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INTRODUCTION
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.
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 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 that was the reason behind development of currency derivatives.
1
1.1 THE PROJECT
The financial environment today has more risks than earlier. Successful business
firms are those that are able to manage these risks effectively. Due to changes in the
macroeconomic structures and increasing internationalization of businesses, there has
been a dramatic increase in the volatility of economic variables such as interest rates,
exchange rates, commodity prices etc. Firms that monitor their risks carefully and
manage their risks with judicious policies enjoy a more stable business than those who
are unable to identify and manage their risks. There are many risks which are influenced
by factors external to the business and therefore suitable mechanisms to manage and
reduce such risks need to be adopted. One of the modern day solutions to manage
financial risks is ‘hedging’.
The project is all about what are the hedging instruments (Currency Derivatives)
available in India and how the business corporations are using currency derivatives as a
risk management tool.
2
1.2 INDUSTRY
In 1971, the Bretton Woods system of administering fixed foreign exchange rates
was abolished in favour of market-determination of foreign exchange rates; a system of
fluctuating exchange rates was introduced. Besides market-determined fluctuations, there
was a lot of volatility in other markets around the world due to increased inflation and the
oil shock. Corporates struggled to cope up with the uncertainty in profits. It was then that
financial derivatives – foreign currency, interest rate, and commodity derivatives
emerged as means of managing risks facing corporations.
The Chicago Mercantile Exchange (CME) created FX futures, the first ever
financial futures contracts, 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. 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.
3
1.2.2 DEVELOPMENT IN INDIA
In India, the economic liberalization in the early nineties provided the economic
rationale for the introduction of FX derivatives. Business houses started actively
approaching foreign markets not only with their products but also as a source of capital
and direct investment opportunities. With limited convertibility on the trade account
being introduced in 1993, the environment became even more favorable for the
introduction of these hedge products. Hence, the development in the Indian forex
derivatives market should be seen along with the steps taken to gradually reform the
Indian financial markets.
The first step towards introduction of derivatives trading in India was the
Securities Laws (Amendment) Ordinance, 1995, which withdrew the prohibition on
options 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. 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.
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.
RBI and SEBI jointly constituted a standing technical committee to analyze the
currency 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 issued circulars in this regard on August 06, 2008.
Currently, Indian Currency market trades with all the major currencies like USD,
EURO, YEN and POUND are traded.
4
The rationale for introducing futures in the Indian context has been outlined in the
report of the internal working group of Currency Futures (Reserve Bank of India, April
2008) as follows:
The rationale for establishing currency futures market is diverse. Both residents
and non-residents purchase domestic currency assets. If the exchange rate remains
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 diversely with
fast growth in cross-border trade and investment 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 of
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.
5
1.2.3 Derivatives in India: A Chronology
Date Progress
14 December 1995 NSE asked SEBI for permission to trade index futures.
18 November 1996 SEBI setup L. C. Gupta Committee to draft a policy framework for index futures
11 May 1998 L. C. Gupta Committee submitted report.
7 July 1999 RBI permitted OTC forward rate agreements (FRAs) and interest rate swaps
24 May 2000 SIMEX chose Nifty for trading futures and options on an Indian index.
25 May 2000 SEBI gave permission to NSE and BSE to do index futures trading.
9 June 2000 Trading of BSE Sensex futures commenced at BSE.
12 June 2000 Trading of Nifty futures commenced at NSE.
31 August 2000 Trading of futures and options on Nifty to commence at SIMEX
June 2001 Trading of Equity Index Options at NSE
July 2001 Trading of Stock Options at NSE
9 November 2002 Trading of Single Stock futures at BSE
June 2003 Trading of Interest Rate Futures at NSE
13 September 2004 Weekly Options at BSE
1 January 2008 Trading of Chhota(Mini) Sensex at BSE
1 January 2008 Trading of Mini Index Futures & Options at NSE
6 August 2008 Circulars regarding Currency Futures by RBI & SEBI
29 August 2008 Trading of Currency Futures at NSE
2 October 2008 Trading of Currency Futures at BSE
7 October 2008 MCX-SX came into existence with USD/INR pair
16 June 2010 The all new United Stock Exchange started mock trading in Currency Futures.
6
1.3 THE COMPANY
7
INTRODUCTION TO MARWADI GROUP
Marwadi Shares & Finance Limited is a Gujarat based financial service group
dealing in equities / commodities broking and portfolio management services. In the last
15 years MSFL has grown into a network of more than70 branches with an 850+
committed professional people and 475+ channel partners across India. MSFL has kept
the faith of over 1.90 lakh investors and it's growing. After establishing supremacy in
Gujarat, now expanding nationwide and to fuel growth plans they recently raised capital
from UK-based investment companies. MSFL got 5th rank in best broking houses also.
Marwadi Group strength lies in its team of confident, young, talented, qualified
and experienced professionals to carry out different functions under the able leadership of
its management.
“Marwadi Shares and Finance Limited” is a huge and very reputed organization in
the world of securities and finance. The organization enjoys a large market share with
highly loyal customers, who in-turn provides a huge business to them.
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1.3.3 MEMBERSHIP
Commodities Derivatives:
National Commodity & Derivatives Exchange Ltd. (NCDEX)
Multi Commodity Exchange of India Ltd. (MCX)
Depository Participation:
National Securities Depository Ltd. (NSDL)
Central Depository Services India Ltd. (CDSL)
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1.3.4 MILESTONES
The company crossed the following milestones to reach its present position as
the leading retail broking house in India:
10
1.3.5 SERVICES @ MARWADI
11
1.3.7 COMPETITORS OF MSFL
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Chapter – 2
2.2 METHODOLOGY
All the data and information is collected by me from different sources for the
preparation of this report. To prepare this report, I have adopted following methodology.
Primary data:
The primary data has been collected from experts, officials and employees
working in MARWADI SHARES & FINANCE LTD.
Secondary data:
For secondary data, I have use internet. Links are given for the same.
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Chapter – 3
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.
For example, wheat farmers may wish to sell their harvest at a future date to eliminate the
risk of a change in prices by that date. Such a transaction is an example of a derivative.
The price of this derivative is driven by the spot price of wheat which is the "underlying".
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.
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3.2 TYPES OF FINANCIAL DERIVATIVES
Figure 1
15
3.3 TRADING OF FINANCIAL DERIVATIVES
16
3.
4 DEFINITIONS
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 and are generally traded on an exchange.
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.
Forwards:
A forward contract is a customized contract between two parties, where
settlement takes place on a specific date in the future at today's pre-agreed price. The
exchange rate is fixed at the time the contract is entered into. 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.
Swaps:
Swaps are 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 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
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opposite direction. There are a various types of currency swaps like as fixed-to-fixed
currency swap, floating to floating swap, fixed to floating currency swap.
In a swap normally three basic steps are involve___
1. Initial exchange of principal amount
2. Ongoing exchange of interest
3. Re - exchange of principal amount on maturity.
Options:
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.
In India only currency forwards and currency futures are only allowed. Currency
swaps and currency option is yet not allowed in India.
This year SEBI is also thinking about launching Currency Options for facilitating
all the investors, exporters, importers and MNCs.
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3.5 CURRENCY FORWARDS MARKETS
19
3.6 THE FUTURE MARKET
Features:
These are traded on an organized exchange like NSE, BSE, MCX etc.
These involve standardized contract terms viz. the underlying asset, the time of
maturity and the manner of maturity etc.
These are associated with a clearing house to ensure smooth functioning of the
market.
There are margin requirements and daily settlement to act as further safeguard.
These provide for supervision and monitoring of contract by a regulatory
authority.
Almost ninety percent future contracts are settled via cash settlement instead of
actual delivery of underlying asset.
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Types:
21
Chapter – 4
Therefore, the buyer and the seller lock themselves into an exchange rate for a
specific value or delivery date. Both parties of the future contract must fulfill their
obligations on the settlement date.
Currency futures can be case settled by delivering the respective obligation of the
seller and buyer. All settlements however, unlike in the case of OTC market go through
the exchange.
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 future trading, it is essential to know both the contract size and also
what is the tick value?, A tick value is the minimum trading increment or price
differential at which traders are able to enter bids and offers. Tick value differ for
different currency pairs. In case of USD-INR currency futures contract the tick size shall
be 0.25 Paise to demonstrate how a move of one tick affects the price, imagine a trader
buys a contract at Rs. 42.2500 one tick move on this contract will translate to Rs. 42.2475
or Rs. 42.2525 depending on the direction of market movement.
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4.2 UTILITY OF CURRENCY DERIVATIVES
Traders in the foreign exchange market make thousands of trades daily, buying
and selling currencies while exchanging market information may be used for varied
purposes:
When an investor decides to "cash out," or bring his money home, any gains
could be magnified or wiped out depending on the change in the exchange rates in the
interim. Thus, changes in exchange rates can have many effects on an economy:
In the volatile FX market, traders constantly try to predict the behavior of other
market participants. If they correctly anticipate their opponents’ strategies, they can act
first and beat the competition.
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Traders make money by purchasing currency and selling it later at a higher price,
or, anticipating the market is heading down, selling at a high price and buying back at a
lower price later.
Their use by importers hedging foreign currency payables is effective when the
payment currency is expected to appreciate and the importers would like to guarantee a
lower conversion rate.
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.
24
Alternatively, they may wish to obtain a foreign currency forward buying
contract, expecting to sell the appreciating currency at a high future rate. 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.
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4.3 PARTIES INVOLVED IN TRADING OF CURRENCY
DERIVATIVES
Exporter:
CDs are used by exporters invoicing the receivables in foreign currency, willing
to protect the earnings foreign currency depreciation by locating the currency conversion
rate at a high level.
Importers:
Importers use CDs for hedging the payables in foreign currency when the foreign
currency is expected to appreciate and they would always like to guarantee a low
conversion rate.
Investors:
Investors in foreign currency denominated securities would like to secure strong
foreign earnings by obtaining the right to sell the foreign currency at a high conversion
rate, thus defending their revenue from foreign currency derivatives.
MNCs:
MNCs use CDs being engaged in direct investment oversease. They want to
guarantee the rate of purchasing foreign currency for various payments related to
installation of a foreign branch or subsidiary, or to joint venture payment with foreign
partners.
26
The most commonly used instrument among the CDs is currency forward
contracts. These are large national value selling or buying contracts obtained by
Exporters, Importers, Investors and speculators from bank with the denomination
normally exceeding 2 million USD. The contracts guarantee the future conversion rate
between currencies and can be obtained for any customized amount and any date in the
future. They normally do not require any security deposits since their purchasers are
institutional investors etc. Their transaction costs are set by spread between banks buy
and sell price. Exporters are the most frequent users of this contract.
Hedgers:
They use derivatives markets to reduce or eliminate the risk associated with price
of an asset. Majority of the participants in derivatives market belongs to this category.
Speculators:
They transact futures and options contracts to get extra leverage in betting on
future movements in the price of an asset. They can increase both the potential gains and
potential losses by usage of derivatives in a speculative venture.
Arbitrageurs:
Their behavior is guided by the desire to take advantage of a discrepancy between
prices of more or less the same assets or competing assets in 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.
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4.4 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.
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.
Whenever the base currency buys more of the terms currency, the base currency
has strengthened / appreciated and the terms currency has weakened / depreciated.
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Chapter – 5
Future 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 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 entering into an equal and opposite transaction.
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5.1 NEED FOR 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 transect at a forward price on a future date. On the maturity date, the obligation
of the individual equals to the forward price at which the contract was executed. Except
on the maturity date no money changes hands.
On the other hand in case of exchange traded currency futures contract mark to
market obligation is settled on a daily basis. Since the profit or loss in a future market are
collected/paid on a daily basis, the scope of building mark to market loss in the books of
various participants gets limited The counter party risk in future contract is further
eliminated by the presence of a clearing corporation, 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 the classes of
investors whether large or small to participate in the future market. The transaction on an
exchange are executed on a price time priority ensuring that the best price is available to
all categories of market participant irrespective of their size. Other advantages of an
exchange traded market would be greater transparency, efficiency and accessibility.
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5.2 FUTURES TERMINOLOGY
Spot price:
The price at which an asset trades in the spot market. In the case of USD/INR, spot value
is T + 2.
Futures price:
The price at which the futures contract trades in the futures market.
Contract cycle:
The period over which a contract trades. The currency futures contracts on the SEBI
recognized exchanges have one-month, two-month, and three-month up to twelve-month
expiry cycles. Hence, these exchanges will have 12 contracts outstanding at any given
point in time.
Expiry date:
It is the date specified in the futures contract. All contracts expire on the last working day
(excluding Saturdays) of the contract months. The last day for the trading of the contract
shall be two working days prior to the final settlement date or value date.
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Contract size:
The amount of asset that has to be delivered under one contract which is also called as lot
size. In the case of USD/INR it is USD 1000; EUR/INR it is EUR 1000; GBP/INR it is
GBP 1000 and in case of JPY/INR it is JPY 100,000.
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 (in commodity markets) the storage
cost plus the 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:
The amount that must be deposited in the margin account at the time a futures contract is
first entered into is known as initial margin.
Marking-to-market:
In the futures market, at the end of each trading day, the margin account is adjusted to
reflect the investor's gain or loss depending upon the futures closing price. This is called
marking-to-market.
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5.3 CONTRACT SPECIFICATION
33
5.3 DETAILS OF CONTRACT SPECIFICATION OF USD/INR
FUTURES
Symbol USDINR
Instrument Type FUTCUR
Unit of trading 1 (1 unit denotes 1000 USD)
Underlying The exchange rate in Indian Rupees for a US Dollar
Tick size Rs.0.25 paise or INR 0.0025
Trading hours Monday to Friday
9:00 a.m. to 5:00 p.m
Contract trading cycle 12 month trading cycle.
Last trading day Two working days prior to the last business day of the expiry month
at 12 noon.
Final settlement day Last working day (excluding Saturdays) of the expiry month. The last
working day will be the same as that for Interbank Settlements in
Mumbai.
Quantity Freeze Above 10,000
Base price Theoretical price on the 1st day of the contract. On all other days,
DSP of the contract
Price operating range Tenure up to 6 months Tenure more than 6 months
+\- 3% of base price +\- 5% of base price
Position limits Clients Trading members Banks
Higher of 6% of Higher of 15% Higher of
total open interest of the total open 15% of total
or USD 10 million interest or open interest
USD 50 million or USD 100
Million
Minimum initial margin 1.75% on day 1, 1% thereafter
Extreme loss margin 1% of MTM value of open position.
Calendar spreads Minimum Rs. 250/- per contract for all months of spread
Settlement Daily settlement : T + 1
Final settlement : T + 2
Mode of settlement Cash settled in Indian Rupees
Daily settlement price Calculated on the basis of the last half an hour weighted average
(DSP) price
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Final settlement price RBI reference rate
(FSP)
NSE trades Currency Derivatives contracts having near 12 calendar month expiry
cycles. All contracts expire two working days prior to the last working day of every
calendar month (subject to holiday calendars). This is also the last trading day for the
expiring contract. The contract would cease to trade at 12:00 noon on the last trading day.
A new contract with 12th month expiry would be introduced immediately ensuring
availability of 12 monthly contracts for trading at any point.
35
5.4 TRANSACTION OF A CONTRACT
36
5.5 FACTS & FIGURES ABOUT USD/INR FUTURES CONTRACT
37
Chapter – 6
38
6.1.2
A Jeweller of Rajkot who is exporting gold jewellery worth USD 50,000, wants
protection against possible Indian Rupee appreciation in Dec ’10, i.e. when he receives
his payment. He wants to lock-in the exchange rate for the above transaction. His strategy
would be:
39
6.1.3
Suppose an Indian IT exporter receives an export order worth 100,000 from a
European Telecom major with the delivery date being in 3 months time. At the time of
placing the contract, the Euro is worth Rs 56.05 in the spot market, while a futures
contract for an expiry date that matches with order payment date is trading at Rs 56. This
puts the value of the order, when placed, at Rs 5,605,000. However, if the domestic
exchange rate appreciates significantly (to Rs 55.20) when the order is paid for (which is
one month after the delivery date), the firm would receive only Rs 5,520,000 rather than
Rs 5,605,000.
To insure against such losses, the firm can, at the time it receives the order, can
enter into 100 Euro futures contract of 1000 each to sell at Rs 56 a Euro, which involves
contracting to sell a foreign currency on expiry date at the agreed exchange rate. Suppose
on payment date the exchange rate is Rs 55.20, the exporter would receives only Rs
5,520,000 on selling the Euro in the spot market, but gains Rs 80,000 (i.e. 56 - 55.20 *
100 * 1000) in the futures market. Thus, overall the firm receives Rs 5,600,000 and
protects itself from the sharp appreciation of domestic currency against Euro.
In the short term, firms can make gains or losses from hedging. But the basic
purpose of hedging is to protect against excessive losses. Firms also tend to benefit from
knowing exactly how much they will receive from the export deals and can avoid the
uncertainty associated with future exchange rate movements.
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6.1.4
An organic chemicals dealer in India placed an import order worth 100,000 with a
German manufacturer. The current spot rate of the Euro is Rs 56.05 and at this rate the
value of the order is Rs 5,605,000. The importer is worried about sharp depreciation of
the Indian Rupee against the Euro in coming months when the payment is due. So, the
importer buys 100 Euro futures contract (1000 each) at Rs 56 a Euro. Suppose, at expiry
date, the Rupee depreciated to Rs 57, the importer would have to pay Rs 5,700,000, but
he would gain Rs 100,000 (i.e. Rs.67 - 56 * 100 * 1000) from the futures market and the
resultant outflow would be only Rs 5,600,000.
In the short term, firms can make gains or losses from hedging. But the basic
purpose of hedging is to protect against excessive losses. Firms also tend to benefit from
knowing exactly how much they will pay for the import order and avoid the uncertainty
associated with future exchange rate movements.
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6.2 ADVANTAGES OF CURRENCY FUTURES
Low Commissions:
A highly competitive market keeps a tab on brokerage, keeping fees to bare minimum.
No Middlemen:
Futures/Options currency trading allows clients to trade directly on the exchange
platform.
Affordability:
Margins are very low and the contract size is very small. As per the specification of NSE,
USD-INR currency future contract, lot size is 1000$. Margin is 1.75%.
42
Online Access:
The advent of online (Internet) trading platforms helps you to trade at your convenience
from your home, office or on the go.
Transparency:
It is possible for everyone to verify trade details on NSE if anyone have a doubt that the
broker has tried to cheat.
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6.3 DISADVANTAGES OF FUTURES
The futures are also disadvantageous in a few areas when compared to OTC
market. The major disadvantages are:
Standardization:
It is not possible to obtain a perfect hedge in terms of amount and timing.
Cost:
Forwards have no upfront cost, while margining requirements may effectively drive
the cost of hedging in futures up.
Small lots:
Generally it is not possible to hedge small exposures.
44
Chapter – 7
CONCLUSION
By far the most significant event in the finance during the past decade has been
the extraordinary development and expansion of financial derivatives. These instruments
enhance 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 futures 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
minimization.
Initially only NSE had the permission but now BSE & MCX-SX has also started
currency future contracts. It shows that how currency future covers ground in the
compare of the other available derivative instruments. Last month MCX-SX ranked top
amongst all three with more than 50% trades of currency futures contracts in India in
sense of volumes and number of contracts also.
Not only big business houses, exporters and importers use this but individuals
who are interested and having knowledge about forex market they can also invest in
currency future. At Marwadi Shares also many individual investors are investing in
currency futures.
Exchange between USD-INR markets in India is very big and along with it other
currency contracts of Euro, Pound and Japanese Yen are in the market and attracting the
investors which is the reason behind higher growth rate of currency futures in India.
45
Chapter – 8
BIBLIOGRAPHY
Websites
www.mcx-sx.com
www.rbi.org.in
www.economywatch.com
www.nseindia.com
www.commodityonline.com
www.indiaaprwire.com
www.moneycontrol.com
www.karvyforex.com
Books
Other sources
Report of the RBI-SEBI standing technical committee on exchange traded
currency futures, 2008
Report of the internal working group on Currency Futures
46