INTRODUCTION

CURRENCY DERIVATIES
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.
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.

1
SCOPE OF THE STUDY:-

To know what is foreign exchange and what are the various foreign exchange services.

To know how the transactions related to foreign exchange volatility carried out.

To have a brief knowledge about various foreign currencies and their exchange rates compare
to other nations currencies.

2
NEED OF THE STUDY

The world nations are increasingly becoming more interrelated global trade, and global
investment. These international result in cross country flow of world nations. Countries hold
currencies of other countries and that a market, dealing of foreign exchange results.
Foreign exchange means reserves of foreign currencies. More aptly, foreign exchange refers
to claim to foreign money balances. Foreign exchange gives resident of one country a financial
claim on other country or countries. All deposits, credits and balances payable in foreign
currency and any drafts, travelers cheques, letters of credit and bills of exchange payable in
foreign currency constitute foreign exchange. Foreign exchange market is the market where
money denominated in one currency is bought and sold with money denominated in another
currency. Transactions in currencies of countries, parties to these transactions, rates at which one
currency is exchanged for other or others, ramificataion in these rates, derivatives to the
currencies and dealing in them and related aspects constitute the foreign exchange (in short,
forex) market.
Foreign exchange transactions take place whenever a country imports goods and services,
people of a country undertake visits to other counties, citizens of a country remit money abroad
for whatever purpose, business units set up foreign subsidiaries and so on. In all these cases the
nation concerned buys relevant and required foreign exchange, in exchange of its currency, or
draws from foreign exchange reserves built. On the other hand, when a country exports goods
and services to another country, when people of other countries visit the country, when citizens
of the country settled abroad remit money homewards, when foreign citizens, firms and
institutions invest in the country and when the country or its business community raises funds
from abroad, the countrys currency is bought by others, giving foreign exchange, in exchange.
Multinational firms operate in more than one country and their operations involve multiple
foreign currencies. Their operations are influenced by politics and the laws of the counties where
they operate. Thus, they face higher degree of risk as compared to domestic firms. A matter of
great concern for the international firms is to analyze the implications of the changes in interest
rates, inflation rates and exchange rates on their decisions and minimize the foreign exchange
risk. The importance of the study is to know the features of foreign exchange and the factors
creating risk in foreign exchange transactions and the techniques used for managing that risk.

3
OBJECTIVES OF THE PROJECT

The basic idea behind undertaking Currency Derivatives project is to gain knowledge
about currency market.
Primary objectives:
To study the basic concept of currency future.
To study exchange traded currency future.
To analyze different currency derivatives products.
Secondary objective:
To know how the currency futures are used as risk management tool.
To analyze income statement and find out the revenues when the dollars are converted
into Indian rupees.
To study the different types of foreign exchange exposure including risk and risk
management techniques which the company is used to minimize the risk.
To present the findings and conclusions of the company in respect of foreign exchange
risk management

4
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
Motilal Oswal Ltd.
Secondary data:
For secondary data, I have use internet. Links are given for the same.

SELECTION OF SCRIP: The sample of the stocks for the purpose of collecting secondary data

has been selected on the basis of Random Sampling.

The stocks are chosen in an unbiased manner and each stock is chosen independent of the other

stocks chosen. And the scrip selected is NIFTY 50. The lot is of any size, profitability position

of futures, buyers and sellers & also the option holders and option writers is studied.

5
LIMITATIONS

The study is confined just to the foreign exchange risk but not the total risk.
The analysis of this study is mainly done on the income statements.
This study is limited for the year 2015-2016.
It does not take into consideration all Indian companies foreign exchange risk.
The hedging techniques are studied only which the company adopted to minimize foreign
exchange risk.

6
 LITERATURE REVIEW

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.

The Underlying Securities for Derivatives are :

1. Commodities: Castor seed, Grain, Pepper, Potatoes, etc.
2. Precious Metal: Gold, Silver
3. Short Term Debt Securities: Treasury Bills
4. Interest Rates
5. Common shares/stock
6. Currency derivatives

7
 TYPES OF FINANCIAL DERIVATIVES

Figure 1

One form of classification of derivative instruments is between commodity derivatives

and financial derivatives. The basic difference between these is the nature of the underlying
instrument assets.
In commodity derivatives the underlying instrument is commodity which may be wheat,
cotton, pepper, sugar, jute, turmeric, corn, crude oil natural gas, gold, silver, zinc and so on.
In financial derivatives the underlying instrument may be treasury bills, stocks, bonds,
foreign exchange, stock index etc. it is to be noted that financial derivative is fairly standard and
there are no quality issues whereas in commodity derivative, the quality may be the underlying
matters.

8
 TRADING OF FINANCIAL DERIVATIVES

Derivatives traded at exchanges are standardized contracts having standard delivery dates
and trading units.
OTC derivatives are customized contracts that enable the parties to select the trading
units and delivery dates to suit their requirements.
A major difference between the two is that of counterparty risk the risk of default by
either party. With the exchange traded derivatives, the risk is controlled by exchanges through
clearing house which act as a contractual intermediary and impose margin requirement. In
contrast, OTC derivatives signify greater liability.

9
 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 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.

10
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 other words, a foreign currency option is a contract for future delivery of a specified
currency in exchange for another in which buyer of the option has to right to buy (call) or sell
(put) a particular currency at an agreed price for or within specified period.

In India only currency forwards and currency futures are only allowed. Currency swaps
and currency option is yet not allowed in India.

Recently MCX-SX has started to offer currency futures contracts in US Dollar-Indian

Rupee (USD-INR,) Euro-Indian Rupee (EUR-INR), Pound Sterling-Indian Rupee (GBP-INR)
and Japanese Yen-Indian Rupee (JPY-INR). Clearing and Settlement is conducted through the
MCX Stock Exchange Clearing Corporation Ltd (MCX-SX CCL).

This year SEBI is also thinking about launching Currency Options for facilitating all the
investors, exporters, importers and MNCs.

11
 CURRENCY FORWARDS MARKETS

Forward contracts are agreements to exchange currencies at an agreed rate on a specified

future date. The actual settlement date is more than two working days after the deal date. The
agreed rate is called forward rate and the difference between the spot rate and the forward rate is
called as forward margin. Forward contracts are bilateral contracts (privately negotiated), traded
outside a regulated stock exchange and suffer from counter -party risks and liquidity risks.
Counter Party risk means that one party in the contract may default on fulfilling its obligations
thereby causing loss to the other party.
An important segment of the Forex derivatives market in India is the Rupee forward
contracts market. This has been growing rapidly with increasing participation from corporates,
exporters, importers, banks and FIIs. Till February 1992, forward contracts were permitted only
against trade related exposures and these contracts could not be cancelled except where the
underlying transactions failed to materialize. In March 1992, in order to provide operational
freedom to corporate entities, unrestricted booking and cancellation of forward contracts for all
genuine exposures, whether trade related or not, were permitted. Although due to the Asian
crisis, freedom to re-book cancelled contracts was suspended, which has been since relaxed for
the exporters but the restriction still remains for the importers.

12
 THE FUTURE MARKET

Futures is a standardized forward contract to buy (long) or sell (short) the underlying
asset at a specified price at a specified future date through a specified exchange. Futures
contracts are traded on exchanges that work as a buyer or seller for the counterparty. Exchange
sets the standardized terms in term of quality, quantity, price quotation, date and delivery place
(in case of commodity).

Features:

The features of a futures contract may be specified as follows:

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.

Futures contracts being traded on organized exchanges impart liquidity to the transaction.
The clearinghouse, being the counter party to both sides of a transaction, provides a mechanism
that guarantees the honoring of the contract and ensuring very low level of default.

13
Types:
Following are the important types of financial futures contract:
Stock Future or equity futures,
Stock Index futures,
Currency futures, and
Interest Rate bearing securities like Bonds, T- Bill Futures.

WHAT IS CURRENCY FUTURES?

A future 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 asset is commodity the contract is termed as Commodity Future Contract. When the
underlying is an exchange rate, the contract is termed a Currency Futures Contract. In other
words, it is a contract to exchange one currency for another currency at a specified date and a
specified rate in the future.

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.

14
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:

For the import and export needs of companies and individuals

For direct foreign investment
To profit from the short-term fluctuations in exchange rates
To manage existing positions or
To purchase foreign financial instruments

Exchange rates are an important consideration when making international investment

decisions. The money invested overseas incurs an exchange rate risk.

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:

Affects the prices of imported goods

Affects the overall level of price and wage inflation
Influences tourism patterns
May influence consumers buying decisions and investors long-term commitments.

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.

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.

15
 To predict the movements of currencies, traders often try to determine whether the
currencys price reflects its fundamental value in terms of current economic conditions.
Examining inflation, interest rates, and the relative strength of the countrys economy helps them
make a determination.

Currency-based derivatives are used by exporters invoicing receivables in foreign

currency, willing to protect their earnings from the foreign currency depreciation by locking the
currency conversion rate at a high level.

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.

Investors in foreign currency denominated securities would like to secure strong foreign
earnings by obtaining the right to sell foreign currency at a high conversion rate, thus defending
their revenue from the foreign currency depreciation.

Multinational companies use currency derivatives being engaged in direct investment

overseas. They want to guarantee the rate of purchasing foreign currency for various payments
related to the installation of a foreign branch or subsidiary, or to a joint venture with a foreign
partner.

A high degree of volatility of exchange rates creates a fertile ground for foreign exchange
speculators. Their objective is to guarantee a high selling rate of a foreign currency by obtaining
a derivative contract while hoping to buy the currency at a low rate in the future.
Alternatively, they may wish to obtain a foreign currency forward buying contract,
expecting to sell the appreciating currency at a high future rate. 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.

16
 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.

Currency futures provide an additional tool for hedging currency risk.

Further development of domestic foreign exchange market.
Permit trades other than hedges with a view to moving gradually towards fuller capital
account convertibility.
Provide a platform to retail segment of the market to ensure broad based participation
based on equal treatment.
Efficient method of credit risk transfer through the Exchange.
Create a market to facilitate large volume transactions to go through on an anonymous
basis without distorting the levels.
MNCs:
MNCs use CDs being engaged in direct investment overseas. 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.

A high degree of volatility creates a fertile ground for foreign exchange speculators.
Their objective is to guarantee a high selling rate of foreign currency by obtaining a derivative
contract while hoping to buy the currency at a low rate in the future.
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.

17
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.

PARTICIPANTS OF CURRENCY MARKET

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.

18
 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--vis 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 terms currency, the base currency has
strengthened / appreciated and the terms currency has weakened / depreciated.

EXCHANGE TRADED CURRENCY FUTURES

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.

19
 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.

20
 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.

Value Date/Final Settlement 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
subsequently declared holiday 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. 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.

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.

21
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.

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.

Determinants of FX rates

The following theories explain the fluctuations in FX rates in a floating exchange rate regime (In
a fixed exchange rate regime, FX rates are decided by its government):

(a) International parity conditions: Relative Purchasing Power Parity, interest rate parity,
Domestic Fisher effect, International Fisher effect. Though to some extent the above
theories provide logical explanation for the fluctuations in exchange rates, yet these
theories falter as they are based on challengeable assumptions [e.g., free flow of goods,
services and capital] which seldom hold true in the real world.
(b) Balance of payments model (see exchange rate): This model, however, focuses
largely on tradable goods and services, ignoring the increasing role of global capital
flows. It failed to provide any explanation for continuous appreciation of dollar during
1980s and most part of 1990s in face of soaring US current account deficit.

22
 (c) Asset market model (see exchange rate): views currencies as an important asset class
for constructing investment portfolios. Assets prices are influenced mostly by peoples
willingness to hold the existing quantities of assets, which in turn depends on their
expectations on the future worth of these assets. The asset market model of exchange rate
determination states that the exchange rate between two currencies represents the price
that just balances the relative supplies of, and demand for, assets denominated in those
currencies.

None of the models developed so far succeed to explain FX rates levels and volatility in the
longer time frames. For shorter time frames (less than a few days) algorithm can be devised to
predict prices. Large and small institutions and professional individual traders have made
consistent profits from it. It is understood from above models that many macroeconomic factors
affect the exchange rates and in the end currency prices are a result of dual forces of demand and
supply. The world's currency markets can be viewed as a huge melting pot: in a large and ever-
changing mix of current events, supply and demand factors are constantly shifting, and the price
of one currency in relation to another shifts accordingly. No other market encompasses (and
distills) as much of what is going on in the world at any given time as foreign exchange.

Market psychology

Market psychology and trader perceptions influence the foreign exchange market in a variety of
ways:

Flights to quality: Unsettling international events can lead to a "flight to quality," with
investors seeking a "safe haven." There will be a greater demand, thus a higher price, for
currencies perceived as stronger over their relatively weaker counterparts. The U.S.
dollar, Swiss franc and gold have been traditional safe havens during times of political or
economic uncertainty.
Long-term trends: Currency markets often move in visible long-term trends. Although
currencies do not have an annual growing season like physical commodities, business
cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may
rise from economic or political trends.

23
 "Buy the rumor, sell the fact": This market truism can apply to many currency situations.
It is the tendency for the price of a currency to reflect the impact of a particular action
before it occurs and, when the anticipated event comes to pass, react in exactly the
opposite direction. This may also be referred to as a market being "oversold" or
"overbought". To buy the rumor or sell the fact can also be an example of the cognitive
bias known as anchoring, when investors focus too much on the relevance of outside
events to currency prices.
Economic numbers: While economic numbers can certainly reflect economic policy,
some reports and numbers take on a talisman-like effect: the number itself becomes
important to market psychology and may have an immediate impact on short-term market
moves. "What to watch" can change over time. In recent years, for example, money
supply, employment, trade balance figures and inflation numbers have all taken turns in
the spotlight.
Technical trading considerations: As in other markets, the accumulated price movements
in a currency pair such as EUR/USD can form apparent patterns that traders may attempt
to use. Many traders study price charts in order to identify such patterns.

Financial instruments

Spot

A spot transaction is a two-day delivery transaction (except in the case of trades between the US
Dollar, Canadian Dollar, Turkish Lira, EURO and Russian Ruble, which settle the next business
day), as opposed to the futures contracts, which are usually three months. This trade represents a
direct exchange between two currencies, has the shortest time frame, involves cash rather than
a contract; and interest is not included in the agreed-upon transaction.

24
Forward

One way to deal with the foreign exchange risk is to engage in a forward transaction. In this
transaction, money does not actually change hands until some agreed upon future date. A buyer
and seller agree on an exchange rate for any date in the future, and the transaction occurs on that
date, regardless of what the market rates are then. The duration of the trade can be one day, a few
days, months or years. Usually the date is decided by both parties. Then the forward contract is
negotiated and agreed upon by both parties.

Swap

The most common type of forward transaction is the currency swap. In a swap, two parties
exchange currencies for a certain length of time and agree to reverse the transaction at a later
date. These are not standardized contracts and are not traded through an exchange.

Future

Foreign currency futures are exchange traded forward transactions with standard contract sizes
and maturity dates for example, $1000 for next November at an agreed rate. Futures are
standardized and are usually traded on an exchange created for this purpose. The average
contract length is roughly 3 months. Futures contracts are usually inclusive of any interest
amounts.

Option

A foreign exchange option (commonly shortened to just FX option) is a derivative where the
owner has the right but not the obligation to exchange money denominated in one currency into
another currency at a pre-agreed exchange rate on a specified date. The FX options market is the
deepest, largest and most liquid market for options of any kind in the world..

25
Speculation

Controversy about currency speculators and their effect on currency devaluations and national
economies recurs regularly. Nevertheless, economists including Milton Friedman have argued
that speculators ultimately are a stabilizing influence on the market and perform the important
function of providing a market for hedgers and transferring risk from those people who don't
wish to bear it, to those who do. Other economists such as Joseph Stiglitz consider this argument
to be based more on politics and a free market philosophy than on economics.

Large hedge funds and other well capitalized "position traders" are the main professional
speculators. According to some economists, individual traders could act as "noise traders" and
have a more destabilizing role than larger and better informed actors .

Currency speculation is considered a highly suspect activity in many countries.While investment

in traditional financial instruments like bonds or stocks often is considered to contribute
positively to economic growth by providing capital, currency speculation does not; according to
this view, it is simply gambling that often interferes with economic policy. For example, in 1992,
currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to
500% per annum, and later to devalue the krona. Former Malaysian Prime Minister Mahathir
Mohamad is one well known proponent of this view. He blamed the devaluation of the
Malaysian ringgit in 1997 on George Soros and other speculators.

Gregory J. Millman reports on an opposing view, comparing speculators to "vigilantes" who

simply help "enforce" international agreements and anticipate the effects of basic economic
"laws" in order to profit.

26
REVIEW 1

AUTHOR: Ming- Hatem Ben-Ameur

TITLE: Pricing Interest-Rate Derivatives with Piecewise Multilinear Interpolations

Interest-rate derivatives like swaptions are challenging to price because they

depend on the term structure of interest rates, which potentially has many degrees of freedom,

requiring modeling numerous underlying stochastic factors (often at least three for the level and

more if stochastic volatility is allowed). In this article, the authors show how the valuation

problem can be streamlined in an affine framework by, effectively, digitizing the derivative

products terminal density. They assume standard affine dynamics for the state vector X, then

divide the state space at option expiration into discrete regions and approximate the payoff in

each one, as a constant in the simplest case. They then compute the transition probabilities to

move from the initial price to each of the terminal regions, using truncated conditional Laplace

transforms. With the probabilities and the set of discrete payoffs, the expected value of the

payoff to the derivative product under the forward measure can be computed, which is then

discounted to compute the initial value. Examples with two- and three-factor affine term

structures show that the procedure is accurate and relatively fast.

27
REVIEW 2

AUTHOR: Stephen J. Taylor,

TITLE: Bankruptcy Probabilities Inferred from Option Prices

In times of financial crisis, solvency concerns are reflected in market prices for financial
instruments. Credit default swap (CDS) spreads provide a direct measure of the markets (risk-
neutral) expectation regarding a firms probability of bankruptcy. The options market is another
place where investors projections of future credit conditions can be seen, in high prices for deep
out-of-the-money puts, for example. Although CDS spreads are available for horizons of 1 to 10
years and more, option maturities are much shorter, offering a window onto short-term
expectations. Moreover, unlike CDS, the availability of market prices for multiple options with
the same expiration but different strike prices allows an entire risk-neutral density (RND) for the
future stock price to be extracted. In this article, the authors extend the strategy of fitting the
RND as a mixture of two lognormals by adding a discrete probability of bankruptcy. Applying
the approach to analyze the RNDs from equity options on Bear Stearns, Lehman, Merrill Lynch,
and AIG in the run-up to their 2008 credit events (two of which ended in forced mergers and the
other two in insolvency), the authors find that the mixture of lognormals plus bankruptcy RND
fits the options market data better than alternative models.

28
REVIEW 3

AUTHOR: Radu S. Tunaru

TITLE: Value at Risk and Expected Shortfall Improved Calculation Based on the Power
Transformation Method

Value-at-risk (VaR), expected shortfall (ES), and similar risk measures are based on

knowledge of the underlying probability distribution of portfolio value, and in particular its

lower tail. The theory is well developed for the familiar normal/lognormal case, but it is well

known that the normal does not match the actual returns observed on portfolios of stocks and

other risky assets. Empirical distributions tend to have fatter tails and negative skewness. Two

standard ways to deal with this problem are either to assume the returns are generated by a

probability law with more flexibility about tail shape than the Gaussian, such as one of the

Johnson family of distributions, or else to develop an empirical fit to the unknown density using

a technique such as GramCharlier or CornishFisher approximation. In both approaches, the

density is chosen to match the moments of the empirical density from the data.

29
REVIEW 4

AUTHOR: Rossella Agliardi and Ramazan Genay

TITLE: Hedging Through a Limit Order Book with Varying Liquidity

Market impact is one of the most important aspects of real-world trading. It is typically a

major component of transaction costs, and trading strategies are carefully optimized to minimize

it. But most of the research has focused on one-off trades, not the repeated series of transactions

required in delta-hedging an options position. In this article, the authors explore optimal hedging

in an illiquid environment for a large trader whose trades absorb a nonmarginal fraction of the

standing orders in the limit order book. The trader needs to take account of both the immediate

price impact of each trade and the speed at which the limit order book is restored afterwardthe

markets resilience. These two aspects of market dynamics together can produce a permanent

effect of a big trade and also a temporary one that dissipates over time. Depending on the

parameters of the liquidity process, the optimal strategy can be the canonical BlackScholes

delta hedge (in the limiting case of infinite liquidity) or one that is distinctly less volatile (when

market impact is large, but there is some resilience in prices) or even one that entails price

manipulation (when there is no resilience and the price impact is permanent).

30
 INDUSTRY PROFILE

The Securities Industry and Financial Markets Association (SIFMA) is a leading securities
industry trade group representing securities firms, banks, and asset management companies in
the U.S. and Hong Kong. SIFMA was formed on November 1, 2006, from the merger of The
Bond Market Association and the Securities Industry Association. It has offices in New York
City and Washington, D. C.

In October 2008, SIFMA laid off over 25% of its staff in the United States due to the "industry
upheaval" which left its member firms in financial straits, and the loss of three of it primary
member firmsLehman Brothers, Bear Stearns, and Merrill Lynch. The dismissals came at the
same time as the United States Congress pledged to revamp the country's financial regulatory
structure.

SIFMA announced in May 2009 that it would also shed its London-based European operation.
That operation will be merged into the London Investment Banking Association (LIBA).

The 350-member American Securitization Forum (ASF) formerly operated as a forum of

SIFMA. On January 14, 2010, ASF announced that it had chosen to terminate its affiliation with
SIFMA as well.

Mission, members, and offices

US operation

SIFMA brings together the shared interests of more than 650 securities firms, banks, and asset
managers. SIFMA's mission is to promote effective and efficient regulation, facilitate more open,
competitive, and efficient global capital markets, champion investor education, retirement
preparedness, and savings, and ensure the publics trust in the securities industry and financial
markets. SIFMA represents its members interests in the U.S. and in Hong Kong. It has offices in
New York and Washington, D.C., and its associated firm, the Asia Securities Industry &
Financial Markets Association (ASIFMA), is based in Hong Kong.

31
In June 2009, SIFMA began a campaign to combat the populist overreaction against Wall
Streets role in the global financial crisis. It hired two aides who had worked for Henry Paulson
when he was Treasury Secretary, to help cleanse Wall Streets image in the eyes of average
Americans. The effort is aimed at policymakers and the media worldwide, and designed to beat
back public skepticism over Wall Streets commitment to change. SIFMA is paying $85,000 a
month for polling, lobbying, and public relations to counter the "lynch mob", according to an
internal SIFMA memo. In internal memos about confidential meetings with top financial
executives, SIFMA said that the securities industry "must be perceived as part of the solution,
which will allow it to better defend against populist overreaction."

In January 2010, SIFMA announced that it had hired the law firm Sidley Austin to consider
filing a lawsuit challenging the Obama administration's banking levy. But an attorney familiar
with the matter said: "I suspect SIFMA got out ahead of its key members." One person with a
large bank said SIFMA had not consulted the bank about its position, and that it was "wildly
premature" to pursue legal action.

In October, 2010, CEO Tim Ryan announced the organization's opposition in the residential real
estate market to a "system wide moratorium on all foreclosures," reacting to problems and
pullbacks in the market by a number of SIFMA members, saying a moratorium "would be
catastrophic." Financial writer Felix Salmon drew attention to the position, terming it
"unhelpful," detailing it as "bizarre" and "sad, ... an inchoate and unhelpful blast of opposition ...
[without] constructive solutions" proposed.

Political giving and lobbying

"SIFMA's political action committees gave more than $1 million during the 2006 election
season, putting the organization in the top 25 of all PACs. Its combined $8.5 million in spending
on federal lobbying last year placed it in the top 30. The financial-services industry is the biggest
corporate player in national politics. Only organized labor donates more money to candidates for
federal offices."

32
European operation

SIFMA also has offices in London, though it announced in May 2009 that it would shed its
European operation. The European High Yield Association (EHYA) in London is a trade
association representing participants in the European high yield market. Members include banks,
investors, issuers, law firms, accounting firms, financial sponsors, and other participants in the
European high yield market. The European Securitisation Forum (ESF) promotes the efficient
growth and continued development of securitisation throughout Europe. It advocates the
positions, represents the interests, and serves the needs of its membersEuropean securitisation
market participants.

Groups

SIFMA has three product and customer-based groups that focus on the U.S.: Capital Markets,
Private Client, and Asset Management. The Capital Markets Group focuses on the primary and
secondary markets for equity and fixed income securities. Its customer focus is issuers,
underwriters, traders, and institutional investors. The Private Client Group focuses on investment
products sold to private clients, as well as individual investor education. The Asset Management
Group focuses on investment products about which asset managers provide investment advice or
investment management services, and on institutional investors and hedge funds.

Senior management

T. Timothy Ryan, Jr., is SIFMA's CEO & President. He took the position after pulling his name
from consideration for a Treasury Department international policy advisor position in April
2007, after problems were noted concerning Ryan's financial portfolio, and he refused to take
certain steps demanded by the Treasury Department's ethic lawyers. SIFMA's other senior
management consists of Kenneth E. Bentsen (EVP, Public Policy and Advocacy), Ileane F.
Rosenthal (EVP, Global Communications & Member Engagement), Randy Snook (EVP), and
Ira Hammerman (Senior Managing Director & General Counsel).

In August 2008, SIFMA hired Michael Paese, former Deputy Staff Director of the Committee on
Financial Services of the House of Representatives, as EVP, Global Advocacy; eight months

33
later Paese left SIFMA to become director of government affairs at Goldman Sachs. Scott
DeFife, who had reported to Paese, left SIFMA in December 2009.

After the 2006 merger which created SIFMA, the organization had a co-CEO structure, with the
SIA's Marc E. Lackritz and BMA's Micah S. Green filling the positions. As a 2007 report
summarized it, "Lackritz [then 60] ha[d] been a friend, colleague and mentor of Green's [then 49]
for two decades." However, with slower-than-hoped-for integration of the merged organization's
operations, and with questions about the handling of executive loans by BMA, Green resigned
abruptly that year and Lackritz assumed the role of sole CEO. Nine months later, Lackritz retired
and T. Timothy Ryan was named CEO.

Board of directors

SIFMA's Chairman of the Board is Blythe Masters (Head of Global Commodities, JPMorgan
Chase), and Vice Chair is Bernard Beal (CEO of M.R. Beal & Company). Other directors
include Samir Assaf (HSBC Bank plc), Shigesuki Kashiwagi (Nomura Holdings America Inc.)
and Sallie Krawcheck (former Chairman & CEO, Citi Global Wealth Management), among
others.

Peter Madoff, brother of fraudster and "money manager" Bernard L. Madoff, and chief
compliance officer and senior managing director of the Madoff investment advisor and broker
dealer businesses, stepped down from the SIFMA Board of Directors in December 2008. His
resignation came amid growing criticism of the Madoff firms links to Washington, and how
those relationships may have contributed to the $50 billion Madoff fraud.

The Madoff family had long-standing ties to SIFMA. Bernard Madoff sat on the board of
directors of the Securities Industry Association, which merged with the Bond Market
Association in 2006 to form SIFMA. Peter Madoff served two terms as a member of SIFMAs
Board of Directors. Over the years 2000-08, the two Madoff brothers personally gave $56,000 to
political action committees controlled by SIFMA or its predecessor organizations in addition to
dues paid to SIFMA by their firm, and tens of thousands of dollars more to sponsor SIFMA
industry meetings. In addition, Bernard Madoff's niece Shana Madoff, who served as a

34
compliance attorney at the Madoff firm, was active on the Executive Committee of SIFMA's
Compliance & Legal Division, but resigned her SIFMA position shortly after her uncle's arrest.

Finances

In 2007 SIFMA had $105 million in both revenues and expenses. SIFMA's highest-paid officers
that year were Donald Kittel (then CFO), $2.1 million, Marc Lackritz (then President & CEO),
$1.5 million, and Randolph Snook (SMD), $1.1 million.

SIFMA's highest-paid officer in 2008 was its new President & CEO Tim Ryan (at approximately
$2 million, for January-October). Ryan had been hired to replace Lackritz in January 2008, at a
43% ($600,000) higher level of compensation, for less than a full year. In related news,
ironically, Ryan wrote in a USA Today editorial in August 2009 that compensation practices at
financial services firms should align with long-term, not short-term, performance.

SIFMA's top three highest paid officers in the fiscal year ending 31 October 2009 were CEO
Tim Ryan at $2.43 million, Executive Vice President Randolph Snook at $1.04 million and
General Counsel Ira Hammerman at $777,000. SIFMA received total revenue that year of $75
million, had total expenses of $82 million, and finished the year with a fund balance of $40
million

35
 COMPANY PROFILE

Motilal Oswal Securities Ltd. (MOSL) was founded in 1987 as a small sub-broking unit, with just two
people running the show. Focus on customer-first attitude, ethical and transparent business practices,
respect for professionalism, research-based value investing and implementation of cutting-edge
technology have enabled us to blossom into an over 1500 member team.

Today we are a well diversified financial services firm offering a range of financial products and services
such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset
Management, Investment Banking, Private Equity, Commodity Broking and Principal Strategies.

We have a diversified client base that includes retail customers (including High Net worth
Individuals), mutual funds, foreign institutional investors, financial institutions and corporate clients. We
are headquartered in Mumbai and as of December 31st, 2012, had a network spread over 526 cities and
towns comprising 1482 Business Locations operated by our Business Partners and us. As on December
31st, 2012, we had 756,159 registered customers.

Research is the solid foundation on which Motilal Oswal Securities advice is based. Almost 10% of
revenue is invested on equity research and we hire and train the best resources to become our advisors. At
present we have an expert team of Research Analysts researching 25+ sectors and commodities. From a
fundamental, technical and derivatives research perspective, Motilal Oswal`s research reports have
received wide coverage in the media. Our consistent efforts towards quality equity research have reflected
in an increase in the ratings and rankings across various categories in the AsiaMoney Brokers Poll over
the years.

Our unique Wealth Creation Study, authored by Mr. Raamdeo Agrawal, Joint Managing Director, is now
in its 17th year. Investors keenly await this annual study for the wealth of information it has on the
companies that created wealth during the preceding five years.

36
As one of Indias leading stockbroking house, we offer you Total India Equities Solution

Award-winning Research: One of the largest Sales & Service team in India
Multi-platform Corporate Access: Comprehensive coverage of the Indian economy, 25 sectors
and 225 companies
Best-in-class Sales Services: Wide-ranging conferences, events, site visits, expert concalls, etc.

37
Our Principles

Customer interest is paramount

Ethical and transparent business practices
Respect for professionals, associates and business partners
Research based value investing
Cutting edge technology to ensure world-class customer

February 2013 Motilal Oswal Securities Ltd won Quality Excellence Award for Best Customer
Service Result award at the National Quality Excellence Awards 2013
February 2013 Motilal Oswal Private Equity won Best Growth Capital Investor-2012 award at
the Awards for Private Equity Excellence 2013
January 2013 Motilal Oswal Securities Ltd. won Depository Participant of the Year award at
the Money Today FPCIL Awards 2012-13
December 2012 The 17th Motilal Oswal Wealth Creation Study presentation was held in
Mumbai on 12th December 2012 and was covered live on CNBC TV18.
November 2012 Motilal Oswal Securities Limited ranked among top 3 in 4 different categories
in the AsiaMoney Brokers Poll 2012 Motilal Oswal Securities ranked No. 2 (Best Local
brokerage) (Best overall Sales Service) (Best for Events and/or Conferences) and No. 3 (Best for
Most Independent Research Brokerage) at the AsiaMoney Brokers Poll 2012
October 2012Motilal Oswal Asset Management hosted the second edition of Value Investing
Forum. The topic of discussion was Sources of Margin of Safety & its importance in Value
Investing and was covered live on CNBC TV18.
September 2012 Mr. Sudhir Dhar, Head-Human Resources has been awarded the Most
Powerful HR Professionals of India Award by the World HRD Congress
August 2012 Motilal Oswal 8th Annual Global Investor Conference was held in Mumbai in
August, 2012. Around 110 corporates participated in the conference and 2,500+ company-
investor meetings.

38
Blood Donation 2011

A blood donation drive was organized, PAN India, starting from 13th to 18th June 2011; 14th June being
a blood donor day. Associates from the company participated in large numbers and generously donated on
noble grounds. Some were first time donors having some apprehensions about donating, which were
cleared by the doctors present; while others were veterans at blood donation.

Prior to proceeding for the blood donation, all donors had to register themselves and check their blood
pressure and haemoglobin levels. Those who were unable to donate blood due to low haemoglobin levels,
high or low blood pressure, vowed to be better prepared to donate next year. Once found normal they
went ahead to do their noble deed. All were advised to eat something before donating as blood donation
should not be done on an empty stomach.

At most locations the drive was held in office premises while at some locations there were mobile vans.
All the donors were given a momento, certificate and a voluntary blood donor card. Some locations also
saw staff and visitors of other offices in the vicinity turning up in big numbers to contribute to this cause.

At the end of the drive there were a total of 294 donors who donated blood. An approximate 1,02,900 ml
of blood was donated. Indeed a proud feeling!

Ahmedabad Investothon 8th Jan 2012

CNBC-TV18 and NSE together initiated the largest most exciting investor support movement the nation
has seen - The INVESTOTHON - a run for India, for its economy and most importantly for its citizens
who are building and living the India Story every day. In the Ahmedabad Investothon, retail investors
stood to be counted in the run for India. 40 participants from Motilal Oswal Securities ltd along with
business associates participated in the Investothon.

Mumbai Investothon 2012

The Mumbai Investothon had garnered massive support in Delhi, Ahmedabad and Chennai with more
than 12,000 investors and corporates participating in those events. Like last year, Motilal Oswal
Securities Limitedparticipated in the 2nd Mumbai Investothon that took place on 26th February, 2012 at
the Bandra Kurla Complex Mumbai.

A total of 107 associates took part in the run on a cool and windy Sunday morning. There were a total of
6000 participants.Motilal Oswal Securities Limited was awarded The Most Enthusiastic Participant
Team Award at the event.

39
Standard Chartered Marathon 2012

The Standard Chartered Mumbai Marathon, Asias largest marathon was held on 15th January 2012.
Approximately 140 associates from the organization participated in the event; around 100 participated in
the Dream category (6Kms) and the rest in Half marathon (21Kms) and Full marathon (42Kms) category.

The dream run race category usually receives corporate group entries where the organization runs as an
assemblage, supporting a cause. 100 Associates from Motilal Oswal Financial Services Limited also did
the same with a gathering at Azad Maidan, CST, Mumbai. We progressed towards the entry gate with our
banners and drums at around 8:45 am, 15 minutes before the start time of Dream Run. .

As soon as the commentator announced the start of the Dream Run 2012, we began to walk along, with
the children from the NGO Light of Life Trust. It was a great spectacle to watch many corporates, NGOs,
private institutions, etc participating in the event.

We walked along with mascots of a Bull and a Bear. Many of our associates successfully completed the
Half marathon receiving medals at the finish. It was a grand event with a lot of display of glamour. The
streets were filled with throngs of participants carrying banners and placards. Many came dressed in
costumes of Donald duck, Dracula, Mickey Mouse, etc. making the walk seem like a fun ride in a
carnival.

Visit to an Old Age Home

On 18th March, 2012 some of our associates visited an Old Age Home in Bhayandar along with
volunteers from the NGO- Umang Foundation. It was a whole day program to meet and greet the inmates
of the Kisan Gopal Rajpuriya Vanprastha Ashram located next to Ram Ratan School, Bhayandar (North
Mumbai falling under the Mira-Bhayander Municipal Corporation). The itinerary included bhajans, one-
to-one interaction with the members, and gift distribution amidst breakfast, lunch, and tea during the
sojourn The members of the old age home had an enjoyable and memorable time with the volunteers.

CSR Initiative On the Occasion of Raksha Bandhan

Motilal Oswal Financial Services Limited in association with LOLT (Light of Life Trust) an NGO,
organised a Rakhi stall across all Mumbai locations as a gesture of support towards the underprivileged
children looked afterby the NGO.

Volunteers from LOLT brought Rakhis to be sold to associates at office locations; The monetary
collection was used to provide educational assistance to the poor and needy children.

40
Joy of Giving Week 2011 Oct 2 Oct 8

The Joy of Giving Week is India`s "festival of giving"! Launched in Sept 27-Oct 3, 2009, the festival is
celebrated every year, in the week including Gandhi Jayanti, i.e., October 2, and brings together Indians
from all walks of life, to celebrate "giving".

From auto drivers to CEOs, school children to celebrities, homemakers to opinion leaders, millions of
people give their time, money, resources or skills back to society- by creating or participating in "events"
of their choice. A giving event could be as simple as a family taking out the maid`s children for an ice-
cream party, or as large as the Design For Change Contest that had 200,000+ school children across India
participating and volunteering to make a difference.

Events are organised by individuals, social groups, schools, colleges, NGOs, corporates, media houses
and others. 1 million+ people participated in 400+ events across 40+ cities in JGW 2010, raising over Rs.
20crores in money and resources donated, and millions of volunteer hours.

As a corporate entity we donated clothes, books (academic/ non-academic), blank note books, children
story books, old newspapers, magazines etc through in-house collections.

Children`s Fun Evening at our office

This year, on the occasion of Childrens Day, MOTILAL OSWAL FINANCIAL SERVICES LIMITED
invited children (aged 10 years to 15 years) from the NGO-LOLT (Light of Life Trust) to spend a
memorable evening at our office. The children were delighted to get such an opportunity to visit our
office.

The NGO provides the children with a supplementary education and support so as to keep the children
motivated enough to continue attending their government school. As is largely noticed, many of the
deprived children drop out of school in order to contribute a hand in their familys income.

41
 DATA ANALYSIS AND INTERPRETATION

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.

42
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

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.

The Instrument type: FUTCUR refers to 'Futures contract on currency' and Contract
symbol: USDINR denotes a currency pair of 'US Dollars Indian Rupee'. Each futures contract
has a separate limit order book. All passive orders are stacked in the system in terms of price-
time priority and trades take place at the passive order price (order which has come earlier and
residing in the system). The best buy order for a given futures contract will be the order to buy at
the highest price whereas the best sell order will be the order to sell at the lowest price.

43
TRANSACTION OF A CONTRACT

44
 USDINR (Future currency(FUTCUR))
Trade Date Instrument Volume (Contracts) Value (in crores) Open Interest
Jan 22, 2016 FUTCUR 4883002 26,568.65 25,48,767
Jan 21, 2016 FUTCUR 2427762 13,213.35 24,95,898
Jan 20, 2016 FUTCUR 2647653 14,375.17 25,37,663
Jan 19, 2016 FUTCUR 3335797 18,191.11 25,31,596
Jan 18, 2016 FUTCUR 2743178 14,934.64 25,60,687
Jan 17, 2016 FUTCUR 2966167 16,171.02 25,82,709
Jan 16, 2016 FUTCUR 3184524 17,387.58 26,95,085
Jan 15, 2016 FUTCUR 2216585 12,119.79 26,75,294
Jan 14, 2016 FUTCUR 2826213 15,524.45 26,66,130
Jan 13, 2016 FUTCUR 2845377 15,672.32 27,09,104
Jan 12, 2016 FUTCUR 2691954 14,822.73 27,21,537
Jan 11, 2016 FUTCUR 3172505 17,550.67 26,87,396
Jan 10, 2016 FUTCUR 3933499 21,638.22 27,31,933
Jan 9, 2016 FUTCUR 5207571 28,310.26 25,43,047
Jan 8, 2016 FUTCUR 3603376 19,509.80 25,57,607
Jan 7, 2016 FUTCUR 4246337 23,076.07 30,05,978
Jan 6, 2016 FUTCUR 4818602 26,090.04 29,46,616
Jan 5, 2016 FUTCUR 3596555 19,582.56 31,88,270
Jan 4, 2016 FUTCUR 3613399 19,729.13 31,84,010
Jan 3, 2016 FUTCUR 2534085 13,741.69 29,77,937
Jan 2, 2016 FUTCUR 2741836 14,921.91 28,55,992
Jan 1, 2016 FUTCUR 2244106 12,161.01 28,45,081

45
Dec 31, 2015 FUTCUR 2749993 14,848.33 26,78,138
Dec 30, 2015 FUTCUR 2482188 13,407.19 27,46,867
Dec 29, 2015 FUTCUR 3455466 18,710.74 26,32,553
Dec 28, 2015 FUTCUR 2081481 11,220.02 25,63,195
Dec 27, 2015 FUTCUR 2781805 14,960.41 24,55,748
Dec 26, 2015 FUTCUR 2979450 15,917.52 25,36,553
Dec 25, 2015 FUTCUR 2465371 13,140.02 23,81,354
Dec 24, 2015 FUTCUR 3051356 16,320.20 23,59,535

Value (in crores)

30,000.00

25,000.00

20,000.00

15,000.00 Value (in crores)

10,000.00

5,000.00

0.00

46
Interpretation:

The value of the currency future market was increasing every day and the market was depending
on Indian trade and tariff and also depends on international trades because dollar was accepted
globally for the trade in the world.

The forward exchange contract is similar to the spot exchange. However, the time period of the
contract is significantly longer. These contracts use a forward exchange rate that differs from the
spot rate. The difference between the forward rate and the spot rate reflects the difference in
interest rates between the two currencies.

This prevents an opportunity for arbitrage. If the rates did not differ, there would be a profit
difference in the currencies. That is, investing in one currency for a year and then selling it
should be the same profit or loss as setting up a forward contract at the forward rate one year in
the future. Investing in one currency would be more profitable than investing in the other. Thus
there would exist an opportunity for arbitrage.

Forward exchange contracts are settled at a specified date in the future. The parties exchange
funds at this date. Forward contracts are typically custom written between the party needing
currency and the bank, or between banks.

The value of the Dollar in the present rate is 60.10 and the trade volume is 26,568.65 unites.

47
 Futures derivatives

USDINR(Option currency(OPTCUR))
Volume Value **
Trade Date Instrument OI
(Contracts) (in crores)
Jan 22, 2016 OPTCUR 1262551 6,892.03 28,39,016

Jan 21, 2016 OPTCUR 1763371 9,682.01 27,59,246

Jan 20, 2016 OPTCUR 1353124 7,428.25 27,51,358

Jan 19, 2016 OPTCUR 1206137 6,615.95 27,09,665

Jan 18, 2016 OPTCUR 1730604 9,504.88 26,38,214

Jan 17, 2016 OPTCUR 1143718 6,298.99 25,69,124

Jan 16, 2016 OPTCUR 857388 4,741.98 25,45,363

Jan 15, 2016 OPTCUR 952530 5,275.11 25,28,443

Jan 14, 2016 OPTCUR 1342095 7,428.11 24,32,493

Jan 13, 2016 OPTCUR 1682169 9,336.00 24,34,787

Jan 12, 2016 OPTCUR 2239422 12,355.07 24,26,632

Jan 11, 2016 OPTCUR 2589450 14,160.56 21,92,359

Jan 10, 2016 OPTCUR 1626024 8,878.25 14,41,320

Jan 9, 2016 OPTCUR 1694767 9,251.36 35,48,976

Jan 8, 2016 OPTCUR 2340710 12,718.45 31,98,242

Jan 7, 2016 OPTCUR 1777244 9,686.11 32,82,142

Jan 6, 2016 OPTCUR 2076869 11,332.86 33,71,120

48
Jan 5, 2016 OPTCUR 977421 5,313.71 30,57,713

Jan 4, 2016 OPTCUR 1208393 6,576.63 30,00,759

Jan 3, 2016 OPTCUR 1245430 6,750.74 28,62,546

Jan 2, 2016 OPTCUR 1021338 5,541.02 28,00,499

Jan 1, 2016 OPTCUR 1014203 5,509.29 27,30,858

Dec 31, 2015 OPTCUR 1793845 9,727.16 26,54,666

Dec 30, 2015 OPTCUR 1061420 5,752.45 25,23,974

Dec 29, 2015 OPTCUR 1366263 7,381.61 24,68,843

Dec 28, 2015 OPTCUR 1049103 5,653.22 24,27,121

Dec 27, 2015 OPTCUR 956026 5,154.30 23,60,502

Dec 26, 2015 OPTCUR 1281541 6,912.91 22,71,262

Dec 25, 2015 OPTCUR 1395316 7,500.05 23,06,353

Dec 24, 2015 OPTCUR 1225026 6,617.41 22,19,422

49
 Value in Cr
16,000.00
14,000.00
12,000.00
10,000.00
8,000.00
Value in Cr
6,000.00
4,000.00
2,000.00
0.00
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31

Interpretation:

The value of the currency Options market was increasing every day and the market was
depending on Indian trade and tariff and also depends on international trades because dollar was
accepted globally for the trade in the world.

A currency option gives the holder the right, but not the obligation, either to buy (call) from the
option writer, or to sell (put) to the option writer, a stated quantity of one currency in exchange
for another at a fixed rate of exchange, called the strike price.

The options can be American, which allows an option to be exercised until a fixed day, called the
day of expiry, or Dollars, which allows exercise only on the day of expiry, not before. The option
holder pays a premium to the option writer for the option.

The value of the Dollar in the present rate is 60.10 and the trade volume is 14,623.08unites.

50
 Price watch of Indian currency and Us Dollars

Value
Best Volume No. of
Contract Best Bid Spread LTP (in OI
Ask (Contracts) Trades
crores)
USDINR 70313 5 384 0.0050 54.4825 4054693 22,030.92 1,330,818 109272
USDINR 60413 50 167 0.0125 54.8700 720970 3,945.31 755,370 27792
USDINR 90513 25 1 0.0075 55.1925 77332 425.51 197,520 3139
USDINR 60613 4 3 0.0025 55.4750 17650 97.56 66,412 799
USDINR 90713 100 3 0.0150 55.7875 6407 35.67 32,280 368
USDINR 80813 206 1 0.0275 56.0500 2287 12.77 33,768 160
USDINR 60913 206 1 0.0500 56.3000 909 5.11 46,693 66
USDINR 91013 30 61 0.2775 56.4975 225 1.27 23,194 17
USDINR 71113 1 1 0.2000 56.7600 166 .94 18,995 10
USDINR 71213 56 1 0.3125 57.0825 107 .61 18,035 24
USDINR 90114 24 50 0.2025 57.4000 404 2.31 15,972 31
USDINR 60214 41 16 0.0300 57.6500 1852 10.66 9,710 122

Volume
4500000
4000000
3500000
3000000
2500000
2000000 Volume
1500000
1000000
500000
0
1 2 3 4 5 6 7 8 9 10 11 12

51
Interpretation:

It is also common for currency options to be used to hedge cash positions. Counters are not
typically in the business of gambling with their profits on deals. It is in the Counters best interest
to lock in an exchange rate they can count on. They are motivated to insure that their profits are
as expected. Two ways they might do this are to enter forward contracts or to buy options.

They would select an exchange rate that would be acceptable but not too expensive. They might
choose to buy a slightly out-of-the-money call option to cover them if the currency exchange rate
falls. If it stays the same or rises, they will exchange at the spot exchange rate at the time the
payment is due.

52
 FINDINGS

1. There is not much change in percentage of operating profit.

2. As currency of other country is increased or decreased there exists volatility in net
operating income.
3. As foreign exchange rate is sensitive phenomena that affect the profitability of the
company, the company should make study of the impact of exchange rate
volatility on its profitability in different foreign markets.
4. To have expanded knowledge on impact on companys profitability when foreign
exchange rates changes, various statements like cash flow, funds flow,etc need to
be checked.

Total revenues are assumed as 80% domestic and 20% foreign and total expenses are assumed as
80% foreign and 20% domestic, thus this factor affects both incomes and expenses when
exchange rate is increased or decreased.

53
 SUGGESTIONS

Often, foreign ships travel through India and dock their vessels at various ports / harbors in the
country. One of the major requirements during such temporary stays, is that of FCY Cash that
has to be made available to the Captain of the Ship for covering Crew wages or for other
expenses on board the ship.

These requirements are usually met through a facility called "Cash to Master". To collect this
cash, the master of the ship has to approach the branch with his passport and a duly filled up
application form. This product is available only in United States Dollars, Pounds Sterling and
Euro Currencies.

Foreign exchange facilities can be availed by customers at any of our branches transacting in
Foreign Exchange. You can buy FCY Cash, TC's and FCY DD's from any our branch and also
encash your TC's and Cash at our branches.

Foreign Exchange can be availed against payments by Cash, Cheque or Pay Order/ Demand
Draft. A maximum of Rs. 49,999/- (as per Indian Tax Laws) will be accepted in cash and any
amount above Rs. 49,999/-, against a Pay Order or Cheque after clearance of the same. You need
to carry the required Documentary Proof for issuance of Foreign Exchange.

54
 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.

55
 BIBLIOGRAPHY

References/Suggested Readings
McDonald, R.L. (2002): Derivatives Markets, Pearson Addison Wesley Publication, Singapore.
Ritchken, P. (1996): Derivative Markets: Theory, Strategy and Applications, Harpercollins
College, Harper Collins.
Hull, J C (2003): Fundamentals of Futures and Options Markets, Pearson Education, Delhi.
Vora, ND and Bagri, BR (1998): Futures and Options, Tata McGraw-Hill Publishing Company
Limited, New Delhi.
Mistry Percy S. Preface & overview of Derivatives Markets in India (2002) edited by Dr. Susan
Thomas.
Mill, John Stuart (1871), Principles of Political Economy, 7th edition.

Journals:
Pricing Interest-Rate Derivatives with Piecewise Multilinear Interpolations andTransition Hatem
Ben-Ameur, Lotfi Karoui, and Walid Mnif
The Journal of DerivativesWinter 2014, Vol. 22, No. 2: pp. 82-109
DOI: 10.3905/jod.2014.22.2.082

Bankruptcy Probabilities Inferred from Option Prices

Stephen J. Taylor, Chi-Feng Tzeng, and Martin Wid
The Journal of DerivativesWinter 2014, Vol. 22, No. 2: pp. 8-31
DOI: 10.3905/jod.2014.22.2.008

Arturo Leccadito, Pietro Toscano, and Radu S. Tunaru

The Journal of DerivativesWinter 2014, Vol. 22, No. 2: pp. 67-81
DOI: 10.3905/jod.2014.22.2.067

Hedging Through a Limit Order Book with Varying Liquidity

Rossella Agliardi and Ramazan Genay

The Journal of DerivativesWinter 2014, Vol. 22, No. 2: pp. 32-49

DOI: 10.3905/jod.2014.22.2.032

A Fast Monte Carlo Algorithm for Estimating Value at Risk and Expected Shortfall
Ming-Hua Hsieh, Wei-Cheng Liao, and Chuen-Lung Chen
The Journal of DerivativesWinter 2014, Vol. 22, No. 2: pp. 50-66
DOI: 10.3905/jod.2014.22.2.050

56
Magazines:
The Economist
Bloomberg Markets
Financial planning
Traders Magazine

Websites:
www.nseindia.com

www.derivatives.com

www.moneycontrol.com

www.money.rediff.com

News Papers:
ECONOMIC TIMES.
BUSINESS LINE.
The Financial Express.
International Business Times

57