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 TERMINOLOGY IN FOREX
þ Spot
Buying 1 currency for another with immediate delivery. Settlement ² T + 2
þ Forward Outright
Exchange one currency for another on any day after spot (Future date)

* USD/CAD is an exception
þ Tick
The minimum trading increment or price differential at which traders are able to enter bids and offers
þ USD-INR : Tick size shall be 0.25 paise or 0.0025 Rupee.

E.g. If a trader buys a contract @ Rs. 42.2500 & USD 1000 being value of the contract
ë One tick movement will translate to Rs. 42.2475 or 42.2525
ë Value on each contact = Rs. 2.50 (1000 * 0.0025)
 TERMINOLOGY«
þ BaseCurrency ² 1st currency in currency pair
þ Term Currency ² 2nd currency
E.g. USD-INR: Dollar quoted in rupee terms
þ Strengthening/Weakening ² change in value of 1
currency vis-a-vis other
When base buys more of term ² base has
strengthened/appreciated
E.g. USD-INR moves from 43 to 43.25 - $ appreciated
þ Exchange rate ² 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.
Market price determined by demand-supply of that currency
TERMINOLOGY«
þ Contract cycle
þ Value Date/Final Settlement Date

þ Expiry date

ë Last trading day

þ Contract size

ë USD/INR : USD 1000; EUR/INR : EUR 1000; GBP/INR

: GBP 1000; JPY/INR : JPY 100,000
þ Basis

þ Cost of carry

þ Initial margin

þ Marking to market
MAJOR CURRENCIES IN THE WORLD
þ USD, EUR, GBP, JPY, Swiss franc etc.
INTRODUCTION - DERIVATIVES
þ Derivative is a product K
 
 


 



  ,
called bases (underlying asset, index, or
reference rate), in a contractual manner.
þ Derivatives are synthetic instruments
þ Asset classes range from financial instruments
to commodities to even classes such as weather
and industrial effluents
þ Underlying theme of derivatives - leveraged
products
þ Derivatives are not always priced at respective
asset value (fair value)
UNDERLYING ASSET CLASS

Underlying Asset
Class

Financial Commodities Credit

Interest Rates Equities Currencies Agricultural Minerals Metals

Govt bond, MM USD/INR,USD/JPY

Single stock, Index
instruments etc.
COMPARE«
+*", -- ./m
"
Derivatives traded on an exchange
like NSE
Standardized contracts
Exchange takes on settlement risk ²
no counterparty risk on individuals
Margin System followed
Can be accessed by retail as well as
institutional investors
Come under regulatory purview
Greater liquidity due to
standardization
E.g. Equity and bond derivatives
Derivatives not traded on exchange
like Overnight Index Swaps (OIS)
Can be both Standardized or
Customized
Counterparty risk exists
No Margining
Usually used between institutions
Usually self-regulated
Illiquid
E.g. Interest rate swaps, currency
derivatives and exotics
DERIVATIVES IN INDIA
þ Structured derivative market relatively
þ Exchange traded equity and commodity
derivatives are vibrant
þ Interest rate derivatives ² OTC market is
active
þ Currency derivatives are dominated by
currency forwards
þ Options are starting to come of age at present
CURRENCY FORWARDS
þ The forward market facilitates the trading of
forward contracts on currencies.
þ A 
K

 is an agreement between a
corporation and a commercial bank to
exchange a specified amount of a currency at a
specified exchange rate (called the 
K

) on a specified date in the future.
þ Cannot be cancelled.
þ Can be closed out by repurchase or sale of
foreign currency on the value date originally
agreed upon.
þ Possible losses or gains are realized on this
date then
þ Forward contracts are OTC
 WHY FORWARD MARKETS?
þ When MNCs anticipate 


 

 , they can set up
forward contracts to lock in the exchange rate.
þ Forward contracts are often valued at $1 million
or more, and are not normally used by consumers
or small firms.
þ As with the case of spot rates, there is a bid/ask
spread on forward rates.
þ Forward rates may also contain a premium or
discount.
ë If the forward rate exceeds the existing spot rate, it
contains a 

.
ë If the forward rate is less than the existing spot rate, it
contains a

.
PREMIUM/DISCOUNT
þ The % by which the forward rate (F
)exceeds the spot rate (S ) at a given point
in time is called the forward premium (p ).

F = S (1 + p )

F exhibits a discount when p < 0.

þ The premium/discount reflect the interest
rate differential b/w currencies in
Euromarkets
PREMIUM/DISCOUNT
þ Annualized forward premium/discount
D 0-   v 12
 !
where  is the number of days to maturity
E.g. Suppose £ spot rate = $1.681, 90-day £ forward
rate = $1.677.
$1.677 ² $1.681 x 360 = ² 0.95%
$1.681 90
So, forward discount = 0.95%
The forward premium/discount reflects the
difference between the home interest rate and the
foreign interest rate, so as to prevent arbitrage.
REASON FOR DIFFERENCE B/W SPOT AND FORWARD
RATES

þ Foreign currency with higher interest rate is

not sold on spot basis but only on forward
þ The seller enjoys an interest advantage during
this period
þ Buyer at a disadvantage - he must wait until
he can invest his funds in the currency
enjoying higher interest rates
þ Interest rate disadvantage is offset by a price
discount.
 DISADVANTAGES OF FORWARD
CONTRACTS
þ OTC ² Counter party risk
þ No contract if no underlying exposure
þ Pricing ² premium/discount cannot be modified ² E.g.
þ Cancellation of contract leads to gain/loss to be borne
by either of the parties
- E.g. Bank to sell USD to a customer @ INR 47.38
- Order gets cancelled. Rupee depreciates
- Bank has to buyback USD @ spot rate (say) INR
47.45
- Deducting 2% commission, bank would pat INR
47.43
- Profit of 5paise to customer
NON-DELIVERABLE FORWARD CONTRACT
þ There is no actual exchange of currencies.
þ A net payment is made by one party to the other
based on the contracted rate and the market rate
on the day of settlement.
þ They effectively hedge expected foreign currency
cash flows.
m

m3


PRICING OF FUTURES
Forward rate - A function of the spot rate and the interest rate
differential between the two currencies, adjusted for time.
PARTICIPANTS
þ Speculators

þ Hedgers

þ Arbitragers
SPECULATION: LONG FUTURE
SPECULATION: SHORT FUTURE
HEDGING
& 345-,",3
þ Long hedge:

Underlying position: short in the foreign currency

Hedging position: long in currency futures

þ Short hedge:
Underlying position: long in the foreign currency
Hedging position: short in currency futures

Corporate Hedging
LONG HEDGE
LONG HEDGE«
SHORT HEDGE
SHORT HEDGE«
TRADING SPREADS USING CURRENCY
FUTURES
þ Spread refers to difference in prices of two futures contracts.
þ Spread movement is based on following factors:
ë Interest Rate Differentials
ë Liquidity in Banking System
ë Monetary Policy Decisions (Repo, Reverse Repo and CRR)
ë Inflation
þ "6m"*&7
-: An intra-currency pair spread
consists of one long futures and one short futures contract.
Both have the same underlying but different maturities.
þ "6m"*&7
-: An inter²currency pair spread
is a long-short position in futures on different underlying
currency pairs. Both typically have the same maturity.
INTER-COMMODITY SPREAD
þ On Feb 12th
m8
  8
  -
m8 
Spot 0.6642 0.6028 1.1019
March 0.6689 0.6050 1.1056
June 0.6632 0.5972 1.1105
September 0.6595 0.5897 1.1184
âRates imply Australian dollar to depreciate against Canadian dollar
over coming 7 months
âSpeculator views that AUD is undervalued relative to CAD
âTo profit: Buy cheap and sell dear
âBuy 1 September AUD contract @ 0.5897/AUD
â Sell 1 September CAD contract @ 0.6595/CAD

âSpread: 0.0698(=0.6595-0.5897)
INTER-COMMODITY SPREAD«
þ On Sep 10th : m8
  8
  -
m8 
Spot 0.6475 0.5815 1.1118

Reverses theSeptember
0.6441 0.5795 1.1115
â position:
â Sell 1 September AUD contract @ 0.5795/AUD
â Buy 1 September CAD contract @ 0.6441/CAD

&9
  m
Sold at 0.5795 0.6595
Bought at 0.5897 0.6441
Net -0.0102 +0.0154
Overall gain is $(125000 * 0.0052) = $650
Spread: 0.0646(=0.6441-0.5795) «.narrowed
INTER-COMMODITY SPREAD«
â On Sep 10th : m8
  8

September 0.6685 0.5965

â Reverses the position:

â Sell 1 September AUD contract @ 0.5965/AUD
â Buy 1 September CAD contract @ 0.6685/CAD

&9
  m
Sold at 0.5965 0.6595
Bought at 0.5897 0.6685
Net +0.0068 -0.0090
Overall loss is $(125000 * 0.0022) = $275
Spread: 0.0720(=0.6685-0.5965) «widened
INTRA-CURRENCY PAIR SPREAD
þ On Sep 08
ë USD appreciates from current quotes i.e. spread widen
ë Buys December currency future @ 47.00
ë Sells October futures @ 46.80
ë Spread: 0.20

þ After 30 days, spread widens

ë Buys October futures contract @ 46.90
ë Sells December futures contract @ 47.25
ë Spread:0.35

Total gain: Rs. 150(0.35-0.20=0.15* $1000) per contract

ARBITRAGE
þ USD/INR is quoted @ Rs. 44.325
þ 1-month forward is quoted at 3 paisa premium to spot @
44.3550
þ 1-month currency futures is trading @ Rs. 44.4625.
ë Sells in futures @ 44.4625 levels (1 month)
ë Buys in forward @ 44.3250 + 3 paisa premium = 44.3550
(1 month) with the same term period
ë On the date of future expiry he buys in forward and
delivers the same on exchange platform
ë In a process, he makes a Net Gain of 44.4625-44.3550 =
0.1075
ë i.e. Approx 11 Paisa arbitrage
ë Profit per contract = 107.50 (0.1075x1000)
m

m.7 .

INTRODUCTION
Currency options are contracts that give the buyer the right, but not the
obligation, to buy or sell one currency against the other, at a
predetermined price and on or before a predetermined date

Category of Options:
â Call Option
â Put Option

Type of Options:
â American Option
âEuropean Option

âUnderlying currency: Currency which is purchased (for a call option) or

sold (for a put option) & in which contract size is given

âTrading currency : Currency (home) in which strike price & premium

are given
âTimeness of Option

In-the-money Out-of-money
At-the-money
(PROFIT) (LOSS)

Call Option Put Option Call Option Put Option

(Spot > Strike+ (Spot < Strike+ (Spot < Strike+ (Spot > Strike+
Premium) Premium) Premium) Premium)

â Value of Option (Premium): Is made up of 2 parts

âIntrinsic Value:
how much you could get from exercising the option immediately
the amount it is ITM
Call= St-X Put= X-St

âTime Value :
difference between premium & intrinsic value
Call= C- Max(0,St-X) Put= P- Max(0,X-St)
CURRENCY OPTIONS IN INDIA
â Started from July 7, 2003

â OTC Product

â Only plain vanilla European options

â Customers can only purchase call or put options & is not allowed to write
options

â Customers can also enter into packaged products involving cost reduction
structures provided the structure does not increase the underlying risk and
does not involve customers receiving net premium

âAuthorized dealers may quote the option premium in Rupees or as a

percentage of the Rupee/foreign currency notional

âSettled on maturity either by delivery on spot basis or by net cash settlement

in Rupees

â Only one hedge transaction can be booked against a particular exposure/

part thereof for a given time period.

â Option contracts cannot be used to hedge contingent or derived exposures

USE OF OPTIONS

Entity who has to

pay in foreign
Currency at a later
date
(IMPORTER)

Combination
Normal Strategy
Strategy

Purchase Call & Sell

Buy Call Option Sell Put Option Straddle Strangle
Put Option

â Underlying to pay in foreign currency

â Protect on the movement on the currency on the upside
STRATEGIES
BUYING A CALL OPTION
 :

8
+&
Spot (S) = INR/USD = 43 S > K - Option Exercised

Strike (K) = INR/USD = 43.5 S = K ² Option Expires without value

Expiry = Dt of Payment = 3mth

Amount = USD 1000 S < K -Option Expires without value

Premium = 0.3/USD
SELLING A PUT OPTION
 :

8
+&
Spot (S) = INR/USD = 43 S > K - Option Expires without value

Strike (K) = INR/USD = 42.5 S = K ² Option Expires without value

Expiry = Dt of Payment = 3mth

Amount = USD 1000 S < K ²Buyer exercises the option

Premium = 0.3/USD
BUYING A PUT OPTION
 :

8
+&
Spot (S) = INR/USD = 43 S > K - Option Expires without value

Strike (K) = INR/USD = 42.5 S = K ² Option Expires without value

Expiry = Dt of Payment = 3mth

Amount = USD 1000 S < K ²Option is exercised

Premium = 0.3/USD
SELLING A CALL OPTION

 :

8
+&
Spot (S) = INR/USD = 43 S > K ² Buyer exercises the Option

Strike (K) = INR/USD = 43.5 S = K ² Option Expires without value

Expiry = Dt of Payment = 3mth

Amount = USD 1000 S < K -Option Expires without value

Premium = 0.3/USD
 BUYING A CALL OPTION & SELLING A PUT OPTION (same strike
price)
 :

8
+&
 m 7 7 7  
-  * *  "8:
Spot (S) = INR/USD = 46 S > K ² Exercise the Call
- 
Option & Put Option
exercises without value 44. 0 0.3 -1 0.2 0.1 -1.1
5
Strike (K) = INR/USD = S = K ² Option Expires
45.5 without value 46 0.5 0.3 0 0.2 0.1 0.4
Expiry = Dt of Payment = 46. 1 0.3 0 0.2 0.1 0.9
3mth 5
Amount = USD 1000 S < K ²Call Option 47 1.5 0.3 0 0.2 0.1 1.4
Exercises without value &
Premium (Call) = 0.3/USD
the Buyer of the Put Option 47. 2 0.3 0 0.2 0.1 1.9
Premium (Put) = 0.2/USD exercises the option 5
 BUYING A CALL OPTION & SELLING A PUT OPTION (different
strike price)/ LONG RANGE FORWARD

 :

8
+&
 m 7 7 7  
-  * *  "8:
Spot (S) = INR/USD = 46 S > K1 ² Buyer Exercises
- 
the Put Option & call
Strike (K1) put = INR/USD Option exercises without 44 0 0.3 -1 0.2 0.1 -1.1
= 45 value
45 0 0.3 0 0.2 0.1 -0.1
Strike (K2) call = INR/USD S is between K1 & K2 ²
= 47 Both Option Expires 46 0 0.3 0 0.2 0.1 -0.1
without value
47 0 0.3 0 0.2 0.1 -0.1
Expiry = Dt of Payment =
3mth 48 1 0.3 0 0.2 0.1 0.9

Amount = USD 1000 S < K2 ²Call Option 49 2 0.3 0 0.2 0.1 1.9
Exercises & the Put Option
Premium (Call) = 0.3/USD
exercises without any
Premium (Put) = 0.2/USD value.
 LONG STRADDLE :

Buy a Put & Buy a Call with the same Strike , same Maturity & same
Amount
 :

8
+&
 m 7 7 7  
-  7- *  "8:
Spot (S) = INR/USD = 46 S > K ² Exercise the Call

Option & Put Option
exercises without value 44. 0 0.3 1 0.2 0.5 0.5
5
Strike (K) = INR/USD = S = K ² Option Expires
45.5 without value 46 0.5 0.3 0 0.2 0.5 0
Expiry = Dt of Payment = 46. 1 0.3 0 0.2 0.5 0.5
3mth 5
Amount = USD 1000 S < K ²Call Option 47 1.5 0.3 0 0.2 0.5 1
Exercises without value &
Premium (Call) = 0.3/USD
the Put Option is exercised 47. 2 0.3 0 0.2 0.5 1.5
Premium (Put) = 0.2/USD 5
 LONG STRANGLE :

Buy a Put & Buy a Call with the Different Strike , but same Maturity &
same Amount
 :

8
+&
 m 7 7 7  
Spot (S) = INR/USD = 46 S > K1 ² Exercises the Call -  * *  "8:
Option & Put Option - 
Strike (K1) put = INR/USD exercises without value 44 0 0.3 1 0.2 0.5 0.5
= 45
S is between K1 & K2 ² 45 0 0.3 0 0.2 0.5 -0.5
Strike (K2) call = INR/USD
= 47 Both Option Expires
46 0 0.3 0 0.2 0.5 -0.5
without value
47 0 0.3 0 0.2 0.5 -0.5
Expiry = Dt of Payment =
3mth 48 1 0.3 0 0.2 0.5 0.5
Amount = USD 1000 S < K2 ²Put Option
49 2 0.3 0 0.2 0.5 1.5
Exercises & the Call Option
Premium (Call) = 0.3/USD
exercises without any
Premium (Put) = 0.2/USD value.
DELTA HEDGING
DELTA:
It is the measure of how the value of an option changes with respect to
changes in the value of the underlying contract

DELTA OF A CALL OPTION:

â Max value = 1
â Min value = 0
â Positive relationship
â Deep in the money - delta close to 1
â Far out of the money - delta close to 0
â At the money - delta is 0.5

DELTA OF A PUT OPTION:

â Max value = 0
â Min value = -1
â Inverse relationship
â Deep in the money - delta close to -1
â Far out of the money - delta close to 0
â At the money - delta is 0.5
DELTA HEDGING:
A Strategy that is designed to make the price of the portfolio of derivatives
insensitive to small changes in the price of the underlying

DELTA NEUTRAL:
â Total Delta (sum of all delta) Position of the portfolio is zero
âPortfolio position unbiased in terms of direction of any price movement of
the underlying contract

HOW TO MAINTAIN DELTA NEUTRAL:

â Call option purchased with shorting the underlying
â Call option sold with buying the underlying
â Put option purchased with buying the underlying
â Put option sold with shorting the underlying
â continues rebalancing

FORMULA
â Delta of Call= N(d1)
â Delta of Put= N(d1) - 1
EXOTIC OPTIONS
â Knock-Out Options
These are like standard options except that they extinguish or cease to
exist if the underlying market reaches a pre-determined level during the
life of the option. The knockout component generally makes them cheaper
than a standard Call or Put.

â Knock-in Options
These options are the reverse of knockout options because they don't come
into existence until the underlying market reaches a certain
predetermined level, at this time a Call or Put option comes into life and
takes on all the usual characteristics.

â Binary option
pays a lump sum of cash if the option is in-the- money at expiration

â Average Rate Options

option contract in which settlement is based on the average value of the
underlying asset over the contract period
CURRENCY SWAPS
WHAT ARE SWAPS?
þ |Kare contractual agreements to
exchange or swap a series of cash flows.
þ These cash flows are most commonly
the interest payments associated with
debt service.
ë If the agreement is for one party to swap its
fixed interest rate payments for the floating
interest rate payments of another, it is termed
an K
ë If the agreement is to swap currencies of debt
service obligation, it is termed a 
K $
REASONS FOR USING SWAPS
There are two main reasons for using swaps:
1. A corporate borrower has an existing debt
service obligation. Based on their interest rate
predictions they want to swap to another
exposure (e.g. change from paying fixed to
paying floating).
2. Two borrowers can work together to get a
lower combined borrowing cost by utilizing
their comparative borrowing advantages in two
different markets.

$!
CURRENCY SWAPS
þ The usual motivation for a currency swap is to
replace cash flows scheduled in an undesired
currency with flows in a desired currency.
þ The desired currency is probably the currency in
which the firm·s future operating revenues (inflows)
will be generated.
þ Firms often raise capital in currencies in which
they do not possess significant revenues or other
natural cash flows (a significant reason for this
being cost).

$
 CURRENCY SWAPS
þ + 9 Suppose a U.S. MNC, m "&, wants to
finance a £10,000,000 expansion of a British plant.
â They could borrow dollars in the U.S. where they
are well known and exchange dollars for pounds.
This results in exchange rate risk, OR
â They could borrow pounds in the international bond
market, but pay a lot since they are not well known
abroad.

$'
 EXAMPLE CONTD«
þ If m "& can find a British MNC with a mirror-
image financing need, both companies may benefit from
a swap.

þ If the exchange rate is S0 = 1.60 $/£, m "& needs

to find a British firm wanting to finance dollar
borrowing in the amount of $16,000,000.

$$
 EXAMPLE CONTD«
þ Company A is the U.S.-based MNC and
Company B is a U.K.-based MNC.
þ Both firms wish to finance a project of the same
size in each other·s country (worth £10,000,000
or $16,000,000 as S = 1.60 $/£). Their borrowing
opportunities are given below.
„ „
„
„ „ '
  
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COMPARATIVE ADVANTAGE«
â Ê is the more credit-worthy of the two.
â Ê pays 2% less to borrow in dollars than h
â Ê pays 0.4% less to borrow in pounds than h
â hhas a comparative advantage in borrowing in £.
â h pays 2% more to borrow in dollars than Ê
â h pays only 0.4% more to borrow in pounds than Ê

„ „
„
       „ „ '
    
       „
„ 

  
 


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POTENTIAL SAVINGS..
„ „
„
„ „ '
  
„
„ 

 

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Î
 |  

If Swap Bank takes 0.4% and A&B split the

rest:
Company A pays 11.6% - 0.6% = 11%
Company B pays 10% - 0.6% = 9.4%
$;
EXAMPLE CONTD«

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CROSS CURRENCY SWAPTION
Swaption allowing one party the right to buy or
sell a cross-currency swap on a given date under
which a pre-agreed fixed or floating rate in one
currency is exchangeable for a floating or fixed
rate in another.

Uses:
To hedge a dual currency bond which offered the
investor the right to seek repayment
or conversion in the second currency
m
 
 

CREDIT DERIVATIVES
þ Credit derivative can be defined as ´
arrangement that allows one party
(protection buyer or originator) to
transfer, for a premium ,the defined
credit risk , or all the credit risk ,
computed with reference to a
notional value , of a reference asset
or assets, which it may or may not
own, to one or more other parties
(the protection sellers).
þ 7 * "&6 The party that
wants to transfer the credit risk
þ 7 * " 6 The Party who
provides protection against the risk.
Funded Credit Unfunded
Credit
Derivatives Derivatives

Credit Credit
Linked Note Default Swap

Collateralized Total Swap

Debt Return
Obligation

Credit Spread
Option
CREDIT DEFAULT SWAP
þ This is a bilateral contract in which a periodic
fixed fee or premium is paid to a protection seller,
in return for which the seller will make a
payment on the occurrence of a specified credit
event.
þ Being structured, the CDS enables one party to
transfer its credit exposure to another party.
þ The maturity of the default swap does not have
to match with the maturity of reference asset.
EXAMPLE
5-year credit default swap, Notional Principal: $100 million,
buyer will pay $9,00,000 every year till life of contract or credit
event whichever is earlier.

Default 90 basis points per year

Default
protection Protection
buyer payment if default by reference entity seller

In case of default of reference patry:

1. Physical settlement: Buyer will get $100million by selling the
bonds to seller
2. Cash settlement : Buyer will receive market value of bond after
credit event by auctioning in open market and will also receive
the balance amount from seller.
CDS AND BOND YIELDS
þ n-year CDS spread= yield on n-year corporate bond- yield
on n-year risk-free bond
Example: CDS spread=7% - 5% = 2%
þ If n-year CDS spread < yield on n-year corporate bond-
yield on n-year risk-free bond
Strategy: investor should buy corporate bond and buy
protection, to earn more than risk-free rate
þ If n-year CDS spread > yield on n-year corporate bond-
yield on n-year risk-free bond
Strategy: investor should short the corporate bond and
sell the protection, to raise loan at less than risk-free rate
TOTAL RETURN SWAP (TRS)
þ An agreement to exchange the total return on the bond for
LIBOR plus a spread
þ 5-year agreement, notional principal: $100 million, exchange
of total return on corporate bond for Libor + 25 basis points.

total return on bond

Total Total
return return
libor + 25 basis points receiver
payer

þ Payment reflecting change in value of the bond at the end of

contract
þ Total return payer will pay to total return receiver , if bond
value increase
þ Total return receiver will pay to Total return payer , if bond
value decreases.
þ If the bond defaults, Total return receiver will pay excess
amount over the market value of the bond.
ABS

Asset 1
Tranche 1
Asset 2 (equity)
Principal:$5
Asset 3 million
Return: 30%
Tranche 2
SPV (mezzanine)
Principal: $20
Asset n million
Return: 10%
Total
principal Tranche 3
$100 million (senior)
Principal: $75
million
Return: 6%
COLLATERAL DEBT OBLIGATION
´An investment-grade security backed by a pool of
bonds, loans and other assets.µCDOs are unique
they represent different types of debt and credit risk.
In the case of CDOs, these different types of debt are
often referred to as 'tranches' or 'slices¶.

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CREDIT-LINKED NOTES

þ A credit-linked note (CLN) is essentially a funded CDS,

which transfers credit risk from the Note issuer to the
investor.

þ The issuer receives the issue price for each CLN from
the investor and invests this in low-risk collateral.

þ If a credit event is declared, the issuer sells the

collateral and keeps the difference between the face
value and market value of the reference entity>s debt.
ITS PROCESS OF WORKING..

Example: 1. Lehman Brothers

2. Credit Cards
 CLN SECURITIZATION

 
 
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CURRENCY DERIVATIVES TRADING
þ September 21, 2010
þ U.S. dollar, the rupee, Japan's yen, the British
pound and the euro
þ 9.9million contracts value $ 10billion

þ 52% share on currency derivatives in India

UNITED STOCK EXCHANGES OF INDIA
þ Operations from September 20, 2010
þ 4th exchange for trading financial instruments in
last 140 years
þ Exchange is backed by 21 Indian public sector
banks (BOI,IDBI, SBI, PNB, etc)
þ Equity participation of 5 private sector banks

Axis, Federal Bank, HDFC Bank, ICICI and J&K

Bank
þ Jaypee Capital, MMTC and Indian Potash also
have a stake
þ BSE as a strategic partner
USE PRODUCTS
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Trading 9:00am to 9:00am to 9:00am to 9:00am to
Hours 5:00pm 5:00pm 5:00pm 5:00pm
Contract
$1000 EUR1000 GBP1000 JPY100000
Size
Available All monthly All monthly All monthly All monthly
Contracts maturities maturities maturities maturities
from 1²12 from 1²12 from 1²12 from 1²12
months months months months
Initial 1% 2% 2% 2.3%
Margin
1 month ² Rs
400, 1 month ² Rs 1 month ² Rs 1 month ² Rs
2 months ² Rs 700, 1500, 600,
Calendar
500, 2 months ² Rs 2 months ² Rs 2 months ²
Spread
3 months ² Rs 1000, 1800,> Rs 1000,>
Margin
800, >3 months ² 3 months ² Rs 3 months ²
> 4months ² Rs 1500 2000 Rs 1500
Rs 1000
CURRENCY OPTIONS IN INDIA
þ SEBI Chairman CB Bhave said stock exchanges
would be launching options in currency
derivatives shortly on 21st sep 2010

þ Mr Bhave said both the Reserve Bank of India

(RBI) and SEBI had principally cleared the
introduction of options in currency derivatives

þ The exchanges have applied expecting to be able

to take a decision about actually allowing the
exchanges to launch currency derivatives very
soon
PROPOSED EXCHANGE TRADED CURRENCY OPTIONS IN INDIA
.7m  :

Underlying USD-INR

Option Type European Call & Put Option

Trading Hours 9:00 am to 5:00 pm

Size of the contract USD 1000

Quotation Premium in Rupee terms & Outstanding position in

USD
Maturity of the contracts Not to exceed 12 months

Available Contracts 3 serial monthly contracts followed by 3 quarterly

contracts
Strike Price Minimum of 3 in the money, 3 out of the money & 1
near the money

Settlement Currency Indian Rupees

Expiry Day 2 working days prior to last working day of the expiry
month

Settlement Price RBI Reference Rate on the date of expiry

Final Settlement Day Last working day (excld Saturdays) of the contract
month
THANK YOU