary. Products

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such as swaps, forward rate agreements, exotic options – and other exotic derivatives – are
almost always traded in this way. The OTC derivative market is the largest market for
derivatives, and is largely unregulated with respect to disclosure of information between the
parties, since the OTC market is made up of banks and other highly sophisticated parties, such
as hedge funds. Reporting of OTC amounts is difficult because trades can occur in private,
without activity being visible on any exchange.

According to the Bank for International Settlements, who first surveyed OTC derivatives in
1995, reported that the "gross market value, which represent the cost of replacing all open
contracts at the prevailing market prices, ... increased by 74% since 2004, to $11 trillion at the
end of June 2007 (BIS 2007:24)." Positions in the OTC derivatives market increased to $516
trillion at the end of June 2007, 135% higher than the level recorded in 2004. The total
outstanding notional amount is US$708 trillion (as of June 2011). Of this total notional amount,
67% are interest rate contracts, 8% are credit default swaps (CDS), 9% are foreign exchange
contracts, 2% are commodity contracts, 1% are equity contracts, and 12% are other. Because
OTC derivatives are not traded on an exchange, there is no central counter-party. Therefore, they
are subject to counterparty risk, like an ordinary contract, since each counter-party relies on the
other to perform.

Exchange-traded derivatives (ETD) are those derivatives instruments that are traded via
specialized derivatives exchanges or other exchanges. A derivatives exchange is a market where
individuals trade standardized contracts that have been defined by the exchange. A derivatives
exchange acts as an intermediary to all related transactions, and takes initial margin from both
sides of the trade to act as a guarantee. The world's largest derivatives exchanges (by number of
transactions) are the Korea Exchange (which lists KOSPI Index Futures &
Options),Eurex (which lists a wide range of European products such as interest rate & index
products), and CME Group (made up of the 2007 merger of the Chicago Mercantile
Exchange and the Chicago Board of Trade and the 2008 acquisition of the New York Mercantile
Exchange). According to BIS, the combined turnover in the world's derivatives exchanges
totaled USD 344 trillion during Q4 2005. By December 2007 the Bank for International
Settlements reported that "derivatives traded on exchanges surged 27% to a record $681 trillion."

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The National Stock Exchange of India Limited (NSE) commenced trading in derivatives with the
launch of index futures on June 12, 2000. The futures contracts are based on the popular
benchmark S&P CNX Nifty Index.

The Exchange introduced trading in Index Options (also based on Nifty) on June 4, 2001. NSE
also became the first exchange to launch trading in options on individual securities from July 2,
2001. Futures on individual securities were introduced on November 9, 2001. Futures and
Options on individual securities are available on 208 securities stipulated by SEBI.

The Exchange has also introduced trading in Futures and Options contracts based on CNX-IT,
BANK NIFTY, and NIFTY MIDCAP 50 indices.

PARTICIPANTS IN A DERIVATIVES MARKET

The derivatives market is similar to any other financial market and has following three broad
categories of participants:

 Hedgers: These are investors with a present or anticipated exposure to the underlying asset
which is subject to price risks. Hedgers use the derivatives market primarily for price risk
management of assets and portfolios.

 Speculators: These are the individuals who take a view on the future direction of the
markets. They take a view whether prices would rise or fall in future and accordingly buy or
sell futures and options to try and make a profit from the future price movements of the
underlying asset.

 Arbitrageurs: They take positions in financial markets to earn riskless profits. The
arbitrageurs take short and long positions in the same or different contracts at the same time
to create a position which can generate a riskless profit.

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ECONOMIC FUNCTIONS OF THE DERIVATIVES MARKET

The derivatives market performs a number of economic functions. Some of them are summed up
as follows:

 Prices in an organised derivatives market reflect the perception of the market participants
about the future and lead the prices of underlying to the perceived future level. The prices
of derivatives converge with the prices of the underlying at the expiration of the
derivatives contract. Thus, derivatives help in discovery of future as well as current
prices.

 The derivatives market helps to transfer risks from those who have them but do not like
them to those who have an appetite for them.

 Derivatives, due to their inherent nature, are linked to the underlying cash markets. With
the introduction of derivatives, the underlying market witnesses higher trading volumes.
This is because of participation by more players who would not otherwise participate for
lack of an arrangement to transfer risk.

 Speculative trades shift to a more controlled environment in derivatives market. In the

absence of an organised derivatives market, speculators trade in the underlying cash
markets. Margining, monitoring and surveillance of the activities of various participants
become extremely difficult in these kind of mixed markets.

 An important incidental benefit that flows from derivatives trading is that it acts as a
catalyst for new entrepreneurial activity. The derivatives have a history of attracting
many bright, creative, well-educated people with an entrepreneurial attitude. They often
energise others to create new businesses, new products and new employment
opportunities, the benefit of which are immense.

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TYPES OF DERIVATIVES

There are various types of derivatives traded on exchanges across the world. They range from the
very simple to the most complex products. The following are the three basic forms of
derivatives, which are the building blocks for many complex derivative instruments:

1. FORWARDS
2. FUTURES
3. OPTIONS

Financial instruments

Spot
A spot transaction is a two-day delivery transaction (except in the case of trades between the US
Dollar, Canadian Dollar, Turkish Lira and Russian Rubble, which settle the next business day),
as opposed to the futures contracts, which are usually three months. This trade represents a
“direct exchange” between two currencies, has the shortest time frame, involves cash rather than
a contract; and interest is not included in the agreed-upon transaction. The data for this study
come from the spot market. Spot transactions has the second largest turnover by volume after
Swap transactions among all FX transactions in the Global FX market NNM.

Forward
One way to deal with the foreign exchange risk is to engage in a forward transaction. In this
transaction, money does not actually change hands until some agreed upon future date. A buyer
and seller agree on an exchange rate for any date in the future, and the transaction occurs on that
date, regardless of what the market rates are then. The duration of the trade can be a one day, a
few days, months or years. Usually the date is decided by both parties.

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Future
Foreign currency futures are exchange traded forward transactions with standard contract sizes
and maturity dates — for example, $1000 for next November at an agreed rate [4],[5]. Futures
are standardized and are usually traded on an exchange created for this purpose. The average
contract length is roughly 3 months. Futures contracts are usually inclusive of any interest
amounts.

Swap
The most common type of forward transaction is the currency swap. In a swap, two parties
exchange currencies for a certain length of time and agree to reverse the transaction at a later
date. These are not standardized contracts and are not traded through an exchange.

Option
A foreign exchange option (commonly shortened to just FX option) is a derivative where the
owner has the right but not the obligation to exchange money denominated in one currency into
another currency at a pre-agreed exchange rate on a specified date. The FX options market is the
deepest, largest and most liquid market for options of any kind in the world.

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 LITERATURE REVIEW:

Cho (1998) points out the reasons for which reforms were made in Indian capital market stating
the after reform developments.

Shah (1999) describes the financial sector reforms in India as an attempt at developing financial
markets as an alternative vehicle determining the allocation of capital in the economy.

Bose. S, Money and Finance, ICRA Bulletin, Jan-June, 2006.

The emergence of the market for derivative products, most notably forwards, futures and options,
can be traced back to the willingness of risk-averse economic agents to guard themselves against
uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets
are marked by a very high degree of volatility. Through the use of derivative products, it is
possible to partially or fully transfer price risks by locking-in asset prices. As instruments of risk
management, these generally do not influence the fluctuations in the underlying asset prices.
However, by locking-in asset prices, derivative products minimize the impact of fluctuations in
asset prices on the profitability and cash flow situation of risk-averse investors.

Derivative products initially emerged, as hedging devices against fluctuations in commodity

prices and commodity-linked derivatives remained the sole form of such products for almost
three hundred years. The financial derivatives came into spotlight in post-1970 period due to
growing instability in the financial markets. However, since their emergence, these products
have become very popular and by 1990s, they accounted for about two-thirds of total
transactions in derivative products. In recent years, the market for financial derivatives has
grown tremendously both in terms of variety of instruments available, their complexity and also
turnover. In the class of equity derivatives, futures and options on stock indices have gained

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more popularity than on individual stocks, especially among institutional investors, who are
major users of index-linked derivatives.

Even small investors find these useful due to high correlation of the popular indices with various
portfolios and ease of use. The lower costs associated with index derivatives vis-vis derivative
products based on individual securities is another reason for their growing use.

S. Asani, The Oxford Companion to Economics in India, 2006, Oxford university Press,
New Delhi

In terms of the growth of derivatives markets, and the variety of derivatives users, the Indian
market has equalled or exceeded many other regional markets. While the growth is being
spearheaded mainly by retail investors, private sector institutions and large corporations, smaller
companies and state-owned institutions are gradually getting into the act. Foreign brokers such
as JP Morgan Chase are boosting their presence in India in reaction to the growth in derivatives.
The variety of derivatives instruments available for trading is also expanding.

There remain major areas of concern for Indian derivatives users. Large gaps exist in the range
of derivatives products that are traded actively. In equity derivatives, NSE figures show that
almost 90% of activity is due to stock futures or index futures, whereas trading in options is
limited to a few stocks, partly because they are settled in cash and not the underlying stocks.
Exchange-traded derivatives based on interest rates and currencies are virtually absent.

As Indian derivatives markets grow more sophisticated, greater investor awareness will become
essential. NSE has programmes to inform and educate brokers, dealers, traders, and market
personnel. In addition, institutions will need to devote more resources to develop the business
processes and technology necessary for derivatives trading.

Srivastava, S., Yadav, S. S., Jain, P. K. (2008), had conducted a survey of brokers in the
recently introduced derivatives markets in India to examine the brokers’ assessment of market
activity and their perception of benefits and costs of derivative 50 trading. The need for such a
study was felt as previous studies relating to the impact of derivatives securities on Indian Stock
market do not cover the perception of market participants who form an integral part of the
functioning of derivatives markets. The issues covered in the survey included: perception of

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brokers about the attractiveness of different derivative securities for clients; profile of clients
dealing in derivative securities; popularity of a particular derivative security out of the total set;
different purposes for which the clients are using these securities in order of preference; issues
concerning derivatives trading; reasons for non-usage of derivatives by some investors.

The investors are using derivative securities for different purposes after its penetration into the
Indian Capital market. They use these securities not only for risk management and profit
enhancement but also for speculation and arbitrage. High net worth individuals and proprietary
traders account for a large proportion of broker turnover. Interestingly, some retail participation
was also witnessed despite the fact that these securities are beyond the reach of retail investors
(because of complexity and high initial cost).

Naresh, G., (2006), studied the dynamic growth of the Derivatives market, particularly Futures
& Options and the perceived risks to the financial sector continue to stimulate debate on the
proper regulation of these instruments. Even though this market was initially fuelled by various
expert teams survey, regulatory framework, recommendations byelaws and rules there is still a
debate on the existing regulations such as why is regulation needed? When and where regulation
needed? What are reasonable and attainable goals of these regulations? Therefore this article
critically examines the views of market participants on the existing regulatory issues in trading
Derivative securities in Indian capital market conditions.

The emergence and growth of the market for derivative instruments is because of the willingness
of risk-averse economic agents to guard themselves against uncertainties arising out of
fluctuations in asset prices. By providing investors and issuers with a wider array of tools for
managing risks and raising capital, derivatives improve the allocation of credit and the sharing of
risk in the global economy, lowering the cost of capital formation and stimulating economic
growth. Now that world markets for trade and finance have become more integrated, derivatives
have strengthened these important linkages between global markets, increasing market liquidity
and efficiency, and have facilitated the flow of trade and finance.

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 RESEARCH METHODOLOGY:

Research Methodology refers to the method adopted for collection of information, which forms
the basis of written report. The data collection techniques used are:

RESEARCH DESIGN

In this project descriptive research design is used.

SOURCES OF DATA

Secondary data is used in this study.

The Secondary information is collected from various research works and journals available on
the topic and from website.

OBJECTIVES

 To study the basic concept of derivatives.

 To Understand the importance foreign Exchange market & there working in context
of Indian currency market.

 To analyse different derivatives products.

 To understand main factors influencing Indian currency market.

 The importance of currency future With the Indian context & how the traders
grasped the opportunities in the currency future market.

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 INTRODUCTION ABOUT THE TOPIC:

Working of Foreign exchange market

The forex market comprises of banks, commercial companies, hedge funds, investment
management firms, brokers and retail investors. The market does not have any centralized
exchange. Trading generally takes place through the interbank market, which is a network of
more than a thousand banks. Each bank in the network trades directly with others with the help
of an Electronic Broking System (EBS), where buy and sell orders are placed and then matched
on the basis of price.

Interbank forex trading continues 24 hours a day, 5.5 days a week, from Monday through midday
on Saturday. On a single trading day, the market opens in Australia and shifts operations
throughout the day to Asia, Tokyo, Hong Kong, Singapore, Europe and New York. The forex
trading day ends with the close of trading in New York.

In the forex market, trading always occurs in currency pairs. The pricing of a currency pair in
this market is determined by the demand and supply of a currency in relation to the other in the
pair. Apart from banks, currency pairs are bought and sold by individual investors via brokers.

WORKING OF INDIAN CURRENCY MARKET

Foreign Exchange Market in India works under the central government in India and executes
wide powers to control transactions in foreign exchange.

The Foreign Exchange Management Act, 1999 or FEMA regulates the whole foreign exchange
market in India. Before this act was introduced, the foreign exchange market in India was
regulated by the reserve bank of India through the Exchange Control Department, by the FERA

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or Foreign Exchange Regulation Act, 1947. After independence, FERA was introduced as a
temporary measure to regulate the inflow of the foreign capital. But with the economic and
industrial development, the need for conservation of foreign currency was urgently felt and on
the recommendation of the Public Accounts Committee, the Indian government passed the
Foreign Exchange Regulation Act, 1973 and gradually, this act became famous as FEMA.

Foreign Exchange Market in India, Indian Economy Until 1992 all foreign investments in India
and the repatriation of foreign capital required previous approval of the government. The
Foreign-Exchange Regulation Act rarely allowed foreign majority holdings for foreign exchange
in India. However, a new foreign investment policy announced in July 1991, declared automatic
approval for foreign exchange in India for thirty-four industries. These industries were
designated with high priority, up to an equivalent limit of 51 percent. The foreign exchange
market in India is regulated by the reserve bank of India through the Exchange Control
Department.
Initially the government required that a company`s routine approval must rely on identical
exports and dividend repatriation, but in May 1992 this requirement of foreign exchange in India
was lifted, with an exception to low-priority sectors. In 1994 foreign and non-resident Indian
investors were permitted to repatriate not only their profits but also their capital for foreign
exchange in India. Indian exporters are enjoying the freedom to use their export earnings as they
find it suitable. However, transfer of capital abroad by Indian nationals is only allowed in
particular circumstances, such as emigration. Foreign exchange in India is automatically made
accessible for imports for which import licenses are widely issued.

Indian authorities are able to manage the exchange rate easily, only because foreign exchange
transactions in India are so securely controlled. From 1975 to 1992 the rupee was coupled to a
trade-weighted basket of currencies. In February 1992, the Indian government started to make
the rupee convertible, and in March 1993 a single floating exchange rate in the market of foreign
exchange in India was implemented. In July 1995, Rs 31.81 was worth US$1, as compared to Rs
7.86 in 1980, Rs 12.37 in 1985, and Rs17.50 in 1990.

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Foreign Exchange Dealers Association of India (FEDAI) is a voluntary association that also
provides some help in regulating the market. The Authorized Dealers and the attributed brokers
are qualified to participate in the foreign Exchange markets of India. When the foreign exchange
trade is going on between Authorized Dealers and RBI or between the Authorized Dealers and
the overseas banks, the brokers usually do not have any role to play. Besides the Authorized
Dealers and brokers, there are some others who are provided with the limited rights to accept the
foreign currency or traveller’s cheque, they are the authorized moneychangers, travel agents,
certain hotels and government shops. The IDBI and Exim bank are also permitted at specific
times to hold foreign currency.

Benefits of the Forex Market

 Highest liquidity: With a daily turnover exceeding $3 trillion, the forex market is the
world’s most liquid market. A single trade amounting to $200-$500 million is not
uncommon.
 24-hour market: The market is open throughout the day at some part of the world. Hence,
investors have the flexibility of making their own trading schedule.
 Extensive leverage: In this market, leverage can range from 50:1 to up to 500:1. This means
that if you have $5,000 in your trading account and your broker is offering 150:1 leverage,
you have the option of trading up to $750,000. This kind of leverage offers you an
opportunity to earn immense profits, even with limited capital.
 Market trends: Trends in this market are never bearish, as a decline in the value of one
currency represents a rise in the exchange value of another. Thus, investors have the
opportunity to earn profits at all times.
 No cap on the lot size: An investor can trade a lot of an unlimited size at any given time and
price.

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Drawbacks of Forex Market

 Highly unpredictable: Since the exchange value of a currency pair is dependent on several
factors, it is extremely difficult to predict the course of the market.
 High losses: As investors can trade with large amounts of cash due to the high leverage
offered by brokers, they can suffer substantial losses.
 Extremely volatile: The forex market is extremely volatile, with the exchange value of a
currency pair changing several times within a trading day. A novice investor might get
flustered with the volatility and suffer huge losses.

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CURRENCY MARKET IN INDIA

Every major development in Indian or world economy affects the Indian currency market. India
follows the Liberalised Exchange Rate Management System (LERMS), under which it is
absolutely essential for corporate executives to understand how the exchange rate moves, and
why. Considering the large volume of transactions, a movement of even 2-3 paisa in the
exchange rate can hit the bottom line of any corporate.

There are several factors that influence the currency market. Some of the important ones among
them, which have impacted the market recently, are discussed below:

CHANGE OF INTEREST RATE

The value of the currency of any country depends on the interest rate of that country. In case of
upward movement of interest rate in the United States, the US Dollar (USD) appreciates against
other currencies as well as against the Indian Rupee (INR). Any change of interest rate by the
Federal Reserve Bank of New York (FED) through the Federal Open Market Committee
(FOMC) has a great impact on the currency market. In the recent past there have been instances
of rate hikes by the FED, as a result of which the USD had appreciated against major
international currencies as well as the Indian Rupee.

Even an expectation of change of interest rate has a great impact on currency market. Whenever
there is any such expectation, the market reacts sharply. The possibility of changes in interest
rate is a speculative move, and the market reacts only for a short period of time. The market
generally discounts some portion of such expectations well in advance, before they actually
happen. Change of interest rate by the European Commercial Bank (ECB) is now equally
important. The value of the Euro is influenced by a change of interest rate by ECB. Recently,
there have been several occasions when the Euro strengthened against the USD following a hike
in interest rate, or even the expectation of a hike in interest rate by the ECB.

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INFLOW OF FOREIGN FUNDS
The exchange rate depends on demand and supply of currency. Strong economic fundamentals
and good ratings by international rating agencies have boosted foreign investors’ confidence in
the Indian market. Huge foreign investments have already come to India, while big investments
through Foreign Institutional Investors (FIIs) and Foreign Direct Investment (FDI) are expected
in the near future. In the last couple of months, substantial foreign funds have been infused into
the Indian market. Since most of these have been in the form of USD, the supply of USD against
the Indian Rupee became high, and it depreciated against the Rupee. On the other hand, at the
time when FIIs wanted to withdraw funds from the market, the demand for USD in the Indian
market became high, and it appreciated against the Rupee.

During the last one to one-and-a-half years, the Indian rupee has shown a tendency to appreciate
due to a huge inflow of foreign funds in the Indian market by FIIs or through FDIs in the form of
External Commercial Borrowings (ECB) and Foreign Currency Convertible Bonds (FCCBs). A
direct relationship may be drawn between the USD–INR exchange rate and the BSE index.
Considering all other factors to be constant, whenever overseas FIIs buy shares from the Indian
market, there is an upward movement of the BSE index. At the same time, due to inflow of
foreign funds (foreign investors have USD to sell—they will buy INR to invest in Indian market
against USD) in the Indian market, the supply of USD increases in the market and it depreciates
against INR, or INR appreciates against USD. On the other hand, if there is any negative flow of
funds by FIIs, there would be a downward movement of the BSE index, and consequently USD
would appreciate against INR.

RBI INTERVENTION
The RBI, which regulates the Indian currency market, does intervene whenever it feels it is
required to stabilise the market, or to keep market volatility under control. It is the responsibility
of the RBI to keep the exchange rate unaffected at a time of volatility in the foreign currency
market. It has been observed that RBI intervenes in the currency market whenever there is any
abnormal movement in the exchange rate, either upward or downward. The RBI buys foreign
currency (USD) to depreciate the domestic currency, and sells foreign currency when the

22
domestic currency depreciates abnormally. Sometimes the RBI does not intervene at all. In April
and May 2006, the Indian Rupee depreciated heavily in the wake of the fall of the BSE Index,
but the RBI did not intervene, much as previously the Indian Rupee had appreciated (in January
and February 2006) to such a level that it needed to be depreciated solely by market forces.

OPTIONS
Options give the buyer (holder) a right but not an obligation to buy or sell an asset in future.
Options are of two types:

 CALLS
 PUTS

Calls give the buyer the right but not the obligation to buy a given quantity of the underlying
asset, at a given price on or before a given future date.

Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying
asset at a given price on or before a given date. One can buy and sell each of the contracts.
When one buys an option he is said to be having a long position and when one sells he is said to
be having a short position.

In the first two types of derivatives contracts (forwards and futures) both the parties (buyer and
seller) have an obligation i.e. the buyer needs to pay for the asset to the seller and the seller needs
to deliver

the asset to the buyer on the settlement date. In case of options only the seller (also called option
writer) is under an obligation and not the buyer (option purchaser). The buyer has a right to buy
(call options) or sell (put options) the asset from/to the seller of the option but he may or may not
exercise this right. In case the buyer of the option does exercise his right, the seller of the option
must fulfil whatever his obligation is. An option can be exercised at the expiry of the contract
period or anytime up to the expiry of the contract period.

INDEX OPTIONS

23
A financial derivative that gives the holder the right, but not the obligation, to buy or sell a
basket of stocks, such as the S&P 500, at an agreed upon price and before a certain date. An
index option is similar to other option contracts, the difference being the underlying instruments
are indexes. Options contracts, including index options, allow investors to profit from an
expected market move or to reduce the risk of holding the underlying instrument.

YEAR No of Contracts Turnover (Rs Cr)

2000-01 - -

2001-02 1,75,900 3,765

2002-03 4,42,241 9,246

2003-04 17,32,414 52,816

2004-05 32,93,558 1,21,943

2005-06 1,29,35,116 3,38,469

2006-07 2,51,57,438 7,91,906

2007-08 5,53,66,038 13,62,110.88

2008-09 21,20,88,444 37,31,501.84

2009-10 34,13,79,523 80,27,964.20

2010-11 65,06,38,557 1,83,65,365.76

2011-12 86,40,17,736 2,27,20,031.64

2012-13 25,76,98,642 66,22,635.23

Table: Annual Growth in Index Options

24
 No of Contracts
1000000000

900000000 864,017,736

800000000

700000000
650,638,557

600000000 No of Contracts

500000000

400000000
341,379,523
300000000 257,698,642
212,088,444
200000000

100000000 55,366,038
25,157,438
12,935,116
1
175,900442,241 3,293,558
,732,414
0
1

3
-0

-0

-0

-0

-0

-0

-0

-0

-0

-1

-1

-1

-1
00

01

02

03

04

05

06

07

08

09

10

11

12
20

20

20

20

20

20

20
20

20

20

20

20

20

25
 STOCK OPTIONS

A privilege, sold by one party to another, that gives the buyer the right, but not the
obligation, to buy (call) or sell (put) a stock at an agreed-upon price within a certain period or
on a specific date.

Year No of Contracts Turnover (Rs Cr)

2000-01 - -

2001-02 10,37,529 25,163

2002-03 35,23,062 1,00,131

2003-04 55,83,071 2,17,207

2004-05 50,45,112 1,68,836

2005-06 52,40,776 1,80,253

2006-07 52,83,310 1,93,795

2007-08 94,60,631 3,59,136.55

2008-09 1,32,95,970 2,29,226.81

2009-10 1,40,16,270 5,06,065.18

2010-11 3,25,08,393 10,30,344.21

2011-12 3,64,94,371 9,77,031.13

2012-13 1,53,06,914 4,13,052.09

Table: Annual Growth in Stock Options

26
 No of Contracts
40000000
36,494,371
35000000
32,508,393

30000000

25000000

20000000

15,306,914
15000000 14,016,270
13,295,970

10000000 9,460,631

5,583,071 5,283,310
5,240,776
5,045,112
5000000 3,523,062
1,037,529
0
1 2 3 4 5 06 07 08 09 10 11 12 13
0 -0 1 -0 2 -0 3 -0 4 -0 5- 6- 7- 8- 9- 0- 1- 2-
2 00 2 00 2 00 2 00 2 00 0 0
20No of Contracts
20 20
0
20
0
20
0
20
1
20
1
20
1

27
Currency Futures

Currency futures were first created in 1970 at the International Commercial Exchange in New
York. But the contracts did not "take off" due to the fact that the Bretton Woods system was still
in effect. They did so a full two years before the Chicago Mercantile Exchange (CME) in 1972,
less than one year after the system of fixed exchange rates was abandoned along with the gold
standard. Some commodity traders at the CME did not have access to the inter-bank exchange
markets in the early 1970s, when they believed that significant changes were about to take place
in the currency market. The CME actually now gives credit to the International Commercial
Exchange (not to be confused with the ICE for creating the currency contract, and state that they
came up with the idea independently of the International Commercial Exchange). The CME
established the International Monetary Market (IMM) and launched trading in seven currency
futures on May 16, 1972. Today, the IMM is a division of CME. In the fourth quarter of 2009,
CME Group FX volume averaged 754,000 contracts per day, reflecting average daily notional
value of approximately $100 billion. Currently most of these are traded electronically.

Introduction
Currency futures are standardised foreign exchange contracts traded on approved stock
exchanges to buy or sell one currency against another on a specified date in the future at a
specified price (exchange rate). The price is fixed on the purchase date. This price can be
different from the price that is quoted in the spot foreign exchange markets. This will help
investors to hedge against foreign exchange risk arising due to price fluctuations in the particular
currency in a future date. This is different from forward exchange contracts, which are private
agreements between two parties and are not as rigid in their stated terms and conditions. There
can be a chance that one of the parties may default on his side of the agreement. This is not
exchange traded, whereas futures contracts are exchange traded and the clearing house guarantee
the transactions (principle of novation). This drastically lowers the probability of default to
almost nil.

Currency futures are traded according to the rules and regulations that are drawn by the futures
exchanges. The trading can be done either on the floors of these futures exchanges or these
exchanges can facilitate electronic trading for its members. The currency futures market is also
28
used by some companies for hedging. These companies either purchase currency futures for their
future payables, or sell the futures on currencies for their future receipts. Speculators may also
buy or sell futures on a foreign currency as a protection against the strengthening or weakening
of the US dollar.

Currency futures or forex trading are fraught with high levels of risk. A small unfavourable
fluctuation in the exchange rate may result in loss of an investor’s entire deposit. Investors are
advised to enter into this field only if they have in-depth knowledge of how risky this segment of
financial market really is.

CURRENCY FUTURES IN INDIA

Currency futures trading started in India on August 29, 2008 on National Stock Exchange. This
was the first time currency derivatives got listed on an exchange in India. Till this time, the
currency futures trading took place over the counter and were unorganized. With the entry of the
National Stock Exchange in the picture, currency trading became more organized with the NSE
acting as a counter party to all the transactions. Soon after, the BSE and MCX also marked their
entry into the currency derivatives market.

29
 Figure 3: Turnover in currency futures on NSE and MCX (USD mn)

Volumes on currency futures exchanges (mainly NSE and MCX) have consistently increased
over the period from $ 60 million per day (on NSE in early Sept 2008) to around $ 700 million
per day (on NSE and MCX together in end Jan 2009). The traded volumes in currency futures
has increased substantially in January 2009, with the average total volumes traded on the two
exchanges being around Rs 2,500 crore (around $0.5 billion) a day. This could soon rise to
$1billion per day if more currency pairs are allowed. Both MCX and NSE have almost 50%
share on an average in terms of volumes. The BSE has failed to generate enough interest in this
segment and the volumes remain abysmally low on the exchange. Although volatility has
ensured that volumes surged after the launch, trading has been concentrated on front-month
contracts as majority of users are traders, small exporters and brokers/banks. For this particular
quarter i.e. FY13 the combined volume is more than 25000 crores.

Growing opportunities for traders in currency futures market

The currency futures market is growing in popularity, as the main participants of this organized
market comprise bankers, importers, exporters, multinational corporations and private
speculators.

 Decent Intra-day Volatility: There is an opportunity for the intraday traders to make
short term profits as the median intraday volatility for the last 6 months on NSE has been
about 43 paise. On the MCX, the median trading range has been wider at about 52 paise.
Traders can capitalize on the same and make intraday profits.

 Lower Margins: The margins on the trades on NSE have been reduced. At the start of
the currency futures trading on NSE, the margins per contract were about Rs.2900, which

30
 have been reduced by about 50%. This works out to 3-3.5% of contract value compared
to average10-15% on index/stock futures.

 Low Brokerage Charges: The brokerage charges vary between 3 to 10 bps depending
on volumes and squaring up period.

 Low Transaction Costs: No transaction charges are being levied by NSE/MCX till
March/April 2009 and STT has so far not been charged on the value of transactions
conducted. This makes trading on currency futures exchanges more feasible and
competitive even for small profits.

 Growing Volumes: The volumes have been increasing consistently since the start of the
currency futures trading on the exchanges in August. This provides more liquidity and
makes trading more feasible. Given the fact that the international currency futures
volumes are about 2.5% of spot market volumes, Indian currency market holds a lot of
potential as their volumes currently are 1.5% of spot market volumes and the spot market
itself is slated to grow fast, as India’s forex trade continues to grow.

ANALYSIS:

Currencies have developed over centuries and most major currencies have free floating exchange
rates today, which help increase financial stability. Globalisation in trade and later in services
increased the exposure to other than the home currency among global market participants. Thus,
investors became aware of the highly liquid and global FX market and over time came to regard
currencies as an asset class with diversification benefits. The market’s biggest players are
financial institutions, which actively use exchange rate movements to generate returns rather
than to simply hedge currency exposure.

India is well placed to attract FII flows over the long term. As economic growth accelerates and
tax compliance improves over the next few years, fiscal deficit could be expected to come under
control. FII flows into India will continue to be strong. India may also get its fair share of inflows

31
by way of increased allocations made to BRIC (Brazil, Russia, India and China) countries as the
group will continue to hold the interest of long-term investors.

India officially does not have a fully open capital account, but its economy is more open to
foreign capital flows than meets the eye. Direct and indirect limited foreign investment is
allowed in most business sectors. This has led to an increase of foreign capital into the country.
At present, the import cover condition as stated in the Tarapore Committee Report has been met
except the fiscal deficit of 3.5%. The average NPL ratio for Indian banks was a mere 1% in
2008, according to central bank statistics. This is well below the 5% benchmark and the budget
deficit for fiscal year 2008/2009 is recorded at 7.8%, way above the 3.5% recommendation. As
both the global and domestic economy are in a bad shape, a further  opening of the capital
account now would not be the smartest of ideas.

But at the same time, the numerous advantages of CAC can’t be ignored. CAC is considered to
be one of the major features of a developed economy. It helps attract foreign investment. It offers
foreign investors a lot of comfort as they can re-convert local currency into foreign currency
anytime they want to and take their money away. At the same time, it makes it easier for
domestic companies to tap foreign markets. At the moment, India has current account
convertibility. This means one can import and export goods or receive or make payments for
services rendered.

So, the government can look forward to implement CAC when the external macroeconomic
environment has stabilized and the focus can turn to preparing the economy for a higher level of
openness. First and foremost, a more transparent and simpler regulatory framework concerning
foreign investment, further financial sector reforms, and greater fiscal discipline are required to
successfully open the capital account.

Market statistics of the first seven months of the launch of exchange traded currency futures
reveal growing interest in the markets. However, these markets have not been able to evince the
kind of activity that OTC markets are witnessing. Many corporates using currency derivatives for
hedging their foreign currency exposure find requirement of margin and settlement of daily

32
mark-to-market differences cumbersome especially since there is no such requirement for OTC
trades. It would perhaps take some time for them to realize the concomitant benefits of these risk
containment measures. There is a perceive resistance to change or switch over from OTC to
Exchange traded framework with the grip and comfortability level in the OTC markets.

The two markets i.e. forward market and futures market are not integrated and there is scope for
arbitrage which will bring about convergence in the markets, as we cannot have two prices in
two markets for the same product — one is notional and the other is based on real transactions.
Also, given the size of the forward market of around $50 billion and the current size of $0.5
billion in futures, there is enormous scope and opportunity for the volumes in the currency
futures market to rise exponentially which will enable trading/hedging opportunities for all
market participants.

Figure 6: Daily NSE and MCX turnover and open interest

If we follow the evolution of the USD since roughly the end of WW2, it gradually became the
world reserve currency, and that was intended. It started with the Breton woods agreement, and
also during WW2 when the European allies currencies were collapsing as Hitler was conquering
Europe. The US at the time was by far the world’s biggest industrial power, and was wealthy
enough to backstop Europe’s currencies as well as rebuilding the West after WW2. And of
33
course, like any power of that magnitude, it got taken advantage of – as today the US is running
horrendous fiscal deficits and is abusing this world reserve currency, the USD. But, ultimately,
since the world economies are all linked now, none can stand alone whatsoever, so then the idea
of individual currencies is fading. In fact, all individual currencies do now is cause trade and
currency frictions, like the US complaining the Chinese are using a cheap Yuan to manipulate
their trade to their advantage, and the Chinese are complaining the US is running ruinous deficits
and devaluing the USD.

What is happening is that primarily through the US Fed, interest rates worldwide are being
pushed down to zero. Japan did this ahead of everyone else starting around 1992 roughly,
fighting their simultaneous stock and real estate bubbles that collapsed. Ultimately, since the
USD is now headed toward Japanese esque zero interest rates, the whole world will be pulled
down to zero rates to compete with the stimulus, and ultimately, the public treasuries of the
world will be the only lenders left out there. The rest of the real money out will move to the
sidelines. Less capital means less investment, leaving only the public left to lend money.

Ultimately, synchronizing world interest rates to zero effectively creates a one world currency
regime (interest rates are what determine currency values fundamentally), and the USD will be
the facilitator of this process, even if itself is replaced in the end. Deflation will remain with us, it
will cause relentless simulative monetary policy, there will be ever lower rates worldwide,
private capital will flee, and the only lenders left will be the public purses, and ultimately
competitive currency devaluations and probably trade wars. Ultimately, that will lead to so many
trade pressures and monetary strains that some new financial crisis will emerge, and some one-
world currency will be moved in to fix the controversies.

And it won’t be the Yuan either. China is caught in their own banking bubble, and an
irreconcilable wealth disparity in their economic build out. They will fail and they will see
domestic chaos. The Yuan will not be the solution to the world’s problems. Gold is not the
ultimate solution either. If we look at any market over the last two years, there are only two real
ones that held up or improved consistently over the last two years, Gold and US treasuries. Gold
benefits because of the abusive monetary policies being incurred, not only in the US but
worldwide, the Chinese figure large here, they are printing the hell out of the Yuan, either

34
growing their own money supply by hundreds of percent, or by making cheap money available in
their own horrific home grown Asian credit bubble that is perhaps two years behind the US in its
evolution.

FINDINGS:
 The investments in the equity derivatives market is raising at a great pace.
 The number of contracts in Index futures rose from 90,580 in 2000-01 to
3,68,49,287 in the year 2012-13.
 The turnover for Index Futures rose from 2,365 Cr in the year 2000-01 to
8,87,165.22 Cr in the year 2012-13.
 In Stock Futures the number of contracts rose from 19,57,856 2001-02 to
4,28,76,791 in 2012-13.
 The turnover for Stock Futures rose from 51,515 Cr in 2001-02 to
11,02,711.07 Cr in 2012-13.
 In case of Index Options the number of contracts rose from 1,75,900 in
2001-02 to 25,76,98,642 in the current year.
 For Index Options, the turnover increased from 3,765 Cr in 2001-02 to
66,22,635.23 Cr in the current year.
 The number of contracts for Stock Options increased from10,37,529 in
2001-02 to 1,53,06,914 in 2012-13.

35
  The turnover for Stock Options increased from 25,163 Cr in the year 2001-
02 to 4,13,052.09 Cr in the current year.
 Major portion of the investments of the derivatives market is flowing into
the Index Options.

RECOMMENDATIONS:

1. People should be provided with all the information required so that

they may be interested in spending in currency market

2. All the advantages should be described in such a way that people

take interest in it.

3. From past 5 years there has been an increase of about 17%

investors in the market.

4. Online ease should be provided to the customers or investors to

deal online without wasting much time in visiting places.

5. People should be encouraged to invest in derivatives as well as in

other elements.

36
 LIMITATIONS OF THE STUDY:

1). The time period of the study is very short. In such a short span of
time it’s not necessary to gain proper insight about the problem.

2).The study is primarily based on secondary data; hence any mistake in

previous works may lead to discrepancy.

3). Requires extensive monitoring of the price performance.

4). The risk of loss may be unlimited when issuing options.

5). Online monitoring for the price performance of the derivative

instrument and the underlying exchange rate is complex enough for
customers.

6). High level of knowledge is required to deal in derivative.

7). Chances of profit are uncertain.

37
8). There is no guarantee of future return.

CONCLUSION:

The survey I have carried out on Impact of currency market in India. The conclusion of the
survey is as follows.

The awareness of the forex market in India is very low in compare to other financial instruments.
Only fewer people know about the currency trading. As the gender wise male investors are more
investing than women investors. But the education level is as well as positive sign of women also
taking interest in forex market. The equity and commodity investors are as well investing in
currency. In India USD, EURO, GBP, and JPY are the currencies been traded most.USD and
EURO are the most preferred currency in response from the respondents. There is high volume
in this two currency pair in India. USD is on first position to trade in India, as per the data of
MCX-SX the volume of USD/INR of June contract 3588917 in lots as on 3 rd June 2011. The
EURO is on second to be traded in India. The data of MCX-SX volume in EURO/INR is 156556
in lots, as on 3rd June 2011. GBP and JPY are been traded in India on3rd and the position
respectively. The volume in GBP/INR was 58255 in lots and volume in JPY/INR was 23628 in
lots as on 3rd June 2011 respectively. In future 36% & 32% of respondent are relay on USD &
EURO respectively. But in future as per the report of Bank Of Japan Change in the total quantity
of domestic currency in circulation and current account deposits held at BOJ, It's positively
correlated with interest rates-early in the economic cycle an increasing supply of money leads to
additional spending and investment, and later in the cycle expanding money supply leads to
38
inflation. This release would be affecting the JPY rate. The earning in currency market is low in
comparison of Equity or Commodity market. The volatility in currency rates is very less. It
doesn’t volatile as equity or commodity market. The risk is also very less in the currency market.
The main or primary object of investing in currency market by investor is hedging. More number
of respondents is connected in the business of Import-Export. They use to hedge the currency
market for future payment and earn the deference. The impact of currency market in Indian
economy can be measure from the Gross Domestic product and Gross national product. The
GDP of current year if 7.8%. It is a positive in comparison to last financial year; the second
factor is foreign reserve. As on May 2011 India is having $ 3010 billion of foreign reserve as per
the IMF data. Export of the country is as well increased as exports surged by 37.5 per cent for
the financial year ended March 31, 2011 to touch $245.9 billion shooting well past the $200-
billion target set for the year. Currency market in India is having a wide scope for development
in future.

39
 Questionnaire:

1. People involved with share market.

TRADE/INVEST IN SHARE MARKET

YES NO
93 27

40
 Respondents

23

yes
no

77

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.

2. Awareness about currency futures among respondents.

AWARENSS OF CURRENCY FUTURES AMONG RESPONDENTS.

YES NO
91 29

41
 Respondents
24

yes
no

76

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.

3. Traders in currency futures market.

TRADING IN CURRENCY FUTURES

YES NO
22 98

42
 Respondents

18

YES
NO

82

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.

4. Reasons for not trading in currency futures.

REASONS NO. PERCENTAGE

Lack of knowledge 44 44.90

Less interest 23 23.47

43
 Past losses 10 10.20
Other 21 21.43
50

45 44 44.9

40

35

30

25 23 23.47 # of respondents
21 21.43 Column1
20

15
10 10.2
10

0
Lack of knowledge Lack of interest Past loss Other

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 46% respondents are not trading in currency futures because of
insufficient knowledge about working of currency futures. About 23% respondents are not
trading in currency futures because of their less interest toward currency futures.

About 10% respondents are not trading in currency futures because of losses occurred in past.
23% respondents are not trading because of many other reasons like…. Investing in stock
market, investing in real-estate and insufficient fund with respondents.

44
5. Ready to trade in currency futures if appropriate knowledge and advisory services are
provided.

READY TO TRADE PERCENTAGE

YES 31 70.45%
NO 13 29.55%

45
 NUMBER OF RESPONDENTS
80

70
70.45
60

50 # OF RESPONDENTS
PERCENTAGE
40

30
29.55
20

10
31 13
0
YES NO

Analysis:

There are total 98 respondents who are not trading in currency futures. Out of them 44
respondents are not trading because of lack of knowledge about mechanism of currency futures
which consists 44.90% of total respondents.

Out of this, 31 respondents are ready to trade in currency futures if they would be provided with
knowledge of currency futures mechanism and this comes to 70.45%.

This shows that if appropriate knowledge and advisory services are provided then people are
ready to get involved with this area also.

6. Sources of information for awareness about currency futures.

SOURCE NO. PERCENTAGE

Seminar 3 3.29
Leaflet 4 4.40
Newspaper/magazines 27 29.67

46
 Friends/relatives 14 15.38
Brokers 26 28.57
Other 17 18.68
35 NUMBER OF RESPONDENTS Column1
29.67
30
25.57
25 27 26
20 18.68
15.38
15 17
14
10
4.4
5 3.29
3 4
0
ar t es s s r
in fle zin ve er he
m Le
a a le ati r ok Ot
Se ag /r B
r /m nds
e ie
pap Fr
ws
Ne

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.

47
7. Purpose of trading in currency futures.

PURPOSE NO. PERCENTAGE

Hedging 15 68.19
Speculation 4 18.19
Arbitrage 2 9.09
Other 1 4.55

48
 80

70 68.19

60

50

40 NUMBER OF RESPONDENTS
Column1
30

20 18.19
15
9.09
10
4 4.55
2 1
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.

68.19% traders use hedging strategy for foreign exposure and through this they can minimize
their risk and maximize the loss.

18.19% Trader use speculation strategy and it includes the maximum risk maximum profit.

9.09% 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.

4.55% 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.

49
8. Preference of respondent for exchange.

1ST RANK 2ND RANK 3RD RANK Wi/w

MCX’SX 13*3 7*2 2*1 55/6

= 39 = 14 =2 =9.16
NSE 6*3 11*2 5*1 45/6

=18 =22 =5 =7.5

BSE 3*3 4*2 15*1 32/6

=9 =8 =15 =5.33

50
 WEIGHTED AVG. RANK
NO
MCX’SX 9.16 1
NSE 7.5 2
BSE 5.33 3

12

10 1

2
8
3
Column1
6
Weighted Avg Number
9.16
4 7.5
5.33
2

0
MCX’SX NSE BSE

Analysis:

MCX’SX is the most preferred exchange by people

2nd most preferred exchange is NSE.

And 3rd preference goes to BSE.

51
9. Preferred currency pair for trading in currency market.

1st RANK 2nd RANK 3rd RANK 4th RANK Wi/w

USD/INR 10*4 6*3 3*2 3*1 67/10

=40 =18 =6 =3 =6.7

EUR/INR 3*4 4*3 5*2 10*1 44/10

=12 =12 =10 =10 =4.4

JPY/INR 2*4 3*3 10*2 7*1 44/10

=8 =9 =20 =7 =4.4
GBP/INR 7*4 9*3 4*2 2*1 65/10

=28 =27 =8 =2 =6.5

WEIGHTED AVG. RANK

NO.
USD/INR 6.7 1
EUR/INR 4.4 3.5
JPY/INR 4.4 3.5
GBP/INR 6.5 2

52
 100%
1
90% 2

80% 3.5 3.5

70%

60%
Column1
50%
WEIGHTED AVG. NO.
6.7
40% 6.5
30% 4.4 4.4
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.

And in the survey we found that Yen and Euro is used in equality.

53
10. Preferred brokerage house.

1ST 2ND RANK 3RD RANK 4TH 5TH Wi/w

RANK RANK RANK
Anagram 15*5 18*4 32*3 34*2 21*1 332/15

=75 =72 =96 =68 =21 =22.13

Sharekhan 27*5 23*4 15*3 20*2 35*1 351/15

=135 =96 =45 =40 =35 =23.4

Religare 21*5 22*4 37*3 19*2 11*1 353/15

=105 =88 =111 =38 =11 =23.53

Motilal 31*5 30*4 12*3 24*2 33*1 392/15
oswal =155 =120 =36 =48 =33 =26.13
Others 26*5 27*4 24*3 23*2 20*1 376/15

=130 =108 =72 =46 =20 =25.06

WEIGHTED AVG. RENK

NO.
Anagram 22.13 5
Sharekhan 23.4 4
Religare 23.53 3
Motilal oswal 26.13 1
Others 25.06 2

54
 30
26.13
25.06
23.4 23.53
25 22.13

20

15 WEIGHTED AVG. NO.

Column1

10
5
4
5 3
2
1

0
Anagram Sharekhan Religare Motilal oswal Others

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 Motilal Oswal is the most favored broking house.

At the 2nd position a list of broking house whose name is not included in the questionnaire can be
selected.

Religare has secured 3rd position; Sharekhan stands at 4th position and Anagram at the 5th
position.

55
11. Criteria for selecting brokerage house.

1ST 2ND 3RD 4TH 5TH Wi/w

RANK RANK RANK RANK RANK
BROKERAG 50*5 34*4 20*3 12*2 4*1 474/15
E =250 =136 =60 =24 =4 =31.6
ONLINE/OFF 12*5 17*4 24*3 30*2 37*1 297/15
LINE =60 =68 =72 =60 =37 =19.8
REASERCH 35*5 27*4 28*3 20*2 10*1 417/15

=175 =108 =84 =40 =10 =27.8

SERVICES 12*5 20*4 23*3 30*2 35*1 304/15

=60 =80 =69 =60 =35 =20.26

OTHER 9*5 22*4 25*3 28*2 34*1 298/15

=45 =88 =75 =56 =34 =19.87

WEIGHTED RANK
AVG.NO.
BROKERAGE 31.6 1
ONLINE/OFF LINE 19.8 5
REASERCH 27.8 2
SERVICES 20.26 3
OTHER 19.87 4

56
 4
OTHER
19.87

3
SERVICES
20.26

2
REASERCH Column1
27.8
WEIGHTED AVG.NO.

5
ONLINE/OFF LINE
19.8

1
BROKERAGE
31.6

0 5 10 15 20 25 30 35

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.

57
 Bibliography:

India Economy Watch

(http://www.economywatch.com/indianeconomy/indian-economy-
overview.html)
(http://www.economywatch.com/indianeconomy/india-
development.html)
(http://www.economywatch.com/economy-articles/globalization-in-
india.html)
(http://www.economywatch.com/budget/india/)
(http://www.economywatch.com/foreign-direct-investment/fdi-
india/index.html)

Ministry of Commerce and Industry

http://dipp.nic.in/fdi_statistics/india_fdi_index.htm

Ministry of Industrial Policy and Promotion

Newspapers and Magazines

Zee News
http://www.zeenews.com/news319587.html

Rediff News

58
http://inhome.rediff.com/money/2006/sep/04faq.htm

Outlook
http://www.outlookindia.com/article.aspx?232627

India Summary (Economics)

(www.indiasummary.com/2009/06/18/negative-inflation-in-india-
deflation-for-the-first-time-since/)

New Era
 http://www.welcome-nri.com/cac.htm

India Investment Centre

http://iic.nic.in/iic3_j.htm

Market Oracle
www.marketoracle.com

Nse site
Nseindia.com

59
 Appendices:

1) Floating exchange rate

A floating exchange rate or fluctuating exchange rate is a type of exchange rate regime wherein
a currency's value is allowed to fluctuate according to the foreign exchange market. A currency
that uses a floating exchange rate is known as a floating currency. It is not possible for a
developing country to maintain the stability in the rate of exchange for its currency in the
exchange market. There are two options open for them- [1] Let the exchange rate be allowed to
fluctuate in the open market according to the market conditions, or [2] An equilibrium rate may
be fixed to be adopted and attempts, should be made to maintain it as far as possible. But, if there
is a fundamental change in the circumstances, the rate should be changed accordingly. The rate
of exchange under the first alternative is known as fluctuating rate of exchange and under second
alternative, it is called flexible rate of exchange. In the modern economic conditions, the flexible
rate of exchange system is more appropriate as it does not hamper the foreign trade.

There are economists who think that, in most circumstances, floating exchange rates are
preferable to fixed exchange rates. As floating exchange rates automatically adjust, they enable a
country to dampen the impact of shocks and foreign business cycles, and to pre-empt the
possibility of having a balance of payments crisis. However, in certain situations, fixed exchange
rates may be preferable for their greater stability and certainty. This may not necessarily be true,
considering the results of countries that attempt to keep the prices of their currency "strong" or
"high" relative to others, such as the UK or the Southeast Asia countries before the Asian
currency crisis. The debate of making a choice between fixed and floating exchange rate regimes
is set forth by Mundell-Fleming model, which argues that an economy cannot simultaneously
maintain a fixed exchange rate, free capital movement, and an independent monetary policy. It
can choose any two for control, and leave third to the market forces.

In cases of extreme appreciation or depreciation, a central bank will normally intervene to

stabilize the currency. Thus, the exchange rate regimes of floating currencies may more
technically be known as a managed float. A central bank might, for instance, allow a currency
price to float freely between an upper and lower bound, a price "ceiling" and "floor".
60
Management by the central bank may take the form of buying or selling large lots in order to
provide price support or resistance, or, in the case of some national currencies, there may be
legal penalties for trading outside these bounds.

2) Fear of floating
A free-floating exchange rate increases foreign exchange volatility. There are economists who
think that this could cause serious problems, especially in emerging economies. These economies
have a financial sector with one or more of following conditions:

• High liability dollarization

• Financial fragility
• Strong balance sheet effects

When liabilities are denominated in foreign currencies while assets are in the local currency,
unexpected depreciations of the exchange rate deteriorate bank and corporate balance sheets and
threaten the stability of the domestic financial system.

For this reason emerging countries appear to face greater fear of floating, as they have much
smaller variations of the nominal exchange rate, yet face bigger shocks and interest rate and
reserve movements. This is the consequence of frequent free-floating countries' reaction to
exchange rate movements with monetary policy and/or intervention in the foreign exchange
market.

3) Exchange rate regime

The exchange rate regime is the way a country manages its currency in respect to foreign
currencies and the foreign exchange market. It is closely related to monetary policy and the two
are generally dependent on many of the same factors.

61
The basic types are a floating exchange rate, where the market dictates the movements of the
exchange rate, a pegged float, where the central bank keeps the rate from deviating too far from a
target band or value, and the fixed exchange rate, which ties the currency to another currency,
mostly more widespread currencies such as the U.S. dollar or the euro.

Types

• Float: Floating rates are the most common exchange rate regime today. For example, the
dollar, euro, yen, and British pound all float. However, since central banks frequently
intervene to avoid excessive appreciation or depreciation, these regimes are often
called managed float or a dirty float.
• Pegged float: Here, the currency is pegged to some band or value, either fixed or
periodically adjusted. Pegged floats are:
• Crawling bands: the rate is allowed to fluctuate in a band around a central value,
which is adjusted periodically. This is done at a preannounced rate or in a
controlled way following economic indicators.
• Crawling pegs: Here, the rate itself is fixed, and adjusted as above.
• Pegged with horizontal bands: The currency is allowed to fluctuate in a fixed
band (bigger than 1%) around a central rate.

• Fixed: Fixed rates are those that have direct convertibility towards another currency. In
case of a separate currency, also known as a currency board arrangement, the domestic
currency is backed one to one by foreign reserves. A pegged currency with very small
bands (< 1%) and countries that have adopted another country's currency and abandoned
its own also fall under this category.

• Currency board: A currency board is a monetary authority which is required to maintain

a fixed exchange rate with a foreign currency. This policy objective requires the
conventional objectives of a central bank to be subordinated to the exchange rate target.

62
• Dollarization: Dollarization occurs when the inhabitants of a country use
foreign currency in parallel to or instead of the domestic currency. The term is not only
applied to usage of the United States dollar, but generally to the use of any foreign
currency as the national currency.

63