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As it is universally accepted that market risks are ones which can not eliminated in
absolute terms. But their management is perfectly possible. The currency derivatives
are efficient tools for management of risks in money and forex markets. The need to
protect the exposure against unforeseen and unpredictable movement in currency and
interest rates has led to the emergence of these kinds of derivatives. Thus external
borrowings or receivables or payments in foreign currencies come within the purview
of management under it. As we all know the exporters and importers incur huge
obligations in terms of foreign currencies and they can guard their interest by buying
appropriate products.
The present project attempts to study the basic concepts of Currency futures, different
factors that affect currency price changes, practical considerations and ways of
considering currency future price and analyze different currency derivatives products.
Currency Derivatives
CONTENTS
II Review of Literature
IV Company Profile
VII Bibliography
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CHAPTER I - INTRODUCTION
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INTRODUCTION
The value of the currencies determines the values of the currency derivatives. As it is
universally accepted that market risks are ones which can not eliminated in absolute
terms. But their management is perfectly possible. The currency derivatives are efficient
tools for management of risks in money and forex markets. The need to protect the
exposure against unforeseen and unpredictable movement in currency and interest rates
has led to the emergence of these kinds of derivatives. Thus external borrowings or
receivables or payments in foreign currencies come within the purview of management
under it. As we all know the exporters and importers incur huge obligations in terms of
foreign currencies and they can guard their interest by buying appropriate products.
The present project attempts to study the basic concepts of Currency futures, different
factors that affect currency price changes, practical considerations and ways of
considering currency future price and analyze different currency derivatives products.
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.
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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.
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 swaps.
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NEED OF THE STUDY
The present project attempts to study the basic concepts of Currency futures, different
factors that affect currency price changes, practical considerations and ways of
considering currency future price and analyze different currency derivatives products.
There are several avenues for retail customers to make investments. Individuals can
use investments instruments in financial markets by using long term goals or short
term trading i.e. shares, options, derivatives, swaps, commodity, real estate, gold,
silver, bonds etc., some of these instruments give an opportunity for people to make
money. Indian financial market is still only 2+ decades old and requires lot of
maturity.
Recently some of trading instruments are available in the market because of
the online facility and many folks are using the technology to make additional money
by trading in futures or cash market along with commodity. There are bound to be
many changes going to happen in the coming years because of the stake taken in BSE
and NSE by foreign exchanges and substantial developments are going to happen
w.r.t technology and access to retail investors.
This project on ‘Currency Derivatives’ has a wide scope and is indeed a great
help in understanding the core concept of trading in various currencies. For better
understanding, various strategies with different situations and actions have been
given. It includes the data collected in the recent years and also the investor’s
approach towards investment in currency markets in the recent years.
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OBJECTIVES OF THE STUDY
The basic idea behind undertaking Currency Derivatives project to gain knowledge
about currency future market
The scope of the study is identified after and during the study is conducted. The study
covers only the currency derivatives market in India. The study is with specific reference
to Rupee and US dollar. The study covers the functioning of currency futures market in
India. The study is mainly relied on secondary data except for the interaction with guide
RESEARCH METHODOLGY
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based on primary data via which the most recent and accurate piece of first hand
information that could be collected from all possible source. Secondary data was used
to support primary data wherever needed.
Data Collection:
1. Primary data
2. Secondary data
Primary Data
Primary data is personally developed data and it gives latest information and
offers much greater accuracy and reliability.
There are various sources for obtaining primary data i.e., Mail survey,
personal interview,
Secondary Data
Secondary data is the published data. It is already available for using and its
saves time. The mail source of secondary data are published market surveys,
government publications advertising research report and internal source such as sales,
sales records orders, customers complaints and other business record etc. the study
has also depended on secondary data to little extent, which is collected through
internal source.
These source were use to obtain information on, Banks and other institutions
history, current issues, policies, procedures etc, wherever required.
Internet
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Magazines
Newspapers
Journals
For the purpose of study, secondary data will be collected. The observational method
is used to collect the primary data. The necessary data is also been collected from official
records and other published sources. The collected data is classified, tabulated, analyzed
and interpreted. Finally, conclusion is draw based on the study and suggestions are
offered to the company for increasing its customer base.
CHAPTERISATION
I Introduction
Chapter 1 will explain the Objectives of the study,
Scope of the study, Need of the study, Methodology of the study and
Limitations of the study
II Chapter II explains the profile of the company
III Chapter III explains the theoretical perspective of the study
IV Data is analyzed and interpreted in chapter IV
V Chapter V includes the Findings, Suggestions and Conclusions.
Annexure lists out the sources of information from where the data is gathered
from (Bibliography)
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LIMITATIONS OF THE STUDY
The analysis was purely based on the secondary data. So, any error in the
secondary data might also affect the study undertaken.
The currency future is new concept and topic related book was not available in
library and market.
The study was carried out for a period of 45 days and due to paucity of time an
in-depth study was not possible.
The derivatives market is a dynamic one. Therefore data related to last few
months was only consider and interpreted.
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CHAPTER II - REVIEW OF LITERATURE
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INTRODUCTION TO FINANCIAL DERIVATIVES
“By far the most significant event in finance during the past decade has been the
extraordinary development and expansion of financial derivatives…These instruments
enhances the ability to differentiate risk and allocate it to those investors most able and
willing to take it- a process that has undoubtedly improved national productivity growth
and standards of livings.”
The past decades has witnessed the multiple growths in the volume of international
trade and business due to the wave of globalization and liberalization all over the world.
As a result, the demand for the international money and financial instruments increased
significantly at the global level. In this respect, changes in the interest rates, exchange
rate and stock market prices at the different financial market have increased the financial
risks to the corporate world. It is therefore, to manage such risks; the new financial
instruments have been developed in the financial markets, which are also popularly
known as financial derivatives.
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A very simple example of derivatives is curd, which is derivative of milk. The
price of curd depends upon the price of milk which in turn depends upon the demand and
supply of milk.
Commodities: Castor seed, Grain, Pepper, Potatoes, etc.
Precious Metal : Gold, Silver
Short Term Debt Securities : Treasury Bills
Interest Rates
Common shares/stock
Stock Index Value : NSE Nifty
Currency : Exchange Rate
Financial derivatives are those assets whose values are determined by the value of
some other assets, called as the underlying. Presently there are Complex varieties of
derivatives already in existence and the markets are innovating newer and newer ones
continuously. For example, various types of financial derivatives based on their different
properties like, plain, simple or straightforward, composite, joint or hybrid, synthetic,
leveraged, mildly leveraged, OTC traded, standardized or organized exchange traded, etc.
are available in the market. Due to complexity in nature, it is very difficult to classify the
financial derivatives, so in the present context, the basic financial derivatives which are
popularly in the market have been described.
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In the simple form, the derivatives can be classified into different categories which
are shown below :
DERIVATIVES
Financials Commodities
Basics Complex
1. Forwards 1. Swaps
2. Futures 2.Exotics (Non STD)
3. Options
4. Warrants and Convertibles
Another way of classifying the financial derivatives is into basic and complex. In
this, forward contracts, futures contracts and option contracts have been included in the
basic derivatives whereas swaps and other complex derivatives are taken into complex
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category because they are built up from either forwards/futures or options contracts, or
both. In fact, such derivatives are effectively derivatives of derivatives.
A major difference between the two is that of counterparty risk—the risk of default
by either party. With the exchange traded derivatives, the risk is controlled by exchanges
through clearing house which act as a contractual intermediary and impose margin
requirement. In contrast, OTC derivatives signify greater vulnerability.
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DERIVATIVES INTRODUCTION IN INDIA
The first step towards introduction of derivatives trading in India was the
promulgation of the Securities Laws (Amendment) Ordinance, 1995, which withdrew the
prohibition on options in securities. SEBI set up a 24 – member committee under the
chairmanship of Dr. L.C. Gupta on November 18, 1996 to develop appropriate regulatory
framework for derivatives trading in India, submitted its report on March 17, 1998. The
committee recommended that the derivatives should be declared as ‘securities’ so that
regulatory framework applicable to trading of ‘securities’ could also govern trading of
derivatives.
To begin with, SEBI approved trading in index futures contracts based on S&P CNX
Nifty and BSE-30 (Sensex) index. The trading in index options commenced in June 2001
and the trading in options on individual securities commenced in July 2001. Futures
contracts on individual stocks were launched in November 2001.
Currency futures were first created at the Chicago Mercantile Exchange (CME) in
1972.The contracts were created under the guidance and leadership of Leo Melamed,
CME Chairman Emeritus. The FX contract capitalized on the U.S. abandonment of the
Bretton Woods 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, increasing the risk of doing business. By creating another
type of market in which futures could be traded, CME currency futures extended the
reach of risk management beyond commodities, which were the main derivative contracts
traded at CME until then. The concept of currency futures at CME was revolutionary, and
gained credibility through endorsement of Nobel-prize-winning economist Milton
Friedman.
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Today, CME offers 41 individual FX futures and 31 options contracts on 19
currencies, all of which trade electronically on the exchange’s CME Globex platform. It
is the 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 (CTAs), proprietary
trading firms; currency overlay managers and individual investors. They trade in order to
transact business, hedge against unfavorable changes in currency rates, or to speculate on
rate fluctuations.
Source: - (NCFM-Currency future Module)
A high degree of volatility of exchange rates creates a fertile ground for foreign
exchange speculators. Their objective is to guarantee a high selling rate of a foreign
currency by obtaining a derivative contract while hoping to buy the currency at a low rate
in the future. Alternatively, they may wish to obtain a foreign currency forward buying
contract, expecting to sell the appreciating currency at a high future rate.
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In either case, they are exposed to the risk of currency fluctuations in the future
betting on the pattern of the spot exchange rate adjustment consistent with their initial
expectations. The most commonly used instrument among the currency derivatives are
currency forward contracts. These are large notional value selling or buying contracts
obtained by exporters, importers, investors and speculators from banks with
denomination normally exceeding 2 million USD. The contracts guarantee the future
conversion rate between two currencies and can be obtained for any customized amount
and any date in the future. They normally do not require a security deposit since their
purchasers are mostly large business firms and investment institutions, although the
banks may require compensating deposit balances or lines of credit. Their transaction
costs are set by spread between bank's buy and sell prices.
Exporters invoicing receivables in foreign currency are the most frequent users of
these contracts. They are willing to protect themselves from the currency depreciation by
locking in the future currency conversion rate at a high level. A similar foreign currency
forward selling contract is obtained by investors in foreign currency denominated bonds
(or other securities) who want to take advantage of higher foreign that domestic interest
rates on government or corporate bonds and the foreign currency forward premium. They
hedge against the foreign currency depreciation below the forward selling rate which
would ruin their return from foreign financial investment. Investment in foreign securities
induced by higher foreign interest rates and accompanied by the forward selling of the
foreign currency income is called a covered interest arbitrage.
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INTRODUCTION TO CURRENCY FUTURE
Currency futures are a linear product, and calculating profits or losses on Currency
Futures will be similar to calculating profits or losses on Index futures. In determining
profits and losses in futures trading, it is essential to know both the contract size (the
number of currency units being traded) and also what is the tick value. A tick is the
minimum trading increment or price differential at which traders are able to enter bids
and offers. Tick values differ for different currency pairs and different underlying. For
e.g. in the case of the USD-INR currency futures contract the tick size shall be 0.25 paise
or 0.0025 Rupees. To demonstrate how a move of one tick affects the price, imagine a
trader buys a contract (USD 1000 being the value of each contract) at Rs.62.2500. One
tick move on this contract will translate to Rs.62.2475 or Rs.62.2525 depending on the
direction of market movement.
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New price: Rs.62. 2475
The value of one tick on each contract is Rupees 2.50. So if a trader buys 5 contracts
and the price moves up by 4 tick, she makes Rupees 50.
During the early 1990s, India embarked on a series of structural reforms in the
foreign exchange market. The exchange rate regime, that was earlier pegged, was
partially floated in March 1992 and fully floated in March 1993. The unification of the
exchange rate was instrumental in developing a market-determined exchange rate of the
rupee and was an important step in the progress towards total current account
convertibility, which was achieved in August 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 concern
from policy-makers and investors. While some flexibility in foreign exchange markets
and exchange rate determination is desirable, excessive volatility can have an adverse
impact on price discovery, export performance, sustainability of current account balance,
and balance sheets. In the context of upgrading Indian foreign exchange market to
international standards, a well- developed foreign exchange derivative market (both OTC
as well as Exchange-traded) is imperative.
With a view to enable entities to manage volatility in the currency market, RBI on
April 20, 2007 issued comprehensive guidelines on the usage of foreign currency
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forwards, swaps and options in the OTC market. At the same time, RBI also set up an
Internal Working Group to explore the advantages of introducing currency futures.
The Report of the Internal Working Group of RBI submitted in April 2008,
recommended the introduction of Exchange Traded Currency Futures. Subsequently, RBI
and SEBI jointly constituted a Standing Technical Committee to analyze the Currency
Forward and Future market around the world and lay down the guidelines to introduce
Exchange Traded Currency Futures in the Indian market. The Committee submitted its
report on May 29, 2008. Further RBI and SEBI also issued circulars in this regard on
August 06, 2008.
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 counterparty credit risk, provide access to all types of market
participants, offer standardized products and provide transparent trading platform. Banks
are also allowed to become members of this segment on the Exchange, thereby providing
them with a new opportunity.
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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.
FORWARDS
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 both the
purchaser and the seller from any risk of loss which might incur due to fluctuations in the
price of underlying asset.
FUTURES
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
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special types of forward contracts in the sense that they are standardized exchange-traded
contracts.
SWAPS
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.
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
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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.
The foreign exchange spot market trades in different currencies for both spot and
forward delivery. Generally they do not have specific location, and mostly take place
primarily by means of telecommunications both within and between countries. It consists
of a network of foreign dealers which are oftenly banks, financial institutions, large
concerns, etc. The large banks usually make markets in different currencies.
In the spot exchange market, the business is transacted throughout the world on a
continual basis. So it is possible to transaction in foreign exchange markets 24 hours a
day. The standard settlement period in this market is 48 hours, i.e., 2 days after the
execution of the transaction.
The spot foreign exchange market is similar to the OTC market for securities. There
is no centralized meeting place and no fixed opening and closing time. Since most of the
business in this market is done by banks, hence, transaction usually do not involve a
physical transfer of currency, rather simply book keeping transfer entry among banks.
Exchange rates are generally determined by demand and supply force in this market.
The purchase and sale of currencies stem partly from the need to finance trade in goods
and services. Another important source of demand and supply arises from the
participation of the central banks which would emanate from a desire to influence the
direction, extent or speed of exchange rate movements.
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FOREIGN EXCHANGE QUOTATIONS
Foreign exchange quotations can be confusing because currencies are quoted in terms
of other currencies. It means exchange rate is relative price.
For example,
EXCHANGE RATE
Direct Indirect
Re/$ = 65 ( or ) Re 1 = $ 0.0153
$1 = Rs. 65
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There are two ways of quoting exchange rates: the direct and indirect. Most countries
use the direct method. In global foreign exchange market, two rates are quoted by the
dealer: one rate for buying (bid rate), and another for selling (ask or offered rate) for a
currency. This is a unique feature of this market.
It should be noted that where the bank sells dollars against rupees, one can say that
rupees against dollar. In order to separate buying and selling rate, a small dash or oblique
line is drawn after the dash.
For example,
In foreign exchange markets, the base currency is the first currency in a currency pair.
The second currency is called as the terms currency. Exchange rates are quoted in per
unit of the base currency. That is the expression Dollar-Rupee, tells you that the Dollar is
being quoted in terms of the Rupee. The Dollar is the base currency and the Rupee is the
terms currency. Exchange rates are constantly changing, which means that the value of
one currency in terms of the other is constantly in flux. Changes in rates are expressed as
strengthening or weakening of one currency vis-à-vis the second currency.
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depreciated. For example, If Dollar – Rupee moved from 63.00 to 63.25. The Dollar has
appreciated and the Rupee has depreciated. And if it moved from 63.0000 to 62.7525 the
Dollar has depreciated and Rupee has appreciated.
With a view to enable entities to manage volatility in the currency market, RBI on
April 20, 2007 issued comprehensive guidelines on the usage of foreign currency
forwards, swaps and options in the OTC market. At the same time, RBI also set up an
Internal Working Group to explore the advantages of introducing currency futures. The
Report of the Internal Working Group of RBI submitted in April 2008, recommended the
introduction of exchange traded currency futures. Exchange traded futures as compared
to OTC forwards serve the same economic purpose, yet differ in fundamental ways. An
individual entering into a forward contract agrees to transact at a forward price on a
future date. On the maturity date, the obligation of the individual equals the forward price
at which the contract was executed. Except on the maturity date, no money changes
hands. On the other hand, in the case of an exchange traded futures contract, mark to
market obligations is settled on a daily basis. Since the profits or losses in the futures
market are collected / paid on a daily basis, the scope for building up of mark to market
losses in the books of various participants gets limited.
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RATIONALE FOR INTRODUCING CURRENCY FUTURE
Futures markets were designed to solve the problems that exist in forward markets. A
futures contract is an agreement between two parties to buy or sell an asset at a certain time
in the future at a certain price. But unlike forward contracts, the futures contracts are
standardized and exchange traded. To facilitate liquidity in the futures contracts, the
exchange specifies certain standard features of the contract. A futures contract is standardized
contract with standard underlying instrument, a standard quantity and quality of the underlying
instrument that can be delivered, (or which can be used for reference purposes in settlement)
and a standard timing of such settlement. A futures contract may be offset prior to maturity by
entering into an equal and opposite transaction.
Location of settlement
The rationale for introducing currency futures in the Indian context has been outlined in
the Report of the Internal Working Group on Currency Futures (Reserve Bank of India,
April 2008) as follows;
The rationale for establishing the currency futures market is manifold. Both residents
and non-residents purchase domestic currency assets. If the exchange rate remains
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unchanged from the time of purchase of the asset to its sale, no gains and losses are made
out of currency exposures.
But if domestic currency depreciates (appreciates) against the foreign currency, the
exposure would result in gain (loss) for residents purchasing foreign assets and loss (gain)
for non residents purchasing domestic assets. In this backdrop, unpredicted movements in
exchange rates expose investors to currency risks.
Currency futures enable them to hedge these risks. Nominal exchange rates are often
random walks with or without drift, while real exchange rates over long run are mean
reverting. As such, it is possible that over a long – run, the incentive to hedge currency risk
may not be large. However, financial planning horizon is much smaller than the long-run,
which is typically inter-generational in the context of exchange rates. As such, there is a
strong need to hedge currency risk and this need has grown manifold with fast growth in
cross-border trade and investments flows.
The argument for hedging currency risks appear to be natural in case of assets, and
applies equally to trade in goods and services, which results in income flows with leads and
lags and get converted into different currencies at the market rates. Empirically, changes in
exchange rate are found to have very low correlations with foreign equity and bond returns.
This in theory should lower portfolio risk. Therefore, sometimes argument is advanced
against the need for hedging currency risks. But there is strong empirical evidence to
suggest that hedging reduces the volatility of returns and indeed considering the episodic
nature of currency returns, there are strong arguments to use instruments to hedge currency
risks.
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Why Use of Currency Derivatives
Presume Entity A is expecting a remittance for USD 1000 on 27 August 16. Wants
to lock in the foreign exchange rate today so that the value of inflow in Indian
rupee terms is safeguarded. The entity can do so by selling one contract of USD -
INR futures since one contract is for USD 1000.
Presume that the current spot rate is Rs.63 and ‘USDINR 27 Aug 16’ contract is
trading at Rs.64.2500. Entity A shall do the following:
Sell one August contract today. The value of the contract is Rs.64,250.
Let us assume the RBI reference rate on August 27, 2016 is Rs.64.00. The entity
shall sell on August 27, 2016, USD 1000 in the spot market and get Rs. 64,000.
The futures contract will settle at Rs.64.00 (final settlement price = RBI
reference rate).
The return from the futures transaction would be Rs. 250, i.e. (Rs. 64,250 – Rs.
64,000). As may be observed, the effective rate for the remittance received by the
entity A is Rs.64.2500 (Rs.44,000 + Rs.250)/1000, while spot rate on that date
was Rs.64.0000. The entity was able to hedge its exposure.
Take the case of a speculator who has a view on the direction of the market. He
would like to trade based on this view. He expects that the USD-INR rate
presently at Rs.60, is to go up in the next two-three months. How can he trade
based on this belief? In case he can buy dollars and hold it, by investing the
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necessary capital, he can profit if say the Rupee depreciates to Rs.63.00.
Assuming he buys USD 10000, it would require an investment of Rs.6,00,000.
If the exchange rate moves as he expected in the next three months, then he shall
make a profit of around Rs.30000. This works out to an annual return of around
20.00%. It may please be noted that the cost of funds invested is not considered
in computing this return.
A speculator can take exactly the same position on the exchange rate by using
futures contracts. Let us see how this works. If the INR- USD is Rs.62 and the
three month futures trade at Rs.62.40. The minimum contract size is USD 1000.
Therefore the speculator may buy 10 contracts. The exposure shall be the same as
above USD 10000. Presumably, the margin may be around Rs.21, 000. Three
months later if the Rupee depreciates to Rs. 62.50 against USD, (on the day of
expiration of the contract), the futures price shall converge to the spot price (Rs.
62.50) and he makes a profit of Rs.1000 on an investment of Rs.21, 000. This works
out to an annual return of 19 percent. Because of the leverage they provide, futures
form an attractive option for speculators.
Let us understand how this works. Typically futures move correspondingly with the
underlying, as long as there is sufficient liquidity in the market. If the underlying
price rises, so will the futures price. If the underlying price falls, so will the futures
price. Now take the case of the trader who expects to see a fall in the price of USD-
INR. He sells one two-month contract of futures on USD say at Rs. 62.20 (each
contact for USD 1000). He pays a small margin on the same. Two months later,
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when the futures contract expires, USD-INR rate let us say is Rs.62. On the day of
expiration, the spot and the futures price converges. He has made a clean profit of 20
paisa per dollar. For the one contract that he sold, this works out to be Rs.2000.
2. Arbitrage:
Arbitrage is the strategy of taking advantage of difference in price of the same or
similar product between two or more markets. That is, arbitrage is striking a
combination of matching deals that capitalize upon the imbalance, the profit being
the difference between the market prices. If the same or similar product is traded in
say two different markets, any entity which has access to both the markets will be
able to identify price differentials, if any. If in one of the markets the product is
trading at higher price, then the entity shall buy the product in the cheaper market
and sell in the costlier market and thus benefit from the price differential without
any additional risk.
One of the methods of arbitrage with regard to USD-INR could be a trading strategy
between forwards and futures market. As we discussed earlier, the futures price and
forward prices are arrived at using the principle of cost of carry. Such of those
entities who can trade both forwards and futures shall be able to identify any mis-
pricing between forwards and futures. If one of them is priced higher, the same shall
be sold while simultaneously buying the other which is priced lower. If the tenor of
both the contracts is same, since both forwards and futures shall be settled at the
same RBI reference rate, the transaction shall result in a risk less profit.
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TRADING PROCESS AND SETTLEMENT PROCESS
Like other future trading, the future currencies are also traded at organized
exchanges. The following diagram shows how operation take place on currency
future market:
TRADER TRADER
( BUYER ) ( SELLER )
Informs
CLEARING
HOUSE
It has been observed that in most futures markets, actual physical delivery of the
underlying assets is very rare and hardly it ranges from 1 percent to 5 percent. Most often
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buyers and sellers offset their original position prior to delivery date by taking an
opposite positions. This is because most of futures contracts in different products are
predominantly speculative instruments. For example, X purchases American Dollar
futures and Y sells it. It leads to two contracts, first, X party and clearing house and
second Y party and clearing house. Assume next day X sells same contract to Z, then X is
out of the picture and the clearing house is seller to Z and buyer from Y, and hence, this
process is goes on.
With a view to enable entities to manage volatility in the currency market, RBI on
April 20, 2007 issued comprehensive guidelines on the usage of foreign currency
forwards, swaps and options in the OTC market. At the same time, RBI also set up an
Internal Working Group to explore the advantages of introducing currency futures. The
Report of the Internal Working Group of RBI submitted in April 2008, recommended the
introduction of exchange traded currency futures. With the expected benefits of exchange
traded currency futures, it was decided in a joint meeting of RBI and SEBI on February
28, 2008, that an RBI-SEBI Standing Technical Committee on Exchange Traded
Currency and Interest Rate Derivatives would be constituted. To begin with, the
Committee would evolve norms and oversee the implementation of Exchange traded
currency futures. The Terms of Reference to the Committee was as under:
2. To suggest the eligibility norms for existing and new Exchanges for Currency
and Interest Rate Futures trading.
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4. To review product design, margin requirements and other risk mitigation
measures on an ongoing basis.
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Delivery More than 90 percent Actual delivery has very less even
settled by actual delivery below one percent
Secured Risk is high being less Highly secured through margin
secured deposit.
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FINANCIAL MARKETS
Finance is the pre-requisite for modern business and financial institutions play a vital
role in the economic system. It is through financial markets and institutions that the
financial system of an economy works. Financial markets refer to the institutional
arrangements for dealing in financial assets and credit instruments of different types such
as currency, cheques, bank deposits, bills, bonds, equities, etc.
Financial market is a broad term describing any marketplace where buyers and sellers
participate in the trade of assets such as equities, bonds, currencies and derivatives. They
are typically defined by having transparent pricing, basic regulations on trading, costs and
fees and market forces determining the prices of securities that trade.
In a nutshell, financial markets are the credit markets catering to the various needs of
the individuals, firms and institutions by facilitating buying and selling of financial
assets, claims and services.
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CLASSIFICATION OF FINANCIAL MARKETS
Financial markets
Money Lenders,
Capital Markets Money Markets
Indigenuos Bankers
Industrial Securities
Call Money Market
Market
Commercial Bill
Primary Market
Market
Government
Securities Market
Long-term loan
market
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Capital Market
The capital market is a market for financial assets which have a long or indefinite
maturity. Generally, it deals with long term securities which have a period of above one
year. In the widest sense, it consists of a series of channels through which the savings of
the community are made available for industrial and commercial enterprises and public
authorities. As a whole, capital market facilitates raising of capital.
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Money Market
Money markets are the markets for short-term, highly liquid debt securities. Money
market securities are generally very safe investments which return relatively low interest
rate that is most appropriate for temporary cash storage or short term time needs. It
consists of a number of sub-markets which collectively constitute the money market
namely call money market, commercial bills market, acceptance market, and Treasury
bill market.
Derivatives Market
The derivatives market is the financial market for derivatives, financial instruments
like futures contracts or options, which are derived from other forms of assets. A
derivative is a security whose price is dependent upon or derived from one or more
underlying assets. The derivative itself is merely a contract between two or more parties.
Its value is determined by fluctuations in the underlying asset. The most common
underlying assets include stocks, bonds, commodities, currencies, interest rates and
market indexes. The important financial derivatives are the following:
Forwards: Forwards are the oldest of all the derivatives. A forward contract
refers to an agreement between two parties to exchange an agreed quantity of an asset for
cash at a certain date in future at a predetermined price specified in that agreement. The
promised asset may be currency, commodity, instrument etc.
Futures: Future contract is very similar to a forward contract in all respects
excepting the fact that it is completely a standardized one. It is nothing but a standardized
forward contract which is legally enforceable and always traded on an organized
exchange.
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want the stock to go up. Put options give the option to sell at a certain price, so the buyer
would want the stock to go down.
It is a market in which participants are able to buy, sell, exchange and speculate on
currencies. Foreign exchange markets are made up of banks, commercial companies,
central banks, investment management firms, hedge funds, and retail forex brokers and
investors. The forex market is considered to be the largest financial market in the world.
It is a worldwide decentralized over-the-counter financial market for the trading of
currencies. Because the currency markets are large and liquid, they are believed to be the
most efficient financial markets. It is important to realize that the foreign exchange
market is not a single exchange, but is constructed of a global network of computers that
connects participants from all parts of the world.
Commodities Market
It is a physical or virtual marketplace for buying, selling and trading raw or primary
products. For investors' purposes there are currently about 50 major commodity markets
worldwide that facilitate investment trade in nearly 100 primary
commodities. Commodities are split into two types: hard and soft commodities. Hard
commodities are typically natural resources that must be mined or extracted (gold,
rubber, oil, etc.), whereas soft commodities are agricultural products or livestock (corn,
wheat, coffee, sugar, soybeans, pork, etc.)
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CHAPTER IV
COMPANY PROFILE
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The IIFL (India Infoline) group, comprising the holding company, India Infoline Ltd
and its subsidiaries, is one of the leading players in the Indian financial services
space. IIFL offers advice and execution platform for the entire range of financial
services covering products ranging from Equities and derivatives, Commodities,
Wealth management, Asset management, Insurance, Fixed deposits, Loans,
Investment Banking, Gold bonds and other small savings instruments. IIFL recently
received an in-principle approval for Securities Trading and Clearing memberships
from Singapore Exchange (SGX) paving the way for IIFL to become the first Indian
brokerage to get a membership of the SGX. IIFL also received membership of the
Colombo Stock Exchange becoming the first foreign broker to enter Sri Lanka. IIFL
owns and manages the website, www.indiainfoline.com, which is one of India’s
leading online destinations for personal finance, stock markets, economy and
business.
IIFL has been awarded the ‘Best Broker, India’ by Finance Asia and the ‘Most
improved brokerage, India’ in the Asia Money polls. India Infoline was also adjudged
as ‘Fastest Growing Equity Broking House - Large firms’ by Dun & Bradstreet. A
forerunner in the field of equity research, IIFL’s research is acknowledged by none
other than Forbes as ‘Best of the Web’ and ‘…a must read for investors in Asia’.
The company’s research is available not just over the Internet but also on
international wire services like Bloomberg, Thomson First Call and Internet
Securities where it is amongst one of the most read Indian brokers.
A network of over 2,500 business locations spread over more than 500 cities and
towns across India facilitates the smooth acquisition and servicing of a large customer
base. All our offices are connected with the corporate office in Mumbai with cutting
edge networking technology. The group caters to a customer base of about a million
customers, over a variety of mediums viz. online, over the phone and at our branches.
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VISION
The company’s vision is to be the most respected company in the financial services
space.
COMPANY STRUCTURE
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India Infoline Limited
India Infoline Limited is listed on both the leading stock exchanges in India, viz. the
Stock Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also
a member of both the exchanges. It is engaged in the businesses of Equities broking,
Wealth Advisory Services and Portfolio Management Services. It offers broking
services in the Cash and Derivatives segments of the NSE as well as the Cash
segment of the BSE. It is registered with NSDL as well as CDSL as a depository
participant, providing a one-stop solution for clients trading in the equities market. It
has recently launched its Investment banking and Institutional Broking business.
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India Infoline Commodities Limited.
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India Infoline Investment Services Limited
Consolidated shareholdings of all the subsidiary companies engaged in loans and
financing activities under one subsidiary. Recently, Orient Global, a Singapore-based
investment institution invested USD 76.7 million for a 22.5% stake in India Infoline
Investment Services. This will help focused expansion and capital raising in the said
subsidiaries for various lending businesses like loans against securities, SME
financing, distribution of retail loan products, consumer finance business and housing
finance business. India Infoline Investment Services Private Limited consists of the
following step-down subsidiaries.
India Infoline Distribution Company Limited (distribution of retail loan
products)
Moneyline Credit Limited (consumer finance)
India Infoline Housing Finance Limited (housing finance)
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IIFL MANAGEMENT
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THE BOARD OF DIRECTORS
Apart from Nirmal Jain and R Venkataraman, the Board of Directors of India Infoline
Ltd. comprises:
Mr. A.K. Purvar – Board member since March 2008 – completed his
Masters degree in commerce from Allahabad University in 1966 and a
diploma in Business Administration in 1967.
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PRODUCTS & SERVICES
Equities
India Infoline provided the prospect of researched investing to its clients, which was
hitherto restricted only to the institutions. Research for the retail investor did not exist
prior to India Infoline. India Infoline leveraged technology to bring the convenience
of trading to the investor’s location of preference (residence or office) through
computerized access. India Infoline made it possible for clients to view transaction
costs and ledger updates in real time. The Company is among the few financial
intermediaries in India to offer a complement of online and offline broking. The
Companies network of branches also allows customers to place orders on phone or
visit our branches for trading.
Commodities
India Infoline’s extension into commodities trading reconciles its strategic intent to
emerge as a one stop solutions financial intermediary. Its experience in securities
broking has empowered it with requisite skills and technologies. The Companies
commodities business provides a contra-cyclical alternative to equities broking. The
Company was among the first to offer the facility of commodities trading in India’s
young commodities market (the MCX commenced operations in 2003). Average
monthly turnover on the commodity exchanges increased from Rs 0.34 bn to Rs
20.02 bn.
Insurance
An entry into this segment helped complete the client's product basket; concurrently,
it graduated the Company into a one stop retail financial solutions provider. To ensure
maximum reach to customers across India, it has employed a multi pronged approach
and reaches out to customers via our Network, Direct and Affiliate channels. India
Infoline was the first corporate in India to get the agency license in early 2001.
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Invest Online
India Infoline has made investing in Mutual funds and primary market so effortless.
Only registration is needed. No paperwork no queues and No registration
charges. India Infoline offers a host of mutual fund choices under one roof,
backed by in-depth research and advice from research house and tools configured
as investor friendly.
Wealth Management
Asset Management
India Infoline is a leading pan-India mutual fund distribution house associated with
leading asset management companies. It operates primarily in the retail segment
leveraging its existing distribution network to reach prospective clients. It has
received the in-principle approval to set up a mutual fund.
Portfolio Management
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Newsletters
As a subscriber to the Daily Market Strategy, client’s get research reports of India
Infoline research team on a priority basis. The Indiainfoline Weekly Newsletter is
the flashback for the week gone by. A weekly outlook coupled with the best of
the web stories from Indiainfoline and links to important investment ideas,
Leader Speak and features is delivered in the client’s inbox every Friday evening.
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CHAPTER V
DATA ANALYSIS
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STRATEGIES USING CURRENCY FUTURES
Hedging:
Hedging means taking a position in the future market that is opposite to a position in
the physical market with a view to reduce or limit risk associated with unpredictable
changes in exchange rate.
Long hedge:
• Underlying position: short in the foreign currency
• Hedging position: long in currency futures
Short hedge:
• Underlying position: long in the foreign currency
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• Hedging position: short in currency futures
Equal hedge: In an Equal Hedge, the total value of the futures contracts involved is
the same as the value of the spot market position. As an example, a US importer who
has an exposure of £ 1 million will go long on 16 contracts assuming a face value of
£62,500 per contract.
Optimal Hedge: An optimal hedge is one where the changes in the spot prices are
negatively correlated with the changes in the futures prices and perfectly offset each
other. This can generally be described as an equal hedge, except when the spot-future
basis relationship changes. An Optimal Hedge is a hedging strategy which yields the
highest level of utility to the hedger.
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Illustration 1: An oil refiner exporter having receivables of USD 80,000 on 30th
Nov is exposed to the risk of Dollar depreciation.
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In case the exporter didn’t hedge his receivables and kept his position open then the
consequences would be
Thus if the exporter didn’t hedge his position, he would gain in case of dollar
appreciation but would incur more losses in case of rupee appreciation. Hence, it is
always advisable to hedge the foreign exchange risks.
The exporters are faced with risk of Rupee appreciation and importers are
faced with that of Dollar appreciation. So they hedge their risk by taking the opposite
position in the futures market and restrict their losses.
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SPECULATION IN FUTURES MARKETS
Speculators play a vital role in the futures markets. Futures are designed primarily to
assist hedgers in managing their exposure to price risk; however, this would not be
possible without the participation of speculators. Speculators, or traders, assume the
price risk that hedgers attempt to lay off in the markets. In other words, hedgers often
depend on speculators to take the other side of their trades (i.e. act as counter party)
and to add depth and liquidity to the markets that are vital for the functioning of a
futures market. The speculators therefore have a big hand in making the market.
Speculation is not similar to manipulation. A manipulator tries to push prices in the
reverse direction of the market equilibrium while the speculator forecasts the
movement in prices and this effort eventually brings the prices closer to the market
equilibrium. If the speculators do not adhere to the relevant fundamental factors of the
spot market, they would not survive since their correlation with the underlying spot
market would be nonexistent.
Based on his forecast, a speculator would like to make gains by taking long /short
positions in derivatives
Long position in a currency futures contract without any exposure in the cash market
is called a speculative position. Long position in futures for speculative purpose
means buying futures contract in anticipation of strengthening of the exchange rate
(which actually means buy the base currency (USD) and sell the terms currency
(INR) and you want the base currency to raise in value and then you would sell it
back at a higher price). If the exchange rate strengthens before the expiry of the
contract then the trader makes a profit on squaring off the position, and if the
exchange rate weakens then the trader makes a loss.
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USD/INR 29th Sept Contract : 63.90
Short position in a currency futures contract without any exposure in the cash market
is called a speculative transaction. Short position in futures for speculative purposes
means selling a futures contract in anticipation of decline in the exchange rate (which
actually means sell the base currency (USD) and buy the terms currency (INR) and
you want the base currency to fall in value and then you would buy it back at a lower
price). If the exchange rate weakens before the expiry of the contract, then the trader
makes a profit on squaring off the position, and if the exchange rate strengthens then
the trader makes loss.
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ARBITRAGE
Illustration 2 – Let’s say the spot rate for USD/INR is quoted @ Rs. 64.325 and one
month forward is quoted at 3 paisa premium to spot @ 64.3550 while at the same
time one month currency futures is trading @ Rs. 64.4625. An active arbitrager
realizes that there is an arbitrage opportunity as the one month futures price is more
than the one month forward price. He implements the arbitrage trade where he;
Observation – The discrepancies in the prices between the two markets have given
an opportunity to implement a lower risk arbitrage. As more and more market players
will realize this opportunity, they may also implement the arbitrage strategy and in the
process will enable market to come to a level of equilibrium.
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TRADING SPREADS USING CURRENCY FUTURES
Intra-Currency Pair Spread: An intra-currency pair spread consists of one long futures
and one short futures contract. Both have the same underlying but different
maturities. Inter-Currency Pair Spread: An inter–currency pair spread is a long-short
position in futures on different underlying currency pairs. Both typically have the
same maturity.
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TRADING IN CURRENCY FUTURES
SYMBOL USDINR
LAST TRADING DAY 2 Working days prior to the last business day of
the expiry month at 12 noon
CALENDAR SPREAD Rs. 250/- per contract for all months of spread
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UNIT
UNDERLYING
TICK SIZE
A tick is the minimum trading increment or price differential at which traders are able
to enter bids and offers. Tick values differ for different currency pairs and different
underlying. In the case of the USD-INR currency futures contract the tick size is 0.25
paise or 0.0025 Rupees.
To demonstrate how a move of one tick affects the price, imagine a trader buys 1
currency future contract at Rs.62.2500. One tick move on this contract will translate
to Rs.62.2475 or Rs.62.2525 depending on the direction of market movement.
The value of one tick on each contract is Rupees 2.50. (Tick size = 0.0025 rupees *
1000) So if a trader buys 5 contracts and the price moves up by 4 tick, she makes
Rupees 50.
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CONTRACT TRADING CYCLE:
The contract expiry is fixed in case of currency futures. The exchange provides
contracts with 12 month trading cycle. There are in all 12 currency futures contract
provided by the exchange, with expiry in different months.
E.g. One 1st Jan 2017, a trader can enter into any of the following 12 contracts:-
The longer the duration of the contract, higher the premium is charged on the
contracts.
The last trading day for the futures contract is 2 working days prior to the last
business day of the expiry month of the contract. Fro e.g. if the contract expires in
June 2016, the last trading day would be 2 working days prior to 30 June, Tuesday
(last business day). Hence the last trading day would be 26 th June 2016, Friday as
Saturday and Sunday are not working days.
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CALENDAR SPREAD
An intra-currency pair spread consists of one long futures and one short futures
contract. Both have the same underlying but different maturities.
Let’s say after 30 days the spread widens as per his expectation and now the October
futures contract is trading at 66.90 and December futures contract is trading at 67.25,
the spread now stands at 0.35. He decides to square off his position making a gain of
Rs. 150 (0.35 – 0.20 = 0.15 x $1000) per contract.
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SETTLEMENT
Currency futures contracts have two types of settlements, the MTM settlement which
happens on a continuous basis at the end of each day, and the final settlement which
happens on the last trading day of the futures contract.
All futures contracts for each member are marked to market to the daily settlement
price of the relevant futures contract at the end of each day. The profits/losses are
computed as the difference between:
1. The trade price and the day's settlement price for contracts executed during the day
but not squared up.
2. The previous day's settlement price and the current day's settlement price for
brought forward contracts.
3. The buy price and the sell price for contracts executed during the day and squared
up.
After completion of daily settlement computation, all the open positions are reset to
the daily settlement price. Such positions become the open positions for the next day.
On the last trading day of the futures contracts, after the close of trading hours, the
Clearing Corporation marks all positions of a CM to the final settlement price and the
resulting profit/loss is settled in cash. Final settlement loss/profit amount is debited/
credited to the relevant CM's clearing bank account on T+2 working day following
last trading day of the contract (Contract expiry Day).
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SETTLEMENT PRICE
Daily settlement price on a trading day is the closing price of the respective futures
contracts on such day. The closing price for a futures contract is currently calculated
as the last half an hour weighted average price of the contract in the Currency
Derivatives Segment of the Exchange. The final settlement price is the RBI reference
rate for the last trading day of the futures contract. All open positions shall be marked
to market on the final settlement price. Such marked to market profit / loss shall be
paid to / received from clearing members.
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DEALING OF CURRENCY FUTURES ORDER
TYPES OF ORDERS
The system allows the trading members to enter orders with various conditions
attached to them as per their requirements. These conditions are broadly divided into
the following categories:
• Time conditions
• Price conditions
• Other conditions
Several combinations of the above are allowed thereby providing enormous flexibility
to the users. The order types and conditions are summarized below.
Time conditions
o Day order: A day order, as the name suggests is an order which is valid for
the day on which it is entered. If the order is not executed during the day,
the system cancels the order automatically at the end of the day.
o Immediate or Cancel (IOC): An IOC order allows the user to buy or sell a
contract as soon as the order is released into the system, failing which the
order is cancelled from the system. Partial match is possible for the order,
and the unmatched portion of the order is cancelled immediately.
Price condition
o Market price: Market orders are orders for which no price is specified at
the time the order is entered (i.e. price is market price). For such orders, the
trading system determines the price.
o Limit price: An order to a broker to buy a specified quantity of a security
at or below a specified price or to sell it at or above a specified price (called
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the limit price). This ensures that a person will never pay more for the
futures contract than whatever price is set as his/her limit. It is also the
price of orders after triggering from stop-loss book.
o Stop-loss: This facility allows the user to release an order into the system,
after the market price of the security reaches or crosses a threshold price
e.g. if for stop-loss buy order, the trigger is Rs. 62.0025, the limit price is
Rs. 62.2575 , then this order is released into the system once the market
price reaches or exceeds Rs. 62.0025. This order is added to the regular lot
book with time of triggering as the time stamp, as a limit order of Rs.
62.2575. Thus, for the stop loss buy order, the trigger price has to be less
than the limit price and for the stop-loss sell order; the trigger price has to
be greater than the limit price.
Other conditions
o Pro: Pro means that the orders are entered on the trading member's own
account.
o Cli: Cli means that the trading member enters the orders on behalf of a
client.
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The USD/INR pair is influenced by various economic, political, health & social
issues of the country as well as globally.
o GDP
The GDP growth rate also appreciates rupee thereby is negatively
correlated with the USD/INR pair. Thus if the GDP rate of India rises
then the USD/INR depreciates.
o Inflation
The Inflation rate has positive correlation with USD/INR pair. The
inflation depreciates the value of rupee and thereby makes Dollar
stronger vis-à-vis rupee.
o Export – Import
The exports – imports of the country also determines the value of its
home currency. If the balance of trade of India is positive then the
value of rupee appreciates and if it is negative, indicating excess of
imports over exports, the rupee depreciates.
o Other factors
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Interest rate modifications – Negative correlation.
Sales, production and consumption indices.
RBI intervention like change in money supply, buying or
selling of rupee etc.
Political Factors
o Elections
The elections have a very strong effect on the currency of the country.
The elections and the formation of new government have strong and
long – lasting effects on the currency pair. The correlation between the
two can be well explained from the recent election results.
o Budget
The financial budget or the anticipation of the budget has very strong
effects over the markets as well as the USD/INR pair. The effect can
be clearly seen in the recent positive movements in the markets and the
downside movement in USD/INR pair in anticipation of a very big
good budget.
o Statements by the Finance Minister or Governor
The various press statements given by the Finance Minister about the
proposed reforms or future projects also effects the movement of the
currency pair. The statements by the Governor in context to the RBI
policies or general scenario have strong effects over the USD/INR pair.
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Health and Social Factors
o The outbreak of any disease affects the economy of the country and
thereby devalues it home currency. But such effects are very temporary
and stay over for a very short span such as couple of days and then it
slides off.
o The anti social activities like riots, terrorist attacks etc also has a
negative effect on the rupee and appreciates USD/INR pair. Moreover,
a series of terrorist attack would have adverse effect on rupee value as
it would discourage FII and FDI flows as well as reduce tourism
revenue.
Economic Factors
o Stock Markets
The movement of the stock markets of United States indices i.e.
NASDAQ and Dow Jones has a positive correlation on the USD/INR
pair. The movements of the stock markets of other countries like
Nikkei (Japan) Hang Sang (Hong Kong), FTSE (United Kingdom)
also effects the USD/INR pair indirectly as they effect the stock
markets of India and USA directly which affects the USD/INR pair
movement.
o GDP
The GDP growth rate of USA has is positively correlated with the
USD/INR pair. Thus if the GDP rate of USA rises then the USD/INR
appreciates. The GDP rate of other important countries like UK,
China, and Japan etc also affects the pair indirectly.
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o Movement of other Currencies
The movement of other currency pair has a major effect on the
USD/INR pair. For proper understanding we can take the currency pair
of EURO/USD. If that currency pair appreciates, the USD lowers
down to EURO and thereby the depreciated value of USD also
depreciates the USD/INR pair. Same is the case with different pairs
like USD/GBP, USD/JPY etc.
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o Other Indicators
Jobless Claims / Unemployment data of USA or UK.
Producer’s Index of the important countries.
Consumers’ confidence level of the USA.
Changes in Money supply in USA as well as other major
countries.
Retail Sales, Wholesale sales indices etc of USA and other
major countries.
Bankruptcy of Big Giants (Banks, Public Companies etc)
Currency Rating and future outlook
IMF and World Bank assessment about various countries’
growth and world growth
o Safe Currency
All the above correlation stands true most of the times. But Dollar &
Yen are considered as safe currencies. Thus, when the global economy
faces downturn recession, the currencies appreciate in their value to
hold on the state of the global economy. This is one of the major
reasons that Dollar had appreciated so much during the initial stage of
the recession. As the global scenario starts getting better, and the good
figures start coming out from the parts of the world, both the
currencies are released and brought back to their original levels. Thus,
in recent times when the various data for GDP, Jobless claim etc show
positive signs for the economy, the USD weakens in order to reach its
original level.
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CHAPTER VI
FINDINGS
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The currency derivatives segment on the NSE and MCX has witnessed
consistent growth both in traded value and open interest since its inception.
This market is being driven by its ability to meet the respective needs of
participants. For example, it is used by importers/exporters to hedge their
payables/receivables; foreign institutional investors (FIIs) and NRIs use it to
hedge their investments in India; borrowers find it an effective way to hedge
their foreign currency loans and resident Indians find it an effective tool to
hedge their investments offshore.
However, it is too early to see a major shift in activity from OTC to exchange-
traded market as it has created a niche for itself and it would perhaps take
some time for the currency futures market to create one for itself.
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SUGGESTIONS
Anybody can easily master forex trading, but most traders lose not because they can
not win, but because they do not work on the development of right areas and here are
some steps to enjoy successful currency trading.
Similar to all areas in your life, you should take charge of your financial life and don’t
rely on a mentor, robot or any forex guru believing that they can make you a
millionaire overnight. Stay alone and stand for yourself as when it comes to forex
trading, you should not work in a group or in a crowd. The statistics proves this. Now
you should get the right information develop your own forex strategy. If you have a
strong desire to reach success and are ready to work, you are on the right path.
Bear in mind that the best systems are simple, make sure that yours is as well.
If it is simple, it can be more reliable and tougher with fewer elements to break than a
complex one. If you can stand on a long term trend following and breakout approach,
it is an everlasting way to gain wins and it can be performed in just 30 minutes a day.
Get away from the mindset of acquiring smart methods or market timing being as the
main key to success. A sound money management is what you really need.
To get wins you should have to play a good defence first. There is one famous
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expression of one trader. It says: “If you take of the losses the profits will look after
themselves”. To win, you should bet and you can’t bet without chips! This poker
saying can also be applicable to forex.
This is the milestone of success. You can have the most effective method, but unless
you can use it with discipline and patience, going through losing times, you will not
win. It is easy, though most traders can’t undergo the losing periods, its difficult when
the market takes your money. Bear in mind that to get wins in forex, you should lose,
this is a part of the process. If you apply a sound method with determination and
discipline, you can start making large wins.
It is obligatory to read unbiased reviews to make a decision “is forex trading a scam?”
before you invest money into trading activity. This is important, don’t forget that we
are living in the world where knowledge quickly enhances the quality of our life.
Due to this if you are properly armed with the knowledge in your topic you can be
sure that you will in any case find the way out from any bad situation. So, please
make sure to track this web site on a regular basis or – the least time consuming way
of doing it – sign up to its RSS. Thus you will have a direct shortcut to the latest info
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updates here. Blogs can be helpful, you just need to know how to use blogging for the
currency exchange market.
CONCLUSIONS
By far the most significant event in finance during the past decade has been the
extraordinary development and expansion of financial derivatives. These instruments
enhances the ability to differentiate risk and allocate it to those investors most able
and willing to take it- a process that has undoubtedly improved national productivity
growth and standards of livings.
The currency future gives the safe and standardized contract to its investors and
individuals who are aware about the forex market or predict the movement of
exchange rate so they will get the right platform for the trading in currency future.
Because of exchange traded future contract and its standardized nature gives counter
party risk minimized.
Initially only NSE had the permission but now BSE and MCX has also started
currency future. It is shows that how currency future covers ground in the compare of
other available derivatives instruments. Not only big businessmen and exporter and
importers use this but individual who are interested and having knowledge about
forex market they can also invest in currency future.
Currency Derivatives
BIBLIOGRAPHY
Websites:
www.sebi.gov.in
www.rbi.org.in
www.frost.com
www.wikipedia.com
www.economywatch.com
www.bseindia.com
www.nseindia.com
Currency Derivatives