OBJECTIVE –

Evaluation of currency derivative in context of Indian derivative

market & its scope .
 CONTENTS
OBJECTIVE

INTRODUCTION OF CURRENCY DERIVATIVES

LITRATURE REVIEW

HYPOTHISIS

RESEARCH METHODOLOGY

•TYPE OF RESEARCH

•SOURCE OF DATA COLLECTION

•OBJECTIVES OF THE STUDY

• LIMITATION OF THE STUDY

Findings suggestions and Conclusions

Bibliography & References

OBJECTIVE –
Evaluation of currency derivative in context of Indian derivative
market & its scope

INTRODUCTION TO CURRENCY DERIVATIVES

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

If any Indian firm borrows funds from international financial market

in US dollars for short or long term then at maturity the same would be refunded
in particular agreed currency along with accrued interest on borrowed money. It
means that the borrowed foreign currency brought in the country will be
converted into Indian currency, and when borrowed fund are paid to the lender
then the home currency will be converted into foreign lender’s currency. Thus,
the currency units of a country involve an exchange of one currency for another.

The price of one currency in terms of other currency is known as exchange rate.

The foreign exchange markets of a country provide the mechanism of

exchanging different currencies with one and another, and thus, facilitating
transfer of purchasing power from one country to another.
 With the multiple growths of international trade and finance all over the world,
trading in foreign currencies has grown tremendously over the past several
decades. Since the exchange rates are continuously changing, so the firms are
exposed to the risk of exchange rate movements. As a result the assets or
liability or cash flows of a firm which are denominated in foreign currencies
undergo a change in value over a period of time due to variation in exchange
rates.

This variability in the value of assets or liabilities or cash flows is referred to

exchange rate risk. Since the fixed exchange rate system has been fallen in the
early 1970s, specifically in developed countries, the currency risk has become
substantial for many business firms. As a result, these firms are increasingly
turning to various risk hedging products like foreign currency futures, foreign
currency forwards, foreign currency options, and foreign currency

LITRATURE REVIEW

History of currency derivative:-

Currency derivative are created in the Chicago Mercantile Exchange (CME) in the
year of1972. The contracts are created under the guidance & leadership of Leo me
lamed, CMEchairman Emeritus. The FX contract capitalized on the U.S.
abandonment of the brettonwoods agreement, which had fixed world exchange
rates to a gold standard after World War II. The abandonment of the Bretton woods
agreement resulted in currency values being allowed to float increases the risk of
doing a business, by creating another market in which futures could be treaded,
CME currency futures extended the reach of risk management beyond
commodities which were main derivative contracts traded at CMEunit then. The
concept of currency futures at CME was revolutionary, & gained credibility
through endorsement of Nobel-prize-winning economist Milton Friedman.
Today, CME offers 41 individual FX futures & 31, options contracts on 19
currencies, allof which trade electronically on the exchanges CME Globex
platform. It is a largest regulated marketplace for FX trading. Traders of CME FX
futures are a diverse group that includes multinational corporations, hedge funds,
commercial banks, investment banks, financial managers, commodity trading
advisors, proprietary trading firms. Currency overlay managers & individual
investors. They trade in order to transact business hedge against unfavorable
changes in currency rates or to speculate on rate fluctuations.

Brief history or overview of foreign exchangemarket

During early 1990’s.india embarked on a series of structural reforms in the

foreign market. The exchange rate regime, that was earlier pegged, was partially
floated inMarch, 1992 and fully floated in March, 1993. The unification of the
exchange rate was instrumental developing a market determined exchange rate of
the rupee and was important steps in the progress towards total current account
convertibility, which was achieved in 1994.
Although liberalization helped the Indian forex market in various ways, it led to
extensive fluctuations of exchange rate .this issue has attracted a great deal of
concen from policy makers and investors. While some flexibility in foreign
exchange markets and exchange rate determination is desirable, excessive
volatility can have an adverse effect on price discovery, export performance,
sustainability of current account balance &balance sheet.

In the content of upgrading Indian foreign market exchange to international

standards a well developed foreign exchange market (both PTC as well as
exchange traded) is imperative. With a view to entities to manage volatilities in the
currency market, RBI on April 207, issued comprehensive guidelines on the wage
of foreign currency forwards, swaps, & options in the OTCmarket. At the same
time, RBIalso setup an internal working group to explore the advantage of
introducing currency futures.The report of the internal working group of RBI
submitted in April 2008 recommended the introduction of exchange traded
currency derivative.
Subsequently, RBI & SEBI jointly constituted the standing technical
committee to analyze the currency forward and future market around the world and
lay down the guide lines to introduce traded currency futures in the Indian market.
The committee submitted its report on May 29, 2008, further RBI& SEBI also
issued circular on this regard, on August 06, 2008. Currently, India is a US D 34
billion OTC market, where althea major currencies like USD, EURO, YEN,
Pound, Swiss and France are trade. With the help of electronic trading and efficient
risk management systems .exchange traded currency futures will bring in more
transparency and efficiency in price discovery, eliminate counter party credit risk,
provide access to all types of market participants, offer standard products and
provide transparent trading platform, marks are allowed to become of this segment
on the exchange, thereby providing them with a new opportunity

CURRENCY DERIVATIVE PRODUCTS

Derivative contracts have several variants. The most common variants are
forwards, futures, options and swaps. We take a brief look at various derivatives
contracts that have come to be used.

 FORWARD :
The basic objective of a forward market in any underlying asset is to fix a
price for a contract to be carried through on the future agreed date and is
intended to free bot.
The purchaser and the seller from any risk of loss which might incur due to
fluctuations in the price of underlying asset.
A forward contract is customized contract between two entities, where
settlement takes place on a specific date in the future at today’s pre-agreed
price. The exchange rate is fixed at the time the contract is entered into. This
is known as forward exchange rate or simply forward rate.

 FUTURE :
A currency futures contract provides a simultaneous right and obligation to
buy and sell a particular currency at a specified future date, a specified price
and a standard quantity. In another word, a future contract is an agreement
between two parties to buy or sell an asset at a certain time in the future at a
certain price. Future contracts are special types of forward contracts in the
sense that they are standardized exchange-traded contracts.

 SWAP :
 Swap is private agreements between two parties to exchange cash flows in
the future according to a prearranged formula. They can be regarded as
portfolio of forward contracts.
The currency swap entails swapping both principal and interest between the
parties, with the cash flows in one direction being in a different currency
than those in the opposite direction. There are a various types of currency
swaps like as fixed-to-fixed currency swap, floating to floating swap, fixed
to floating currency swap.

In a swap normally three basic steps are involve___

(1)Initial exchange of principal amount.
(2) Ongoing exchange of interest
(3) Re - exchange of principal amount on maturity.

 OPTIONS :
Currency option is a financial instrument that give the option holder a right
and not the obligation, to buy or sell a given amount of foreign exchange at a
fixed price per unit for a specified time period ( until the expiration date ).In
other words, a foreign currency option is a contract for future delivery of a
specified currency in exchange for another in which buyer of the option has
to right to buy (call) or sell (put) a particular currency at an agreed price for
or within specified period. The seller of the option gets the premium from
the buyer of the option for the obligation undertaken in the contract. Options
generally have lives of up to one year, the majority of options traded on
options exchanges having a maximum maturity of nine months. Longer
dated options are called warrants and are generally traded OTC.

RESEARCH METHODOLOGY

 TYPE OF RESEARCH
 In this project Descriptive research methodologies were use.

 SOURCE OF DATA COLLECTION

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

 OBJECTIVES OF THE STUDY

The basic idea behind undertaking Currency Derivatives project to gain
Knowledge about currency future market.

To study the basic concept of Currency future

To understand the practical considerations and ways of considering currency

future price.

To analyze different currency derivatives products.

 LIMITATION OF THE STUDY

The limitations of the study that analysis was purely based on the secondary
data. So, any error in the Secondary data might also affect the study undertaken.

SUGGESTIONS

it will be explain later .

CONCLUSIONS
It will be explain later
BIBLOGRAPHY

Financial Derivatives (theory, concepts and problems) By: S.L. Gupta.

NCFM: Currency future Module.

BCFM: Currency Future Module.

Websites:
www.sebi.gov.in

www.rbi.org.in

www.frost.com

www.wikipedia.com

www.economywatch.com

www.bseindia.com

www.nseindia.com