1.

1 Introduction :
Globalisation and integration of financial markets, coupled with progressive
increase of cross border flow of capital have transformed the dynamics of Indian
financial markets. This has increased the need for dynamic currency risk
management. In today‟s globalised and integrated business environment, many
entities irrespective of its business are impacted by currency risk either directly or
indirectly. The steady rise in India‟s foreign trade along with liberalization in
foreign exchange regime has led to large inflow of foreign currency into the system
in the form of FDI and FII‟s investments. INR has seen huge fluctuations of around
10% in its price against USD in a span of less than one year.

In order to provide a liquid, transparent and vibrant market for foreign exchange
rate risk management, Securities & Exchange Board of India (SEBI) and Reserve
Bank of India (RBI) have allowed trading in currency futures for the first time in
India based on the USD-INR exchange rate. This provided Indian corporate
another tool for hedging their exchange risk effectively and flexibility at
transparent rates on an electronic trading platform. The primary purpose of
exchange traded currency future derivatives is to provide a mechanism for price
risk management and consequently provide price curve of expected future prices to
enable the industry to protect its foreign currency exposure. The need for such
instrument increases with increase of foreign exchange volatility.

After its inception, currency future is coming up with good signs. It is still in its
nascent stage, still providing a better option for investment in comparison to other
future and options including gold. Gold are perceived as inflation hedges. India is
one of the largest importer of Gold. If India wants to use Gold, they have to buy it.
And they have to pay for it with the currency of the country that produces it. In this
India have to sell rupee and then buy dollar (as example) to pay for the Gold. From
this dollar gets double boost. A huge amount of dollar are bought in the market for
this particular transaction.
Although U.S is facing economic crisis, still dollar is looking strong against rupee
(graph 1). In expectation of improvement in future, investors are inclining toward
currency futures. It has been observed that inter-nationally, many investors use
futures rather than the cash market to manage the duration of their portfolio or
asset allocation because of low upfront payments and quick transactions.

1
As per the latest Reserve Bank of India (RBI) data, non-resident Indians (NRIs)
sent $28 billion in remittances in 2007-08. Strengthening of Indian rupee against
other currencies runs the risk of reducing the real value of the money sent back
home by NRIs and people of Indian origin abroad --whether they are from the
West Asia, far east countries, the US,UK or Canada. Here the currency futures
really help investors. As they can enter into future contract of currency future
derivatives. They can contract on future rate of currency. Since futures derivative
are linked to the underlying cash market, its availability improves trading volume
in the cash market. To facilitate liquidity in the futures contracts, the exchange
specifies certain standard features of the contract.

Since the commencement of trading of currency futures in all the three exchanges,
the value of the trade has gone up steadily from Rs. 17,429 crores in October 2008
to Rs. 45,803 crores in December 2008.This trend is continuously increasing with
increasing number of contracts (graph 2).
Since futures derivative are linked to the underlying cash market, its availability
improves trading volume in the cash market. Gold are perceived as inflation
hedges. If India wants to use Gold, they have to buy it. And they have to pay for it
with the currency of the country that produces it. In this India have to sell rupee
and then buy dollar (as example) to pay for the Gold. From this dollar gets double
boost. A huge amount of dollar are bought in the market for this particular
transaction. Here the currency futures really help investors. They can enter into
future contract of currency. They can contract on future rate of currency.

The National Stock Exchange (NSE) will become the first exchange in the country
to introduce currency derivatives on 29th August 2008. Currency futures trading
currently is being offered by MCX-SX, NSE and BSE. Since the commencement
of trading of currency futures in all the three exchanges, the value of the trade has
gone up steadily from Rs. 17,429 crores in October 2008 to Rs. 45,803 crores in
December 2008. Without financial futures, investors would have only one trading
location to alter portfolio when they get new information that is expected to
influence the value of assets- the cash market. Future provide another market that
investors can use to alter their risk exposure to an asset when new information is
acquired.

2
United Stock Exchange has received in-principal approval from the market
regulator for commencing contracts in currency derivatives. The United Stock
Exchange of India (USE), promoted by state-run MMTC and brokerage firm
Jaypee Capital, will start trading in currency derivatives from July this year. “USE
will launch currency futures in July 2009.

1.2 Rationale Behind Launching ETCF :

The introduction of exchange-traded currency futures (ETCF) on the National
Stock Exchange (NSE) from August 29 is a reflection of two important points.

First, it is evidence of the seriousness of efforts demonstrated by players across the

board to sustain investors' interest in the markets.

The currency futures segment is meant to provide non-institutional market

participants a means to hedge their currency exposures in a transparent and price
efficient manner, the size of future contract is not unduly large. In currency future,
the price discovery are such that the individual and SME‟s are able to trade on
same price as are available to large customers. While in OTC market, if price
discovery is done for a large size lot, the individual and SME‟s may not be able to
capture the fineness of that rate for their small size lots. This is the one of demerit
of the OTC markets. Currency future is a very good alternative to the present over-
the-counter hedging mechanism, which requires a lot of documentation and
sanctions.

Second, an investor can take advantage of currency futures as an asset class.

Thirdly, by virtue of scale of participation and its cost structures, the transaction
cost in futures is usually much lesser than that of OTC alternative.

Fourthly, compared to OTC, futures offer more price transparency, fully

eliminating the counterparty risks and reach out to a larger section of population.

After its inception, currency future is coming up with good signs. It is still in its
nascent stage, still providing a better option for investment in comparison to other
future and options including gold. Although U.S is facing economic crisis, still
dollar is looking strong against rupee. In expectation of improvement in future,
investors are inclining toward currency futures. It has been observed that inter-

3
nationally, many investors use futures rather than the cash market to manage the
duration of their portfolio or asset allocation because of low upfront payments and
quick transactions.

1.3 Objective of the Project:

The basic idea behind undertaking Currency Derivatives project is to gain
knowledge about currency future market. To study the basic concept of Currency
future.

To understand the investors response for currency future with other currency
derivatives.
To study the hedging, speculation and arbitrage in Currency Future.
To understand the practical considerations and ways of considering currency
future price.

1.4 Methodology :
The research is basically a descriptive research. In this project Descriptive research
methodologies is used. The research methodology will be used for gathering
details of different aspects of currency future derivative in India.

Primary Data will be collected from clients through structured questionnaire. The
questionnaire will comprise of open ended and open ended questions. Such
question will be sub-divided into three sub-types which are Free Response,
Probing and Projective.

Secondary data will be collected from articles in journals and magazines. The
database of SEBI, RBI, NSE and BSE will be taken. As this topic is very new,
article from other website links is required. Report submitted by RBI/SEBI
committee is used.

1.5 Limitation of the Study :

The analysis will be purely based on the primary and secondary data. The primary
data comprise only of feedback collected from retail investors. It will not include
institutional investors. The currency future is a new concept, the study is based on
information from different articles.

4
2.1 ORIGIN OF FOREX MARKET

The foreign exchange market is where currency trading takes place. It is where
banks and other official institution facilitate the buying and selling of foreign
currencies. The foreign exchange market that we see today started evolving during
the 1970s when world over countries gradually switched to floating exchange rate
from fixed exchange rate. The purpose of foreign exchange market is to facilitate
trade and investment. It is the largest and most liquid financial market in the world.
The origin of the forex market development in India could be traced back to 1978
when banks were permitted to undertake intra-day trades. However, the market
witnessed major activity only in the 1990‟s with the floating of the currency in
March 1993, following the recommendations of the Report of the High Level
Committee on Balance of Payments. Exchange traded foreign exchange future
contracts were introduced in 1972 at the Chicago Mercantile Exchange and are
actively traded relative to most other future contracts. The global turnover is
around USD 4000 billion per day. It is 24hrs market. The main currencies traded in
forex market are USD, EUR, JPY.
The foreign exchange market is unique because of:
Its trading volumes
The extreme liquidity of the market
Its geographical dispersion
Its long trading hours
Use of leverage
In terms of convertibility, there are mainly three kind of currencies. The first is
fully convertible in that it can be freely converted into other currencies, the second
kind is only partially convertible for non-residents, while the third kind is not
convertible at all. The last holds true for currencies of a large number of
developing countries. All the developed countries already have fully convertible
capital accounts. Most emerging countries do not permit foreign exchange
derivative products on their exchange in view of prevalent control on the capital
accounts. However, a few select emerging countries like India, Korea, South

5
Africa, have successfully experimented with the currency future exchanges, despite
having control on the capital account.

2.2 OVERVIEW OF THE FOREIGN EXCHANGE MARKET

IN INDIA :

The foreign exchange market has acquired a distinct vibrancy as evident from the
range of products, participation, liquidity and turnover. According to the Bank for
International Settlements (2007), India‟s share in global transactions has increased
sharply in the past three years from about 0.3% to the current 0.7%. Currently,
India is a USD 34 billion OTC market, where all the major currencies like USD,
EURO, YEN, Pound, Swiss Franc etc. are traded. It has been a long felt need to
have a transparent currency derivatives platform in the country. With increasing
globalisation and robust performance of the economy, businesses in India have
been rapidly integrating with the world, especially in the past few years, forcing
them to face the additional risk of exchange rate fluctuations besides other risks.
The Indian foreign exchange market has grown significantly in the several years.
The daily average turnover has gone up from about USD 5 billion per day in 1998
to more than USD 50 billion per day in 2008.The spot foreign exchange market
remains the most important segment but the derivative segment has also grown. In
the derivative market foreign exchange swaps account for the largest share of the
total turnover of derivative in India followed by forward and options.
Cash settled exchange traded currency futures have made foreign currency a
separate asset class that can be traded without any underlying need or exposure and
on a leveraged basis on the recognized stock exchanges with the credit risks being
assumed by the central counterparty.
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. 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
policymakers and investors. While some flexibility in foreign exchange markets
and exchange rate determination is desirable, excessive volatility can have an

6
adverse impact on price discovery, export performance, sustainabilit y 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 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.Later on, trading in
exchange traded currency futures commenced on August 29, 2008 on the National
Stock Exchange.
The need for widening hedging options arose as the OTC markets were largely
opaque and accessible only to a few players. However, currency derivatives differ
from OTC as they help improve the efficiency of price discovery, attracting
heterogeneous participants. So, the success of a futures platform is determined by
the liquidity it can achieve that will make the process of price discovery more
efficient.
The foreign exchange markets of a country provide the mechanism of exchanging
different currencies with one and another, and thus, facilitating transfer of
purchasing power from one country to another. With the multiple growths of
international trade and finance all over the world, trading in foreign currencies has
grown tremendously over the past several decades. Since the exchange rates are
continuously changing, so the firms are exposed to the risk of exchange rate
movements. As a result, the assets or liability or cash flows of a firm which are
denominated in foreign currencies undergo a change in value over a period of time
due to variation in exchange rates. This variability in the value of assets or
liabilities or cash flows is referred to exchange rate risk. Since the fixed exchange

7
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.

2.3 Foreign exchange rate :

It is defined as the conversion rate of one currencies into another. This rate
depends on the local demand for foreign currencies and their local supply,
country‟s trade balance, strength of its economy, and other such factors. Exchange
rates are constantly changing, which means that the value of one currency in terms
of the other is constantly in flux. Changes in the rates are expressed as
strengthening or weakening of one currency over the second currency. Changes are
also expressed as appreciation or depreciation of one currency in terms of the
second currency. Whenever the base currency buys more of the term currency, the
base currency has strengthened/appreciated and the term currency has weakened.

2.4 Base Currency/ Terms Currency:

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.

8
3.1 DERIVATIVES

Derivatives are very important financial instruments for risk management as they
allow risks to be separated and more precisely controlled. Derivatives are used to
shift elements of risk and therefore can act as a form of insurance. There are three
basic ways in which trading can take place:

1. Over The Counter (OTC);

2. On an exchange floor using open outcry; and
3. Using an electronic, automated matching system
Derivative is a product whose value is derived from the value of one or more basic
variables, called bases (underlying asset, index, or reference rate), in a contractual
manner. The underlying asset can be equity, foreign exchange, commodity or any
other asset. In the Indian context the Securities Contracts (Regulation) Act, 1956
(SC(R)A) defines "derivative" to include-

1. A security derived from a debt instrument, share, loan whether secured or

unsecured, risk instrument or contract for differences or any other form of security.

2. A contract which derives its value from the prices, or index of prices, of
underlying securities.

Derivatives are securities under the SC(R)A and hence the trading of derivatives is
governed by the regulatory framework under the SC(R)A. The term derivative has
also been defined in section 45U(a) of the RBI act as follows:

“An instrument, to be settled at a future date, whose value is derived from change
in interest rate, foreign exchange rate, credit rating or credit index, price of
securities (also called “underlying”), or a combination of more than one of them
and includes interest rate swaps, forward rate agreements, foreign currency swaps,
foreign currency-rupee swaps, foreign currency options, foreign currency-rupee
options or such other instruments as may be specified by the Bank from time to
time”.

There are two basic types of assets for which futures contracts exist. These are
Commodity futures contracts and Financial futures contracts. Although both
contracts are similar in principle, the methods of quoting prices, delivery and

9
settlement terms vary according to the contract being traded. Commodity futures
comprise grains, oil seeds, energy, metals, coffee, sugar, cocoa, etc. Financial
futures comprise Interest rates, Bond prices, Currency exchange rates, stock
indices. Financial Derivatives were introduced in India, mainly as a risk
management tool for both institutional and retail investors. Derivative products
initially emerged as hedging devices against fluctuations in commodity prices, and
commodity-linked derivatives.

3.2 DERIVATIVE PRODUCTS

Derivative contracts have several variants. The most common variants are
forwards, futures, options and swaps.

Forwards: A forward contract is a customized contract between two entities,

where settlement takes place on a specific date in the future at today's pre-agreed
price. 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 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. Futures contracts are special
types of forward contracts in the sense that they are standardized exchange traded
contracts. 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.

Options: Options are of two types - calls and puts. Calls give the buyer the right
but not the obligation to buy a given quantity of the underlying asset, at a given
price on or before a given future date. Puts give the buyer the right, but not the
obligation to sell a given quantity of the underlying asset at a given price on or
before a given date.

Warrants: Options generally have lives of upto 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 over-the-counter.

LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities.

These are options having a maturity of upto three years.

10
Baskets: Basket options are options on portfolios of underlying assets. The
underlying asset is usually a moving average of a basket of assets. Equity index
options are a form of basket options.

Swaps: Swaps are private agreements between two parties to exchange cash flows
in the future according to a prearranged formula. They can be regarded as
portfolios of forward contracts. The two commonly used swaps are:
· Interest rate swaps: These entail swapping only the interest related cash flows
between the parties in the same currency.
· Currency swaps: These entail 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.

3.3 FACTORS DRIVING THE GROWTH OF DERIVATIVES :

The derivatives market has seen a phenomenal growth. A large variety of

derivative contracts have been launched at exchanges across the world. Some of
the factors driving the growth of financial derivatives are:

1. Increased volatility in asset prices in financial markets,

2. Increased integration of national financial markets with the international

markets,

3. Marked improvement in communication facilities and sharp decline in their

costs,

4. Development of more sophisticated risk management tools, providing economic

agents a wider choice of risk management strategies, and

5. Innovations in the derivatives markets, which optimally combine the risks and
returns over a large number of financial assets leading to higher returns, reduced
risk as well as transactions costs as compared to individual financial assets.

11
4.1 INTRODUCTION TO CURRENCY FUTURES :
Currency derivatives can be described as contracts between the sellers and buyers,
whose values are to be derived from the underlying assets, the currency amounts.
These are basically risk management tools in forex and money markets. They are
used for hedging risks and act as insurance against unforeseen and unpredictable
currency and interest rate movements. It is not completely risk free. Market r isks
can't be avoided, but have to be managed. The currency derivative serve the
purpose of financial risk management.
A futures contract is a standardized contract, traded on an exchange, to buy or sell
a certain underlying asset or an instrument at a certain date in the future, at a
specified price. When the underlying is an exchange rate, the contract is termed a
“currency futures contract. The origin of futures can be traced back to 1851 when
the Chicago Board of Trade (CBOT) introduced standardized forward contracts
The Chicago Mercantile Exchange (CME) first conceived the idea of a currency
futures exchange and it launched the same in 1972. The Chicago Mercantile
Exchange, or CME, provides the most popular currency futures.

The undertaker in a futures market can have two positions in the contract :

i. Long position when the buyer of a future contract agrees to purchase the
underlying asset.
ii. Short position when the seller agrees to sell the asset.

The holder of a contract could exit from his commitment prior to the settlement
date by either selling a long position or buying back a short position (offset or
reverse trade). Currency futures can be cash settled or settled by delivering the
respective obligation of seller and buyer. All settlements however, unlike in the
case of OTC markets, go through the exchange. The future date is called the
delivery date or final settlement date. The pre-set price is termed as future price,
while the price of the underlying asset on the delivery date is termed as the
settlement price. The future price normally converges towards the spot price on the
settlement date.

12
4.2 The standardized items in a futures contract are:

The standardized items of a future contract can be discussed as :

 Quantity of the underlying
 Quality of the underlying
 The date and the month of delivery
 The units of price quotation and minimum price change
 Location of settlement

RBI has currently permitted futures only on the USD-INR rates. The contract
specification of the futures shall be as under:

Underlying
Initially, currency futures contracts on US Dollar – Indian Rupee (USD-INR)
would be permitted.

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

Size of the contract

The minimum contract size of the currency futures contract at the time of
introduction would be USD 1000.

Quotation
The currency futures contract would be quoted in Rupee terms. However, the
outstanding positions would be in dollar terms.

Tenor of the contract

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

13
Available contracts
All monthly maturities from 1 to 12 months would be made available.

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

Settlement price
The settlement price would be the Reserve Bank of India Reference Rate on the
last trading day.

Final settlement day

The final settlement would be the last working day (subject to holiday calendars)
of the month. In keeping with the modalities of the OTC markets, the value date /
final settlement date for the each contract will be the last working day of each
month and the reference rate fixed by RBI two days prior to the final settlement
date will be used for final settlement (graph 3). The last trading day of the contract
will therefore be 2 days prior to the final settlement date. On the last trading day,
since the settlement price gets fixed around 12:00 noon, the near month contract
shall cease trading at that time (exceptions: sun outage days, etc.) and the new far
month contract shall be introduced.

The contract specification in a tabular form is as under:

Underlying Rate of exchange between one USD and

INR
Trading Hours 9:00 a.m to 5:00 p.m
(Monday to Friday)
Contract Size USD 1000
Tick Size 0.25 paise or 0.0025
Trading Period Maximum expiration period of 12 months
Contract Months 12 near calendar months
Final Settlement date/Value date Last working day of the month(subject to
holiday calendars)
Last Trading Day Two working days prior to Final
Settlement Date
Settlement Cash Settled
Final Settlement Price The reference rate fixed by RBI two
working days prior to the final settlement
date will be used for final settlement.

14
4.3 Margining Facility:
The reason behind introducing margin facility in currency future trading is to stop
cornering of market. One type of irregularity occurs when investors group tries to
corner the market. The investors group can take huge long position and also tries to
exercise some control over the supply of underlying security. As the maturity of
future contract is approached, the investor does not close out its positions. So that
the number of outstanding future contracts may exceeds the amount of security
available for delivery. The holder of short position realize that they will find it
difficult to deliver and become desperate to close out their positions. The result is a
large rise in both futures and spot prices.
The regulators usually deal with this type of abuse of market by increasing margin
positions, imposing stricter positions limits, prohibiting trades that increase
speculator‟s open positions, and forcing market participants to close out their
positions.

4.4 Participants:
No person other than a person resident in India‟s as defined in section 2(v) of the
Foreign Exchange Management, 1999(Act 42 of 1999) shall participate in the
currency future market. Only a resident of India can participate in the trading and
no other agency, including banks, can participate in the futures market without
getting the approval of its concerned regulators. Foreign institutional investors and
NRIs (Non Resident Indians) are presently excluded from the market.
The membership of the currency future market of a recognized stock exchange
shall separate from the membership of the equity derivative segment or the cash
segment. Membership for both trading and clearing, in the currency futures market
shall be subject t the guidelines issued by the SEBI.
Bank authorized by the Reserve Bank of India under section 10 of the Foreign
Exchange Management Act, 1999 as „AD Category–I bank‟ are permitted to
become trading and clearing member of the currency future market of the
recognized stock exchange, on their account and on the behalf of their clients,
subject to fulfilling the required formalities. A bank can become a trading or a
clearing member of such an exchange provided it has capital and reserves worth

15
Rs.500 crore,10 percent capital adequacy ratio, 3 percent or less net non-
performing assets and has a three-year profit record.
There are three types of participants on the currency futures market: floor trader,
floor broker (also called pit broker), broker- trader. Floor trader operate for their
own account. They are speculators whose time horizon is short term. Floor broker
representing the broker‟s firm, operate on behalf of their clients and, therefore, are
remunerated through commission. The third category, called broker trader,
operates either on the behalf of clients or for their own accounts.

4.5 Flow of Transaction on Future Market:

SELLER
Buyer

Purchase Order Sales Order

Transaction on the floor
BROKER
BROKER

CLEARING
HOUSE

4.6 Factors reflecting Currency Futures :

Conversion Rate,
High inflation level,
Higher import bill,
Government budget deficit
Dollarization (This refers to the broad use of a foreign currency in the place
of the domestic currency for transaction and other purposes) of an economy;

16
 Risks of increased volatility in the exchange rate, which could then spill over
to other segments of the financial market and in the process have an
Impact on interest rates,
Pace of economic activity and financial stability.

4.7 EXCHANGE-TRADED VS. OTC DERIVATIVES MARKET :

The OTC derivatives markets have witnessed rather sharp growth over the last few
years, which accompanied the modernization of commercial and investment
banking and globalisation of financial activities. The recent developments in
information technology have contributed to a great extent to these developments.
While both exchange-traded and OTC derivative contracts offer many benefits, the
former have rigid structures compared to the latter. Some of the features of OTC
derivatives markets embody risks to financial market stability.

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 are settled on a daily basis. Since the profits or losses in the futures
market are collected / paid on a daily basis, the scope for building up of mark to
market losses in the books of various participants gets limited.
The counterparty risk in a futures contract is further eliminated by the presence of
a clearing corporation NSCCL, which by assuming counterparty guarantee
eliminates credit risk.. Further, in an Exchange traded scenario where the market
lot is fixed at a much lesser size than the OTC market, equitable opportunity is
provided to all classes of investors whether large or small to participate in the
futures market. The transactions on an Exchange are executed on a price time
priority ensuring that the best price is available to all categories of market
participants irrespective of their size. Other advantages of an Exchange traded
market would be greater transparency, efficiency and accessibility.

17
 OTC Market Currency futures
Price Transparency Low High
Underlying exposure Required Not required
Accessibility Credit dependent High
Liquidity Subject to credit limits High
Agreements Customized Standard
Credit Exposure Yes Mitigate through the
clearing corporation
Margins(Collateral) Usually not required Required
Daily MTM No Yes

4.8 Advantages of Currency Future :

The advantage of exchange traded forex futures trading India:

EASY ACCESSIBILITY: Small investors would get an easy access to currency

futures trading on the popular exchanges.

EASY AFFORDABILITY: Margins are very low and the contract size is very
small. As per the specification of NSE USD-INR currency future contract, the lot
size is 1000$. Margin is 1.75%. It is easy and affordable for any retail investor to
take a call on Indian Rupee by taking position in currency futures.

LOW TRANSACTION COSTS: When you trade in currency futures in India,

you have to pay a small amount of brokerage fees and statutory duties and taxes. In
overseas forex trading you have to pay commissions to the banks or foreign
exchange agents in the form of spread. Spread is the difference in the buy/sell price
over the reference rate, which can be very high.

TRANSPERANCY: It is possible for you to verify trade details if you have a

doubt that the broker has tried to cheat you.

EFFICIENT PRICE DISCOVERY: Internationally it has been established that

currency future is a better and efficient mechanism for price discovery. With its
state of the art automated electronic trading system where the orders are executed
on the basis of price-time priority, it is well poised to offer efficient price
discovery.

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COUNTER-PARTY DEFAULT RISKS: All the trades done on the recognized
exchanges are guaranteed by the clearing corporations and hence it eliminates the
risks associated with counter party default. NSCCL (National Securities Clearing
Corporation Limited) carries out all the novation, clearing and settlement process
of currency futures trading.

STANDARDIZED CONTRACTS: Exchange Traded currency futures are

standarizsed in respect of lot size (1000$) and maturity (12 monthly contracts).
Retail investors with their limited resources would find it tremendously beneficial
to take positions in standardised USD INR futures contracts.

4.9 Distinction between Futures and Forward Contract :

Futures contracts Forwards contracts

1. Are traded on an exchange 1. Are not traded on an exchange
2. Use a Clearing House which 2. Are private and are negotiated between
provides protection for both parties the parties with no exchange guarantees
3. Require a margin to be paid 3. Involve no margin payments
4. Are used for hedging and 4. Are used for hedging and physical
speculating delivery
5. Are dependent on the negotiated
5. Are standardised and published
contract conditions
6. Are transparent - futures contracts 6. Are not transparent as they are all
are reported by the exchange. private deals

4.10 Future Terminology:

SPOT PRICE :

The price at which an asset trades in the spot market. The transaction in which
securities and foreign exchange get traded for immediate delivery. Since the
exchange of securities and cash is virtually immediate, the term, cash market, has
also been used to refer to spot dealing. In the case of USDINR, spot value is T + 2.

19
FUTURE PRICE :

The price at which the future contract traded in the future market.

CONTRACT CYCLE :

The period over which a contract trades. The currency future contracts in Indian
market have one month, two month, three month up to twelve month expiry cycles.
In NSE/BSE will have 12 contracts outstanding at any given point in time.

VALUE DATE / FINAL SETTELMENT DATE :

The last business day of the month will be termed the value date /final settlement
date of each contract. The last business day would be taken to the same as that for
inter bank settlements in Mumbai. The rules for inter bank settlements, including
those for „known holidays‟ and would be those as laid down by Foreign Exchange
Dealers Association of India (FEDAI).

EXPIRY DATE :

It is the date specified in the futures contract. This is the last day on which the
contract will be traded, at the end of which it will cease to exist. The last trading
day will be two business days prior to the value date / final settlement date.

CONTRACT SIZE :

The amount of asset that has to be delivered under one contract. Also called as lot
size. In case of USDINR it is USD 1000.

BASIS :

In the context of financial futures, basis can be defined as the futures price minus
the spot price. There will be a different basis for each delivery month for each
contract. In a normal market, basis will be positive. This reflects that futures prices
normally exceed spot prices.

COST OF CARRY :
The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry. This measures the storage cost plus the

20
interest that is paid to finance or „carry‟ the asset till delivery less the income
earned on the asset. For equity derivatives carry cost is the rate of interest.

INITIAL MARGIN :

When the position is opened, the member has to deposit the margin with the
clearing house as per the rate fixed by the exchange which may vary asset to asset.
Or in another words, the amount that must be deposited in the margin account at
the time a future contract is first entered into is known as initial margin.

MARKING TO MARKET :

At the end of trading session, all the outstanding contracts are reprised at the
settlement price of that session. It means that all the futures contracts are daily
settled, and profit and loss is determined on each transaction. This procedure,
called marking to market, requires that funds charge every day. The funds are
added or subtracted from a mandatory margin (initial margin) that traders are
required to maintain the balance in the account. Due to this adjustment, futures
contract is also called as daily reconnected forwards.

MAINTENANCE MARGIN :
Member‟s account are debited or credited on a daily basis. In turn customers‟
account are also required to be maintained at a certain level, usually about 75
percent of the initial margin, is called the maintenance margin. This is somewhat
lower than the initial margin. This is set to ensure that the balance in the margin
account never becomes negative. If the balance in the margin account falls below
the maintenance margin, the investor receives a margin call and is expected to top
up the margin account to the initial margin level before trading commences on the
next day.

21
5.1 PRICING CURRENCY FUTURES :

The price of Futures is closely linked with Spot rate. The difference between the
two is dependent on the number of days to maturity and interest rates of two
currencies. The difference between future rate and spot rate is called „basis‟ and
given by the equation:
Basis = Futures rate – Spot rate
The basis tends towards zero as the maturity date approaches. On the date of
maturity, the future is a perfect substitute of Spot rate and that is why Futures rate
and spot rate on the date of maturity are identical.
The Cost carry model applied to calculate price of futures. The general formula for
pricing futures is :

F = Se rT

Where;
r = cost of financing
T = time till expiration
e = 2.71828

In the general formula discussed above, “S” would stand for the current spot price
of one unit dollar in Rupee terms and “F” would stand for the future price in
Rupees of one unit of USD.

A foreign currency has the property that the holder of the currency can earn
interest at the risk free interest rate prevailing in the foreign country. For example,
the holder can invest the currency in USD denominated bonds. The risk free
interest rate that could be earned in a foreign country for the said period T, is
defined as rf. As in the general formula given above, the domestic risk free rate
when money is invested for the time period T shall be referred as r. The
relationship between F and S then could be given as :

F = Se (r-rf)T

This relationship is known as interest rate parity relationship.

22
It is important to be noted from the above relationship, if foreign interest rate is
greater than the domestic rate( i.e. rf > r), then F shall be less than S. The value of F
shall decrease further as time T increase. If the foreign interest is lower than the
domestic rate,( i.e. rf < r,) then value of F shall be greater than S. The value of F
shall increase further as time T increases.

As per the interest parity relationship, we can understand the Future and Spot rate
are linked by the equation:
Future rate = Spot rate 1+ Interest rate of home currency * D/360

1 + Interest rate of foreign currency * D/360

Where “D” is the number of days to maturity.

Basis = Future rate – Spot rate = Spot rate Future rate _ 1
Spot rate

For currencies which are fully convertible, the rate of exchange for any date other
than spot, is a function of spot and the relative interest rates in each currency. The
assumption is that, any funds held will be invested in a time deposit of that
currency. Hence, the forward rate is the rate which neutralizes the effect of
differences in the interest rates in both currencies.
The forward rate is a function of the spot rate and the interest rate differential
between the two currencies, adjusted for time. In the case of fully convertible
currencies, having no restrictions on borrowing or lending of either currency the
forward rate can be calculated as follows;

Forward Rate = Spot +/- Points

Points = Spot 1 + terms i * days/basis _ 1

1 + base i * days/basis

where i = rate of interest

23
Cost of carry model and Interest rate parity model are useful tools to find out
standard future price and also useful for comparing standard with actual future
price.

There is an alternate approach, one that involve splitting the currency effect into
two component: expected or known effect captured by forward premium or
discount; and unexpected or surprise effect as defined below.

Currency Surpriset =

(foreign currency spot ratet )-(foreign currency forward ratet-1)

Foreign currency spot ratet-1

In other words, currency surprise can be interpreted as “the unexpected movement

of the foreign currency relative to its forward rate or market predicted rate”, the
assumption is that forward premium or discount will be embedded in the returns
from a fully hedged portfolio.

The market values the dollar rate based on two benchmarks: the current spot rate
and the current forward rate. However, there is no reason to assume that the futures
rate will be higher than the spot and equivalent to the forward rates. The future rate
is theoretically defined as the spot price plus cost of carry. If the cost of carry is
positive, then the futures will be higher than the spot price. However, today, the
spot rate is not quite market-determined as the RBI has a role to play here. The
RBI ensures that the spot rate does not depreciate or appreciate too drastically, and
uses forex reserves to do so. To do this, the RBI buys or sells dollars in the market.

5.2 FUTURES PAYOFFS :

A payoff is the likely profit/loss that would accrue to a market participant with
change in the price of the underlying asset. This is generally depicted in the form
of payoff diagrams which show the price of the underlying asset on the X-axis and
the profits/losses on the Y-axis. Futures contracts have linear payoffs. In simple
words, it means that the losses as well as profits for the buyer and the seller of a
futures contract are unlimited. Options do not have linear payoffs. Their pay offs
are non-linear. These linear payoffs are fascinating as they can be combined with
options and the underlying to generate various complex payoffs. However,
currently only payoffs of futures are discussed as exchange traded foreign currency
options are not permitted in India.

24
5.2.1 Payoff for buyer of futures: Long futures

The payoff for a person who buys a futures contract is similar to the payoff for a
person who holds an asset. He has a potentially unlimited upside as well as a
potentially unlimited downside. Take the case of a speculator who buys a two -
month currency futures contract when the USD stands at say Rs.43.19. The
underlying asset in this case is the currency, USD. When the value of dollar moves
up, i.e. when Rupee depreciates, the long futures position starts making profits, and
when the dollar depreciates, i.e. when rupee appreciates, it starts making losses. It
can be understood from graph below;

Profit

43.19
0

Loss

5.2.2 Payoff for seller of futures: Short futures

The payoff for a person who sells a futures contract is similar to the payoff for a
person who shorts an asset. He has a potentially unlimited upside as well as a
potentially unlimited downside. Take the case of a speculator who sells a two
month currency futures contract when the USD stands at say Rs.43.19. The
underlying asset in this case is the currency, USD. When the value of dollar moves
down, i.e. when rupee appreciates, the short futures position starts making profits,
and when the dollar appreciates, i.e. when rupee depreciates, it starts making
losses. It can be understood from graph below;

25
Profit

43.19

Loss

26
6.1 PLAYERS IN THE CURRENCY FUTURE MARKETS :

The following three broad categories of participants –

 Hedgers,
 Speculators,
 Arbitrageurs

Hedgers face risk associated with the price of an asset and they use futures or
options markets to reduce or eliminate this risk. Speculators wish to bet on future
movements in the price of an asset. Arbitrageurs are in business to take advantage
of a discrepancy between prices in two different markets. If, for example, they see
the futures price of an asset getting out of line with the cash price, they will take
offsetting positions in the two markets to lock in a profit.

The participants in this segment shall prima -facie include all the entities who
directly or indirectly have exposure to the foreign exchange movements. Any
importer or exporter of goods and services has exposure to foreign currency risk.
These entities shall find this product useful for hedging their risks. The entities
shall include corporates importing machinery / raw materials or paying for services
to an offshore entity, and corporate exporting their products and services abroad.
Therefore all entities having trade or capital related flows denominated in foreign
currency will have an interest in using this product.

The share holders and creditors of the companies also may be indirectly exposed to
the currency risk and hence may find the product useful. Any entity using such
goods and services whose price is exposed to foreign exchange movements may
also find this useful. For example, entities who procure, say oil or metals like say
zinc, copper, etc. locally, are not importers. International price movement expose
these users to foreign currency risks. Hence entities who are directly importers or
exporters or entities having an indirect or derived exposure are potential users of
exchange traded futures.

6.2 HEDGING :

Currency futures are widely used as hedging tools by financial institutions, b anks,
exporters, importers etc. 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 currency risk arising from exchange rate fluctuations that is faced by
exporters and importers needs to be properly managed. For example, an exporting

27
firm is expecting to receive dollar inflows. If the rupee appreciates against the
dollar, then there will be a negative impact on the profitability of these companies.
If a company has un-hedged exposures in foreign currency on account of
borrowings, and the rupee depreciates against the borrowed currency, there could
be a loss requiring disclosure. Though this is not a direct business loss, it adds to
the liability and as such impacts the balance sheet. It is possible that subsequently
the rupee might appreciate or regain the lost ground; but, what is relevant is the
rate as on the day of the closure of the books. The deficit on the date is considered
a notional loss as the liability has not crystallised and there is no outflow of rupees.

Says Geojit Financial Services‟ managing director, CJ George, “Exchange traded

currency futures are likely to attract retail interest, so far as inflation-related
speculation (rupee movement) could be hedged here. For instance, a mid-level gold
importer, currently unable to hedge dollar exposures, can come on to these markets
and take a directional call on the rupee.” Exporters who receive continuous cash
inflows can hedge their positions through selling currency futures at the most
suited exchange rate.

Before the introduction of currency futures market, exporters had to take hedge
positions in OTC markets where delivery of the underlying is a must. Contract
cancellation is possible but it would be very expensive. In the futures market,
positions are settled in cash but the client-wise exposure is limited to 6 million
dollars or 5% of the total open interest, whichever is higher. The position limits are
not high enough for exporting houses to take big positions. However, the interest
of small exporters has been protected after the introduction of the currency futures
market.

A key difference between investing in domestic and foreign asset is that the latter
exposes the investor to a currency risk. The reasoning was that if the exchange rate
remains constant from time of purchase of the foreign asset to its sale, then the
currency risk has had zero impact. On the other hand, if the domestic has
weakened (strengthened) against the foreign currency, the exposure would result in
a gain (loss).
Exchange rates are quite volatile and unpredictable, it is possible that anticipated
profit in foreign investment may be eliminated, rather even may incur loss. Thus,
in order to hedge this foreign currency risk, the traders‟ oftenly use the currency
futures. For example, a long hedge (i.e.., buying currency futures contracts) will
protect against a rise in a foreign currency value whereas a short hedge (i.e., selling

28
currency futures contracts) will protect against a decline in a foreign currency‟s
value. It is noted that corporate profits are exposed to exchange rate risk in many
situation. For example, if a trader is exporting or importing any particular product
from other countries then he is exposed to foreign exchange risk. Similarly, if the
firm is borrowing or lending or investing for short or long period from foreign
countries, in all these situations, the firm‟s profit will be affected by change in
foreign exchange rates. In all these situations, the firm can take long or short
position in futures currency market as per requirement. In a long hedge, one takes a
long futures position to offset an existing short position in the cash market. In a
short hedge, one takes a short futures position to offset an existing long position in
the cash market. The general rule for determining whether a long or short futures
position will hedge a potential foreign exchange loss is:

Loss from appreciating in Indian rupee= Short hedge

Loss form depreciating in Indian rupee= Long hedge

Principle of covering on future market is rather simple. A long position is covered

by a short position on Future market and vice versa. In order to have a perfect
cover, it is necessary that the value of a position in Future changes by the same
amount as the Spot position, but in opposite direction. On future market, enterprise
which want to cover themselves against rate risk, compensate for the losses that
they are likely to incur on Spot market. For this they need to take reverse position
on Future market as against their position on Spot market. The contracts may be
kept up to the maturity date or they may be settled before that date, depending
upon the choice of the operator or hedger.
The price difference between Spot and future is called Basis, and th e risk arising
out of the difference is defined as Basis Risk. The situation in which the difference
between spot and future price reduces (either negative or positive) is defined as
“Narrowing of the Basis”. Two situations generally happen;
First; When future prices are higher than spot price, then

Narrowing of Basis Widening of Basis

Benefits Short Hedgers Benefits Long Hedgers

29
Second; When future prices are lower (discount) to spot price, then

Narrowing of Basis Widening of Basis

Benefits Long Hedgers Benefit Short Hedgers

If a small importer wants to hedge through currency futures, he can do so by

buying futures. After purchasing the currency futures if the rupee closes at a
depreciated price, then the importer gains in currency futures, and later, he has to
convert the rupee into dollar at a higher price. Imagine that an importer with an
obligation to pay US$10,000 after three months, bought currency futures which is
maturing after three months at Rs.44. A few weeks later, currency depreciates to
Rs.46. Here, the importer gains Rs.2/- per dollar (Rs.2 *10000). Later, he converts
his import obligation at Rs.46. The importer‟s net obligation is therefore only
Rs.44.

NRIs who regularly send dollars to their families can also advise their family
members to create hedge positions in the currency futures market. When the
exchange rates are comfortable, the family members can take short positions on
various maturities. Later, if the rupee appreciates, then the family member can
make profits. On the other hand, if the rupee depreciates, the family member incurs
a loss, but he can later convert the currency at a higher exchange rate thereby
getting a fixed amount throughout the year.

Choice of underlying currency;

The first important decision in this respect is deciding the currency in which
futures contracts are to be initiated.

Choice of the maturity of the contract;

The second important decision in hedging through currency futures is selecting the
currency which matures nearest to the need of that currency.

Choice of the number of contracts (hedging ratio)

Another important decision in this respect is to decide hedging ratio. The value of
the futures position should be taken to match as closely as possible the value of the
cash market position. In the futures markets due to their standardization, exact

30
match will generally not be possible but hedge ratio should be as close to unity as
possible, which can be defined as follows:

HR= VF / Vc

Where, VF is the value of the futures position and Vc is the value of the cash
position. Suppose value of contract dated 28th May 2009 is 49.8850. And spot
value is 49.8500. HR=49.8850/49.8500=1.001.

Currency exposure could happen to anybody and hedging against future risks could
work to one's advantage. The latest decision of the government would enable
multiple hedging opportunities for individuals. A person could hedge on a currency
for future medical treatment of a kin abroad or reduce one's risk while receiving
the periodical remittances from abroad or even for the individual who paid in
foreign currency for his kin's education abroad.

6.3 SPECULATION :

Generally two strategies is followed by the investors which are as follows:

Speculation: Bullish, buy futures

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.42, 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 necessary capital, he
can earn profit if say the Rupee depreciates to Rs.42.50. Assuming he buys USD
10000, it would require an investment of Rs.4,20,000. If the exchange rate moves
as he expected in the next three months, then he shall make a profit.

Speculation: Bearish, sell futures

Futures can be used by a speculator who believes that an underlying is over-valued

and is likely to see a fall in price. All he needs to do is sell the futures.

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. Suppose a trader who

31
expects to see a fall in the price of USD-INR. He sells one two-month contract of
futures on USD say at Rs. 42.20 (each contact for USD 1000). He pays a small
margin on the same. Two months later, when the futures contract expires, USD-
INR rate let us say is Rs.42. On the day of expiration, the spot and the futures price
converges. He has made a clean profit of 20 paise per dollar.

6.4 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
mispricing 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.

32
7.1 QUESTIONNAIRE :
The questionnaire (page 36) is prepared to analyse the investors response. It is
basically divide into two parts. The first part of the questions is for the investors
who know about the currency future derivatives. The questionnaire in first part is
having open ended as well as close ended questions. The second part consists of
open ended questions, mainly for the investors who do not aware about the
currency future.
The questionnaire collect the investors profile like their age group, gender, marital
status and profession.

7.2 Investors Response from the Questionnaire :

On taking survey of ten investors following findings come into picture;
 In survey every investor knows about the Derivatives. These investors are
below 35 years of age. These investors are mainly the employees.
 Out of examined investors who know about the derivatives, they trade in
derivative instruments. The most famous derivatives among investors are in
stocks and index. The investment in stock derivatives are preferred by 66 per
cent while investment in index instrument is found to be around 34 per cent
(Graph 4).
 Out of investors who know about derivatives whether just aware or trade in
it, almost 70 per cent of them know about the Currency future derivatives
and used it for hedging, speculation and arbitrage. The following graph will
show the proportions in percentage. The 14 per cent are found using it as
hedging and for 29 per cent of people using it as speculation. The most
important fact which come out which is, about 57 per cent of examined
people use it for both hedging and speculation depending upon the market
situation (Graph 4).

While the volume of contract trading has grown impressively, the range and
diversity of contracts and instruments developed and traded have not increased
commensurately. It requires to make aware the investors about Currency future. It
is important to aware investors of following prospects;

33
  Profit Earning Capacity
 Risk associated with currency future
 Growth potential
 Benefit of service provided by the trading company.

Also it is the institutional segment of the capital market has not yet begun to use
derivatives for risk hedging or for position taking in the way that such investors
should. That is for two reasons.

First, the development of derivatives has so far been excessively skewed toward
derivatives used in the equity rather than debt or forex markets.

Second, India‟s financial institutions are dominantly idle, retarded state-owned

financial intermediaries (SFIs) – i.e. the public sector banks (PSBs), mutual funds
(UTI as well as those run by the public banks), insurance companies (LIC and
GIC), pension funds and non-bank financial intermediaries (e.g. state level
financial institutions of various types) of various types.

Though private financial intermediaries now exist in almost every segment of the
financial market, and though their influence is growing, they still represent less
than 80% of overall financial assets.

It is found that due to lack of knowledge of derivative especially currency future, it

is not gaining its pace. Another reason is preoccupied concepts regarding the mode
of investment. Two prong strategy can be taken: firstly focus on clients/investors
already engaged in derivative trading other than currency futures. Secondly, focus
on clients/investors who never tried their hand in derivative segment. This requires
elaborate awareness program to attract retail investors. Along with these , it require
to reconsider the regulation prevailing in the market.
Currency Future need to change some restriction it imposed such as cut off limit of
5 million USD, Ban on NRI‟s and FII‟s and Mutual Funds from participating. FIIs
with a larger stake, reach and access to global exchanges have the potential to sway
the market in particular directions more suitable to them than to be of any
relevance to the real economy. We can target traders, HNIs (high net worth
individuals) and those who receive remittances from abroad and want to mitigate
their currency risk,”. In view of the promising performance of currency futures

34
segment as also greater prospects for its growth in the future, analysts normally
expect that the participation of FIIs in currency futures trading will lead to further
rise in volumes and improvement in market depth. However, if RBI allows foreign
players to trade locally, there may be a good reason for all flows to migrate to the
Indian market. The market for currency futures could even pull players, currently
active on the OTC market, where deals happen over-the-counter on a bilateral
basis. Much depends on the price discovery in this market. Foreign Institutional
Investors(FII) can be permitted to trade in currency futures once the market gets
stabilized and matured.
Once the new market segment gains traction, the RBI alongwith SEBI can look at
introducing contracts in other currencies too, which would further help in making
the market move away from the bilateral over-the-counter mode. Exchange traded
currency future segment only one pair USD-INR is available to trade so there is
also one more demand by the exporters and importers to introduce another pair in
currency trading. Like POUNDINR, CAD-INR etc. There are other major
currencies against which the rupee is transacted would have to be brought into the
realm of futures. For example, almost one-fifth of India‟s total foreign trade in
2006-07 was done with the EU bloc. Hence, the current scenario, when the dollar‟s
supremacy is being challenged by currencies such as the euro, calls for taking it
into consideration as well. The road map to launch contracts on other currencies
need continuous innovation and improvement in the design of financial products,
its customer service as well as all India delivery.

In response to the emerging global development, the RBI has taken a series of
measures to augment forex and domestic liquidity. The Securities and Exchange
Board of India (SEBI) is studying a proposal submitted by exchanges to extend
trading hours of the currency futures segment in line with commodities as both are
linked closely with each other. If SEBI approves the demand, trading hours of
currency futures will be extended to 11.30 pm from the existing 9 am to 5.30 pm.
Internationally trading in futures continues for nearly 23 hours a day. It is
important that some space be given for the domestic players to understand the
market and grasp it with more confidence before we allow the floor for FIIs. The
financial sector needs to be opened up to greater competition so as to be able to
provide world class financial services at competitive rates. They should work
towards removal of entry barriers to domestic corporate player and foreign
financial firms in all segments of the financial services industry. All legal tangle in
currency futures can be avoided for growth of exchange traded currency futures.

35
 Questionnaire

I, Rudra Kumar, a first year MBA student of ICFAI Business School (IBS),am
conducting a research project titled “Use of Currency Future Derivatives” as part
of my curriculum. I am doing a study to understand the response of investors
regarding Currency Future Derivative and mechanism of hedging, speculation and
arbitrage in it. Any information provided by you will be treated in the „most
confidential‟ manner and will not be used for any other purpose.

1. Do you know about derivatives. Yes No

2. How do you come to know about derivatives.
Just Aware Do trade Both

3. If you trade in derivatives, then in which instrument,

Stocks Index Currency Commodity

4. Are you aware that you can trade in currency future derivative.
Yes No

If “yes”, answer the question from 5 to 17,

5. In which all exchanges you can trade in Currency Future Derivatives.

MCX BSE NSE NCDEX

6. The currency future derivative was launched on

1April 2000 29August 2008 8 August 2008

7. The underlying asset in currency future derivative contract.

Exchange Rate Index Stock Commodity

8. Which one is base currency for currency future derivative segment.

US Dollar Euro Yen Rupee

36
9. Which is the tick size (breakeven point) in the currency future contract.
0.25 0.50 1.00 0.75

10. Which currency pair is currently traded in currency future derivative segment.
USD-INR USD-EURO Yen-INR EURO-INR

11. The size of Currency future contract,

1000$ 5000$ 100$ 2000$

12. How many contracts for currency future derivative are open at particular time.
1month 2month 3month 12month All these

13. For what purpose you use currency future derivatives for
Hedging Speculation Arbitrage

14. In Over the Counter, daily settlement happens in currency derivative contracts.
Yes No

15. National Securities Clearing Corporation Limited(NSCCL) undertakes clearing

and settlement of all trades executed on the Currency Derivative segment of
NSE. True False

16. As an investor, what do you think of benefit in Currency future derivative as

compared to other financial derivatives.
…………………………………………………………………………………
………………………………………………………………………………....
…………………………………………………………………………………

17. Your suggestions; …………………………………………………………….

………………………………………………………………………………...
………………………………………………………………………………...

37
If “No”, then answer following questions..

18. Would you like to know and trade if properly guided and informed.
Yes No

19. What are the aspects you want to know to trade in Currency Future Derivative.
a.)
b.)
c.)

20. Your suggestions for Currency Future Derivative.

………………………………………………………………………………….
………………………………………………………………………………….
………………………………………………………………………………….

Name:

Age: Below 25 26-35 36-45 Above 45

Gender: Male Female

Marital Status: Married Single

Occupation : Businessman Professional Employed

Student Others

Date: Signature

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 GRAPHS
Graph 1 : USD INR Rate from 29th August 2008 to 10th April 2009.

54

52

50

48

46 Series1

44

42

40

38

Graph 2 : Number of contracts from 29th August 2008 to 26th March 2009.

900000

800000

700000

600000

500000
Series1
400000

300000

200000

100000

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Graph 3: RBI Reference Rate Vs. USD INR (Series 1: RBI Rate, Series 2 :USD
INR) from 29th August 2008 to 26th March 2009.

52

50

48

46
Series1
44 Series2
42

40

38
1 2 3 4 5 6 7 8

Graph 4: Investment in stock derivative and index derivatives.

Chart Title
1 2

34%

66%

40
Graph 5: Preference for using currency future as hedging, speculation and both.

Chart Title
1 2 3

14%

57% 29%

41
 References

Books:
(a) Options, Futures & Other Derivatives (fifth edition) by John C. Hull. Publisher:
Prentice Hall of India Private Limited.
(b)Bulls, Bears & The Mouse, an Introduction to Online Market Trading. By Dr.
Kamlesh N Agarwala, Deeksha Agarwala.
Publisher: Macmillan.
(c)Derivative Core Module (NSE‟s Certification In Financial Markets)
(d)FEDAI-NSE Currency Futures (Basic) Module
Websites:
http://www.derivativesindia.com
http://www.xe.com
http://www.nse-india.com
http://www.bseindia.com
http://www.geojit.com
http://www.sebi.gov.in
http://www.bloomberg.com

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