Title

“CURRENCY DERIVATIVE”

A Study Project
Submitted to University of Pune in partial fulfillment of the
requirements for the
Award of Master’s Degree Course in Business Administration

2009 – 2011

Submitted by: Under Guidance:

(Shaikh Mohammed Saif G.A) (Prof Mrs. Dhanashree)

SINHGAD INSTITUTE OF BUSINESS ADMINISTRATION

AND COMPUTER APPLICATION, LONAVALA
 REPORT ON

“CURRENCY DERIVATIVE”
 PREFACE

The project titled “CURRENCY DERIVATIVES STUDY” has been carried out for
RELIGARE SECURITIES LTD.”

The main objective of this project is to know the Awareness of Financial Instrument
among investors and also to know the investment pattern of people in different Financial
Securities.

RELIGARE operates in various financial products and services like, Consultancy, Stock
Broking, and Mutual Fund, which is best seen in customer rise. Now a day’s investment or
saving’s has assumed great importance.

According to the study of the markets, it is being observed that there are a lot of financial
instruments available in the market and some of them are really doing well. In near future a
proper financial planning is required to invest money in all type of financial product because
there is good potential in market to invest.

In this project the great emphasis is given to the investor’s mind in respect to investment
in all type of financial instrument where he can maximize his wealth by investing in various
financial instruments. The needs and wants of the client are taken into consideration.

I hope “RELIGARE SECURITIES” will recognize this as well as take more reference
from this project report.

Religare is a global financial services group with a presence across Asia, Africa, Middle East,
Europe and the Americas. In India, Religare’s largest market, the group offers a wide array of
products and services ranging from insurance, asset management, broking and lending solutions
to investment banking and wealth management. The group has also pioneered the concept of
investments in alternative asset classes such as arts and films. With over 10,000 employees
across multiple geographies, Religare serves over a million clients, including corporate and
institutions, high net worth families and individuals, and retail investors.
 ACKNOWLEDGEMENT

The satisfaction and Euphoria that accompany the successful completion of

the work would be incomplete unless we mention the people, as an expression of
gratitude, who made it possible and whose constant guidance and encouragement
served as a beacon of light and crowned our efforts with success. This report would
not have been possible without the support & guidance that I received from various
people at different stages of the project.

Firstly, I would like to thank. Mr.Rajesh Dewele of Religare Securities for

giving me an opportunity to work on this project.

Last but not the least I extend my sincere thanks to the entire Religare team
for providing me their time and active co-operation and all who has helped me
directly or indirectly with this project.

My sincere thanks to my internal guide Prof. (Mrs) Dhanashree, whose

excellent guidance, encouragement and patience has made possible the successful
completion of the project.
 TABLE OF CONTENTS

S NO. TOPICS PAGE NO.

  TITLE PAGE I.

  INSTITUTE CERTIFICATE

  COMPANY CERTIFICATE

  PREFACE

  ACKNOWLEDGEMENTS

1 INTRODUCTION

2 COMPANY PROFILE

3 OBJECTIVES OF THE RESEARCH

4 SCOPE OF THE RESEARCH

5 RESEARCH METHODOLOGY

6 LIMITATION OF THE PROJECT

7 THEORATICAL BACKGROUND

8 THE MECHANICS OF CURRENCY TRADING

9 TECHNICAL ANALYSIS OF CURRENCY TRADING

10 FINDING/INFERENCES

11 SUGGESTIONS/RECOMMENDATION

12 CONCLUSION

13 BIBLIOGRAPHY

14 QUESTIONNAIRE/ANNEXURE
 Chapter 1

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 INTRODUCTION TO FINANCIAL DERIVATIVES

“By far the most significant event in finance during the past decades has been the

extraordinary development and expansion of financial derivatives… These instrument enhances

the ability to differentiate risk allocate it to those investors most able and willing to take it- a

process that has undoubtedly improved national productivity growth and standards of living.”

Alan Greenspan, Former Chairman.

US Federal Reserve Bank.

The past decades has witnessed the multiple growths in the volume of international trade

and business due to the wave of globalization and liberalization all over the world.

As a result, the demand for the international money and financial instruments increased

significantly at the global level. In this respect, changes in the interest rates, exchange rate and

stock market prices at the different financial market have increased the financial risks to the

corporate world. It is therefore, to manage such risks; the new financial instrument shave been

developed in the financial markets, which are also popularly known as financial derivatives.
 1.2 INDUSTRY

1.2.1 HISTORY OF CURRENCY DERIVATIVES

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.
Corporate 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
Me lamed, 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.
 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.
 The rationale for introducing futures in the Indian context has been outlined in thereport
of the internal working group of Currency Futures (Reserve Bank of India, April2008) 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 good sand 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.
 1.2.3 Derivatives in India: A Chronology

Date process
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 Trading of Currency Futures at BSE
16 June 2010 The all new United Stock Exchange started mock trading in Currency
Futures
 1.3 THE COMPANY PROFILE

Name

Religare is a Latin word that translates as 'to bind together'. This name has been chosen to reflect
the integrated nature of the financial services the company offers.

Symbol

The Religare name is paired with the symbol of a four-leaf clover. Traditionally, it is considered
good fortune to find a four-leaf clover as there is only one four-leaf clover for every 10,000
three-leaf clovers found.

For us, each leaf of the clover has a special meaning. It is a symbol of Hope. Trust,Care, Good
Fortune.

For the world, it is the symbol of Religare.

The first leaf of the clover represents Hope. The aspirations to succeed. The dream of
becoming. Of new possibilities. It is the beginning of every step and the foundation on
which a person reaches for the stars.

The second leaf of the clover represents Trust. The ability to place one’s own faith in
another. To have a relationship as partners in a team. To accomplish a given goal with
the balance that brings satisfaction to all, not in the binding, but in the bond that is
built.

The third leaf of the clover represents Care. The secret ingredient that is the cement in
every relationship. The truth of feeling that underlines sincerity and the triumph of
diligence in every aspect. From it springs true warmth of service and the ability to
adapt to evolving environments with consideration to all.

The fourth and final leaf of the clover represents Good Fortune. Signifying that rare
ability to meld opportunity and planning with circumstance to generate those often
looked for remunerative moments of success.
 Hope. Trust. Care. Good Fortune. All elements perfectly combine in the emblematic
and rare, four-leaf clover to visually symbolize the values that bind together and form
the core of the Religare vision.
Religare Securities Limited (RSL),

A 100% subsidiary of Religare Enterprises Limited is a leading equity and securities firm in
India. The company currently handles sizeable volumes traded on NSE and in the realm of online
trading and investments; it currently holds a reasonable share of the market. The major activities
and offerings of the company today are Equity Broking, Depository Participant Services,
Institutional Broking and Research Services. To broaden the gamut of services offered to its
investors, the company offers an online investment portal armed with a host of revolutionary
features.

 RSL is a member of the National Stock Exchange of India, Bombay Stock

Exchange of India, Depository Participant with National Securities Depository
Limited and Central Depository Services (I) Limited.

 Religare has been constantly innovating in terms of product and services and to
offer such incisive services to specific user segments it has also started the NRI, FII,
HNI and Corporate Servicing groups. These groups take all the portfolio investment
decisions depending upon a client's risk / return parameter.

Religare has a very credible Research and Analysis division, which not only caters to the need of
our Institutional clientele, but also gives their valuable inputs to investment dealers

Religare is a global financial services group with a presence across Asia, Africa, Middle
East, Europe and the Americas. In India, Religare’s largest market, the group offers a wide array
of products and services ranging from insurance, asset management, broking and lending
solutions to investment banking and wealth management. The group has also pioneered the
concept of investments in alternative asset classes such as arts and films. With over 10,000
employees across multiple geographies, Religare serves over a million clients, including
corporate and institutions, high net worth families and individuals, and retail investors.
Study Aims and Objectives Of The Firm:

Aim:
To identify, analyze and assess the impacts made by currency futures exchanges in developing
countries on development.

Objectives:
 Awareness-raising: to build awareness of the solutions that currency exchanges provide,
and the extent of their track record in doing so, among key national, regional and
international stakeholders – including governments, regulators, the private sector, civil
society and the media.
 Knowledge accumulation: to produce a high-quality report that adds to the existing
knowledge base - it will seek to establish within a coherent framework the enduring
social and economic impacts that currency exchanges have made in key markets over
time.
 Worldwide applicability: to demonstrate the extent to which exchange success in
upgrading currency sectors and fostering development is part of a worldwide
phenomenon.
 Exchange of information: to share information, experience and perspectives from across
the major developing country region

OFFERINGS

1. EQUITY AND DERIVATIVES

Trading in Equities with Religare truly empowers you for your investment needs. We ensure you
have a superlative trading experience through –
 A highly process driven, diligent approach.
 Powerful Research & Analytics and
  One of the “best-in-class” dealing rooms.

Further, Religare also has one of the largest retail networks, with its presence in more than 1800*
locations across more than 490* cities and towns. This means, you can walk into any of these
branches and connect to our highly skilled and dedicated relationship managers to get the best
services.

The Religare edge

 Pan India footprint.

 Powerful research and analytics supported by a pool of highly skilled research analysts.
 Ethical business practices.
 Offline/Online delivery models.
 Single window for all investment needs through your unique CRN.

2. DEPOSITORY

RSL provides depository services to investors as a Depository Participant with NSDL and
CDSL.
The Depository system in India links issuers, Depository Participants, Depositories National
Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL)
and clearing houses / clearing Corporation of Stock Exchanges. These facilitate holding of
securities in dematerialized form and securities transactions are processed by means of account
transfers.
Our customer centric account schemes have been designed keeping in mind the investment
psychology. With a competent team of skilled professionals, we manage over 380,000 accounts
and have a dedicated customer care centre, exclusively trained to handle queries from our
customers. With our country wide network of branches, you are never far from Religare
depository services.
Religare’s depository service offers you a secure, convenient, paperless and cost effective way to
keep track of your investment in shares and other instruments over a period of time, without the
hassle of handling physical documents. Your DP account with us takes care of your depository
needs like dematerialization, dematerialization, transfer and pledging of shares, stock lending
and borrowing.

Your Demat account is safe and absolutely secure in our hands, every debit instruction is
executed only after its authenticity is established. Our hi-tech in-house capabilities cater to the
needs of software maintenance, database administration, network maintenance, backups and
disaster recovery. This extra cover of security has gained the trust of our clients.

3. PORTFOLIO MANAGEMENT SERVICES:

Religare offers PMS to address varying investment preferences. As a focused service, PMS
pays attention to details, and portfolios are customized to suit the unique requirements of investors.

Religare PMS currently extends six portfolio management schemes, viz Monarque, Panther, Tortoise,
Elephant, Caterpillar and Leo. Each scheme is designed keeping in mind the varying tastes,
objectives and risk tolerance of our investors.

OUR SCHEMES

Monarque
At Religare, we understand ‘those who reign’ have truly inimitable needs and objectives and deserve
an equivalently matchless partner to provide your wealth the care it deserves to grow and be
preserved. Monarque is a portfolio structured to provide higher returns by taking aggressive positions
across sectors and market capitalizations. Monarque is ideally suitable for investors with "High Risk
High Return" appetite.

Panther
The Panther portfolio aims to achieve higher returns by taking aggressive positions across sectors
and market capitalizations. It is suitable for the “High Risk High Return” investor with a strategy to
invest across sectors and take advantage of various market conditions.

Tortoise
The Tortoise portfolio aims to achieve growth in the portfolio value over a period of time by way of
careful and judicious investment in fundamentally sound companies having good prospects. The
scheme is suitable for the “Medium Risk Medium Return” investor with a strategy to invest in
companies which have consistency in earnings, growth and financial performance.

Elephant
The Elephant portfolio aims to generate steady returns over a longer period by investing in Securities
selected only from BSE 100 and NSE 100 index. This plan is suitable for the “Low Risk Low
Return” investor with a strategy to invest in blue chip companies, as these companies have steady
performance and reduce liquidity risk in the market.

Caterpillar
The Caterpillar portfolio aims to achieve capital appreciation over a long period of time by
investing in a diversified portfolio. This scheme is suitable for investors with a high risk appetite.
The investment strategy would be to invest in scrip’s which are poised to get a re-rating either
because of change in business, potential fancy for a particular sector in the coming years/months,
business diversification leading to a better operating performance, stocks in their early stages of
an upturn or for those which are in sectors currently ignored by the market.

Leo
Leo is aimed at retail customers and structured to provide medium to long-term capital
appreciation by investing in stocks across the market capitalization range. This scheme is a mix
of moderate and aggressive investment strategies. Its aim is to have a balanced portfolio
comprising selected investments from both Tortoise and Panther. Exposure to Derivatives is
taken within permissible regulatory limits.
The Religare Edge :
We serve you with a diligent, transparent & process driven approach and ensure that your money
gets the care it deserves.

No experts, only expertise.

PMS brought to you by Religare with its solid reputation of an ethical and scientific approach to
financial management. While we offer you the services of a dedicated Relationship Manager
who is at your service 24x7, we do not depend on individual expertise alone. For you, this means
lower risk, higher dependability and unhindered continuity. Moreover, you are not limited by a
particular individual’s investment style.

No hidden profits.
We ensure that a part of the broking at Religare Portfolio Management Services is through
external broking houses. This means that your portfolio is not churned needlessly. Using more
broking firms gives us access to a larger number of reports and analysis, enabling us to make
better, more informed decisions. Furthermore, your portfolio is customized to suit your
investment objectives.

Daily Disclosures.
Religare Portfolio Management Services gives you daily updates on your investment. You can
pinpoint where your money is being invested, 24x7, instead of waiting till the end of the month
to keep track.

No charge till you profit*.

So sure are we of our approach to Portfolio Management that we do not charge you for our
services, until your investments start showing profit. With customized investment options
Religare Portfolio Management Services invites you to invest across five broad portfolios to suit
your investment needs.

CURRENCY FUTURES
Benefits of Currency Futures
 High Liquidity.
 Extended trading hours - 9 am to 5 pm.
 Opportunities to reap benefits owing to a highly dynamic market.
 Small lot size of only US $1000 with low exchange specified margins.

Currency Futures is best suited for-

 SMEs / Individuals involved in Imports/Exports.

 Corporate/ Institutions involved in Imports/Exports and anybody else who has
 foreign currency exposure

RESEARCH

We at Religare believe in providing independent research for clients to make

investment decisions, with strict emphasis on self-regulation, avoiding possible
conflict of interest in objectivity.

Our Research Products

 Fundamental Research
 Technical Research
 Daily Reports
 Intraday trading tech calls
 Intraday Derivative call
 Directional F&O calls
 Key Officials

Name Designation
Sunil Godhwani Chairman and Managing director
Rajesh Doshi Co. Secretary & Compl. Officer
Ravi Batra Sr. Vice President & Company Secretary

Religare structure
Religare AMC Limited Religare Finvest Limited

Asset Management Business Lending and Distribution business

Portfolio Management
Religare Insurance Broking Limited
AEGON Religare Life Insurance Co. Ltd.
Life Insurance Broking Business
Life Insurance Company, JV with Aegon (26%),  Non-Life Insurance Broking Business
Religare (44%), and Bennett & Coleman(30%)
Religare Arts Initiative Limited
Religare Macquarie Wealth Mgmt. Ltd.
Business of Art
JV with Macquarie for Wealth Management Business Art Gallery
Art Advisory
Religare Securities Limited
Religare Venture Capital Limited
Retail Equity Broking
Online Investment Portal Private Equity and Investment Manager
Depository Services
Vistaar Religare Capital Advisors Ltd.
Religare Commodities Limited
JV with Vistaar Entertainment Ventures for film
Commodity Broking Business fund
India's first ever film fund
Religare Capital Markets Limited
Religare - Milestone
PE and M&A Advisory
Institutional Broking JV with Milestone Capital to manage a healthcare
Investment Banking and education fund

Religare Finance Ltd.

Capital Market Financing

 1.3.1 CORE COMPETENCES

Commodities research & broking services

Online or offline trading facility
Depository services through CDSL
Web based 24 x 7 back office software
Good understanding of the sub-broker and retail customer needs
Professional work culture with a personal touch
Cost- effective processes
Streaming quotes & real time charts for BSE /NSE [cash / derivatives]
Single connectivity and speedy execution of trades.
Online technical support & help desk

GLOBALLY NETWORK OF RELIGARE

 Objective of the Project:

The basic idea behind undertaking Currency Derivatives project is to gain knowledge
about currency future market.

 To study the basic concept of Currency future.

 To understand the investors response for currency future with other currency derivatives.

 To study the hedging, speculation and arbitrage in Currency Future.

 To understand the practical considerations and ways of considering currency future price.

Limitation of the Study :

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

1) As a result of the financial constraints, the research could not be carried on an extensive scale
and the scope remained limited.

2) The stock brokers and other concerned people are indulged in the stock market operations
during working hours of the day and our busy, therefore are hesitant to give time and
information.

3) It was difficult to take in-depth interviews from everyone due to limitation of time from both
ends.
 Scope:

Post 1991, India has emerged as a global leader for international trade leading to transfer
of currency which has actually given a huge scope to currency market for futuristic result
in order to hedge funds.

Devoid of jargon, currency derivatives can be described as contracts between the sellers
and buyers, whose values are to be derived from the underlying assets, the currency
amounts. These are basically risk management tools in forex and money markets used for
hedging risks and act as insurance against unforeseen and unpredictable currency and
interest rate movements. Any individual or corporate expecting to receive or pay certain
amounts in foreign currencies at future date can use these products to opt for a fixed rate -
at which the currencies can be exchanged now itself. Risks arising out of borrowings, in
foreign currency, due to currency rate and interest rate movements can be contained. If
receivables or payments or expenditure are denominated or to be incurred in multiple
currencies, derivatives can be used for matching the inflows and outflows.

Market risks can't be avoided, but have to be managed. And currency derivative serve the
purpose of financial risk management encompassing various market risks. As in the case
of insurance, an upfront premium is payable for buying a derivative.

While there could be some gains, depending on the markets and market movement and
the type of derivative selected, losses are contained. Entering into contracts not backed by
genuine business cash flows in relevant currencies amounts to speculation and can lead to
losses.
 Chapter - 2

RESEARCH AND METHODOLOGY

2.1 MEANING OF RESEARCH

Research in common parlance (language) refers to a search for common knowledge.

Once can also define research as a scientific and systematic search for pertinent information on a
specific topic. Research is an academic activity and as such the term should be used in a
technical sense.

Research is an art of scientific investigation. It can also be defined as “a careful investigation or

enquiry, especially through search for new facts in any branch of knowledge.” Some people
consider research as movement from the known to the Unknown.

Keeping in view the objective of the project, I designed the research plan which includes the
decision on data sources, research approach, research instruments and contact method.

Research Methodology is the systematic way to solve the research problem. The scope of
research methodology is much wider than that of research methods. Research process has the
following steps:

1. Defining the problem and research Objectives.

2. Developing the research plan, implementing it and interpreting and reporting the
findings.
3. Formulating proper research design.
4. Considering the various data sources.
5. Defining the proper research approach and sampling method.
 2.3 DATA COLLECTION:

The task of data collection begins after a research problem has been defined and plan
chalked out. There are two types of data viz. Primary data, Secondary data. The Primary data
those which are collected afresh and for the first time, and thus happen to be original in
character. The Secondary data, on the other hand, are those which have already been collected by
some one else and which have been passed through the statistical process.

In research data is divided into two major parts i.e. Primary Data & Secondary Data.

There different sources and methods of data collection follows:

 Primary data collection:

The Primary data those which are collected afresh and for the first time, and thus happen
to be original in character.

The primary data is collected through Personal interview using Questionnaire as the research
instrument and information provided by the company.

The Questionnaire designed by me contained the close-ended questions and these were filled by
the clients during the visit

 Secondary Data Collection:

The Secondary data, on the other hand, are those which have already been
collected by someone else and which have been passed through the statistical process.

The secondary data collected in project through Manuals, Internet, books, and newspapers etc.
 Chapter – 3

3.1 WHAT IS DERIVATIVES?

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
3.1.1
Derivatives are traded at organized exchanges and in the Over The Counter
( OTC ) market :

Derivatives Trading Forum

Organized Exchanges Over The Counter

Commodity Futures Forward Contracts

Financial Futures Swaps

Options (stock and index)

Stock Index Future:

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 vulnerability.

 3.2 TYPES OF FINANCIAL DERIVATIVES

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.
 3.3 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.
 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 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 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
3.5 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.

3.6 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

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.

 Chapter – 4

4.1 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 ³Currency 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 differs for different currency pairs. In case of USD-INR
currency futures contract the tick size shall be 0.25 Paisa 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.
 4.2 UTILITY OF CURRENCY DERIVATIVES

Traders in the foreign exchange market make thousands of trade’s 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.

To predict the movements of currencies, traders often try to determine whether the currency’s
price reflects its fundamental value in terms of current economic conditions. Examining
inflation, interest rates, and the relative strength of the country’s 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.

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.

WHAT AFFECTS CURRENCY RATES?

In a word- information. Information is what drives every financial market. Many different cross-
currencies are at play in the currency market at any given movement. After all, the market is
setting the value of one currency relative to another, so at the minimum, you are looking at the
themes affecting two major international economies.

Factor Affecting The Currency Rate:

Political
Factors
Performance of Uncertain
Equity Market Events

Performance of
Other Asian
Exchange Fundamental
Rate Factors
Currencies

Policy Capital
Decisions Flows

RBI
Intervention
FUNDAMENTALS DRIVE THE CURRENCY MARKET:

Fundamentals are the broad grouping of news and information that reflects the macroeconomic
and political fortunes of the countries whose currencies are traded. Most of the time when you
hear someone talking about the fundamentals of a currency, he’s referring to the economic
fundamentals. Economic fundamentals are based on:

 Economic data reports

 Interest rate levels

 Monetary policy

 International trade flows

 International investment flows

There are also political and geopolitical fundamentals. An essential element of any currency’s
value is the faith or confidence that the market places in the value of the currency. If political
events, such as an election or scandal, are seen to be undermining the confidence in a nation’s
leadership, the value of its currency may be negatively reflected.

Gathering and interpreting all this information is just part of a currency trader’s daily routine,
which is one reason why we put dedication at the top of our list of successful trader attributes.
FINDING YOUR TRADING STYLE:

What do you mean by trading style? Basically it boils down to how you approach currency
trading in terms of
 Trade timeframe: how long you hold a position? Are you looking at short- term trade

opportunities (day trading), trying to capture more significant shifts in currency prices

over days or weeks, or something in between?

 Currency pair election: are you interested in trading in all the different currency pairs, or

are you inclined to specialize in only one or two?

 Trade rationale: are you fundamentally or technically inclined? Are you considering

creating a systematic trading model? Are you a trend follower or a breakout trader?

 Risk appetite: how much are you prepared to risk and what are your return expectations?

PLANNING THE TRADE

Whatever trading style, you ultimately choose to follow, you won’t get very far if you don’t
establish a concrete trading plan and stick to it. Trading plans are what keep small bad trades
from becoming big bad trades and what can turn small winners. More than anything, though,
they are your road map, helping you to navigate the market after the adrenaline and emotions
start pumping, no matter what the market throws your way.

We are not telling you that trading is any easier than any other financial market speculation. But
we can tell you that trading with a plan will greatly improve your chances of being a successful
in the stock market over time. Most important, we want to caution you that trading without plan
is a surf ire recipe for disaster.
EXECUTING THE TRADE PLAN FROM START TO FINISH:

The start of ant trade comes when you step into the market and open up a position. How you
enter your position, how you execute the first step of your trading plan, can be as important as
the trade opportunity itself. After all, if you never enter the position, the trade opportunity will
never be exploited. And probably nothing is more frustrating as a trader than having pinpointed a
trade opportunity, having it go the way you expected, but having nothing to show for it because
you never put the trade on.

The effort and resources you invest in researching, monitoring, and analyzing the market come to
a concrete result when you open a trade. You are now exposed to price fluctuations and your
trading account will register a profit or loss as a result. But that’s just the beginning of it

Active trade management is also critical to keeping more of what you make in the market. In our
experience, making money in the currency market is not necessarily the hard part. More often
than not, keeping what you have made is the really hard part.

Exiting each trade is the culmination of the entire process and you are either going to be
pleased with a profit or disappointed with a loss. Every trade ends in either a profit or a loss
(unless you get out at the entry price); it’s just the way the market works. While you trade is still
active, however, you are still in control and you can choose to exit at any time.
CURRENCIES AND OTHER FINANCIAL MARKETS:

As much as we like to think of the currency market as the be-all and end-all of financial trading
markets, it doesn’t exist in vacuum. There are some markets like gold, oil, stocks, and bonds.

GOLD

Gold is commonly viewed as a hedge against inflation, an alternative to the U.S. dollar, and
as a store of value in times of economic or political uncertainty. Over the long term, the
relationship is mostly inverse, with a weaker USD generally accompanying a higher gold price,
and a stronger USD coming with a lower gold price. However, in the short run, each market has
its own dynamics and liquidity, which makes short-term trading relationships generally tenuous.
Overall, the gold market is significantly smaller than the forex market, so if we were gold
traders, we would sooner keep an eye on what’s happening to the dollar, rather than the other
way around.

With that noted, extreme movement in gold prices tend to attract currency traders attention and
usually influence the dollar in a mostly inverse fashion.

OIL

A lot of misinformation exists on the internet about the supposed relationship between oil
and the USD or other currencies, such as CAD or JPY. The idea is that, because some countries
are oil producers, their currencies are positively (or negative) affected by increases (or decreases)
in the price of oil. If the country is an importer of oil (and which countries aren’t today?)

The best way to look at oil is an inflation input and as a limiting factor on overall
economic growth. The higher the price of oil, the higher inflation is likely to be and the slower
an economy is likely to grow. The lower the price of oil, the lower inflationary pressures are
likely (but not necessarily) to be.
 STOCKS

Stocks are micro economic securities, rising and falling in response to individual corporate
results and prospects, while currencies are essentially macroeconomic securities, fluctuating in
response to wider- ranging economic and political developments. As such there is a little
intuitive reason that stock markets should be related to currencies. Long term correlation studies
bear this out, with correlation coefficients of essentially zero between the major USD pairs and
U.S. equity markets over the last five years.
The two markets occasionally intersect, though this is usually only at the extremes and for very
short periods.

BONDS
Fixed income or bond markets have a more intuitive connection to the forex market because they
are both heavily influenced by interest rate expectations. However, short term market dynamics
of supply and demand interrupt most attempts to establish a viable link between the two markets
on a short term basis. Sometimes the forex market reacts first and fastest depending on shifts in
interest rate expectations. At other times, the bond market more accurately reflects changes in
interest rate expectations, with the forex market later playing catch-up

(Because it takes longer to turn a bigger ship around).

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 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.
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.
.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.

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.
 4.5 MAJOR CURRENCIES OF THE WORLD:

The US Dollar is by far the most widely traded currency. In part, the widespread use of
the US Dollar reflects its substantial international role as “investment” currency in many capital
markets, “reserve” currency held by many central banks, “transaction” currency in many
international commodity markets, “invoice” currency in many contracts, and “intervention”
currency employed by monetary authorities in market operations to influence their own exchange
rates.

Other Major Currencies include:

The Euro
Like the US Dollar, the Euro has a strong international presence and over the years has emerged
as a premier currency, second only to the US Dollar.

The Japanese Yen

The Japanese Yen is the third most traded currency in the world. It has a much smaller
international presence than the US Dollar or the Euro. The Yen is very liquid around the world,
practically around the clock.

The British Pound

Until the end of World War II, the Pound was the currency of reference. The nickname Cable is
derived from the telegrams used to update the GBP/USD rates across the Atlantic. The currency
is heavily traded against the Euro and the US Dollar, but it has a spotty presence against other
currencies.
The two-year bout with the Exchange Rate Mechanism, between 1990 and 1992, had a
soothing effect on the British Pound, as it generally had to follow the Deutsche Mark's
fluctuations, but the crisis conditions that precipitated the pound's withdrawal from the Exchange
Rate Mechanism had a psychological effect on the currency.
The Swiss Franc

The Swiss Franc is the only currency of a major European country that belongs neither to the
European Monetary Union nor to the G-7 countries. Although the Swiss economy is relatively
small, the Swiss Franc is one of the major currencies, closely resembling the strength and quality
of the Swiss economy and finance.
Switzerland has a very close economic relationship with Germany, and thus to the Euro zone.
Typically, it is believed that the Swiss Franc is a stable currency. Actually, from a foreign
exchange point of view, the Swiss Franc closely resembles the patterns of the Euro, but lacks its
liquidity.

Currency Table

The Currency Table is a user-friendly table that provides information on currency

movements

USD EUR GBP JPY

USD 1 0.7468 0.6627 99.19
EUR 1.339 1 0.8869 132.66
GBP 1.509 1.1275 1 149.53
JPY 0.0101 0.0075 0.0067 1
USD EUR GBP JPY

4.6 OVERVIEW OF INTERNATIONAL CURRENCY MARKETS:

 During the past quarter century, the concept of a 24-hour market has become a reality.
Somewhere on the planet, financial centres are open for business; banks and other institutions are
trading the US Dollar and other currencies every hour of the day and night, except on weekends.
In financial centres around the world, business hours overlap; as some centres close, others open
and begin to trade. The foreign exchange market follows the sun around the earth.

With access to all of the foreign exchange markets generally open to participants from all
countries, and with vast amounts of market information transmitted simultaneously and almost
instantly to dealers throughout the world, there is an enormous amount of cross-border foreign
exchange trading among dealers as well as between dealers and their customers

24HOURS MARKET WINDOW

Chapter – 5
 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

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.

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.

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).

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.
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.

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 µcarry¶ 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.

5.3 DETAILS OF THE CONTRACT SPECIFICATION OF USD/INR

FUTURE
 Symbol USDINR
Instrument Type FUTCUR
Unit Of Trading 1 (1 unit denotes 1000 USD)
Underlying The exchange rate in Indian Rupees for a US Dollars
Tick Size Rs.0.25paise or INR 0.0025
Trading Hours Monday to Friday
9.00a.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 the interbank
settlements in the Mumbai.
Quantity Freeze Above 10,000
Base Price Theoretical price on the 1st day of the contract. On all other days,
DSP of the contracts.
Price Operating Range Tenure up to 6 months Tenure more than 6 months
+\-3% of base price +\-5% of the base price
Position Limits Clients Trading members
Higher of 6% of total Higher of 15% of the total
Open interest or open interest or
USD 10 millions USD 50 millions
Minimum Initial Margin 1.75% on day 1, 1% thereafter
Extreme Loss Margin 1% of MTM value of the open position.
Calendars 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 (FSP) RBI reference rate

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.

5.4 TRANSACTION OF A CONTRACT

5.5 FACTS & FIGURES ABOUT USD/INR FUTURES CONTRACT

 Trade Date Total Total Value Spread Open RBI
Contracts (in Rs Cr.) Volume Interest Reference
Rate
19-Nov-08 179362 895.68 - 64676 49.74
01-Dec-08 192221 970.1 - 71325 50.09
01-Jan-09 97289 474.66 - 133015 48.73
01-Dec-09 1845073 8571.3 221069 580426 46.45
01-Jan-10 948881 4437.47 250133 468156 46.65
29-Jan-10 2919761 13557.42 421800 595355 46.37
17-June-10 36,85,770 17049.6 1276594 - 46.16

5.6 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.

Standardized Lot Size:

Lots or contract sizes are determined and fixed by the exchanges.

Low Transaction Cost:

The retail transaction cost (the bid/ask spread) is typically less than 0.1 percent under
normal market conditions.

Almost Instantaneous Transactions:

High liquidity and low bid/ask spreads lead to immediate trades.
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%.

Low Margins, High Leverage:

Margins of 3-5% increase leverage possibilities. These 2 factors increase the potential for
making higher profits (and losses)

Online Access:
The advent of online (Internet) trading platforms helps you to trade at your convenience
from your home, office or on the go.

No one can corner the market:

The Forex market is so vast and has so many participants that no single entity, not even a
central bank, can control the market price for an extended period of time. Even
interventions by mighty central banks are becoming increasingly ineffectual and short-
lived. Thus central banks are becoming less and less inclined to intervene to manipulate
market prices.

Transparency:
It is possible for everyone to verify trade details on NSE if anyone have a doubt that the
broker has tried to cheat

5.7 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.

5.8 CLEARING, SETTLEMENT AND RISK MANAGEMENT

Clearing Corporation undertakes clearing and settlement of all trades executed on the
Currency Derivatives Segment of the exchange. It also acts as legal counterparty to all trades on
the Currency Derivatives segment and guarantees their financial settlement.

Clearing entities

Clearing and settlement activities in the Currency Derivatives segment are undertaken by
a Clearing Corporation with the help of the following entities:

Clearing members
In the Currency Derivatives segment, trading-cum-clearing member, clear and settle their
own trades as well as trades of other trading members (TMs). Besides, there is a special category
of members, called professional clearing members (PCM) who clear and settle trades executed
by TMs. The members clearing their own trades and trades of others, and the PCMs are required
to bring in additional security deposits in respect of every TM whose trades they undertake to
clear and settle.

Clearing banks
 Funds settlement takes place through clearing banks. For the purpose of settlement all
clearing members are required to open a separate bank account with the Clearing Corporation
designated clearing bank for Currency Derivatives segment. The Clearing and Settlement process
comprises of the following three main activities:
 Clearing
 Settlement
 Risk Management

5.9 RISK MANAGEMENT MEASURES

Every exchange has a comprehensive risk containment mechanism for the Currency
Derivatives segment. The salient features of risk containment mechanism on the Currency
Derivatives segment are:

 The financial soundness of the members is the key to risk management. Therefore, the
requirements for membership in terms of capital adequacy (net worth, security deposits)
are quite stringent.

 Upfront initial margin is charged for all the open positions of a CM. It specifies the initial
margin requirements for each futures contract on a daily basis. It also follows a value-at-
risk (VaR) based margining through SPAN® (Standard Portfolio Analysis of Risk). The
CM in turn collects the initial margin from the TMs and their respective clients.

 The open positions of the members are marked to market based on contract settlement
price for each contract. The difference is settled in cash on a T+1 basis.

 The on-line position monitoring system monitors the member open positions and margins
on a realtime basis vis-à-vis the deposits provided by the CM or the limits set for the TM
by the CM. The online position monitoring system generates alerts whenever the margins
of a member reaches the predetermined percentage of the capital deposited by the CM or
 limits set for the TM by the CM. The Clearing Corporation monitors the CMs for initial
margin and extreme loss margin violations, while TMs are monitored for initial margin
violation.

 CMs are provided with a trading terminal for the purpose of monitoring the open
positions of all the TMs clearing and settling through them. A CM may set limits for a
TM clearing and settling through him. The Clearing Corporation assists the CM to
monitor the intra-day limits set up by a CM and whenever a TM exceeds the limits, it
stops that particular TM from further trading.

 A member is alerted of his position to enable him to adjust his position or bring in
additional capital. Margin violations result in withdrawal of trading facility for all TMs of
a CM in case of a violation by the CM.

 Separate settlement guarantee funds for this segment have been created by exchanges.
The most critical component of risk containment mechanism for the Currency
Derivatives segment is the margining system and on-line position monitoring. The actual
position monitoring and margining is carried out on-line through Exchange Risk
Management Systems that use SPAN® (Standard Portfolio Analysis of Risk)
methodology, and compute on-line margins, based on the parameters defined by SEBI.

5.10 MARGIN REQUIREMENTS

The initial security deposit paid by a member is considered as his initial margin for the
purpose of allowable exposure limits. Initially, every member is allowed to take exposures up to
the level permissible on the basis of the initial deposit.
However, if a member wishes to create more exposure, he has to deposit additional margins.
If there is surplus deposit lying with the Exchanges toward margins, it is not refunded to the
member unless a written request is received from the member for refund. However, the member
receives additional exposure limit on account of such additional / surplus deposit. In case of
receipt of written request for refund of additional deposit, the same may be refunded within 3
working days.
The different types of margins collected by the Exchanges are as follows:

Initial Margin

The Initial Margin requirement is based on a worst case loss of a portfolio of an

individual client across various scenarios of price changes. The various scenarios of price
changes would be so computed so as to cover a 99% Value at Risk (VaR) over a one-day
horizon. In order to achieve this, the price scan range is fixed at 3.5 standard deviation. The
initial margin so computed would be subject to a minimum of 1.75% on the first day of currency
futures trading and 1% thereafter. The initial margin shall be deducted from the liquid net worth
of the clearing member on an online, real-time basis.

Portfolio Based Margin

The Standard Portfolio Analysis of Risk (SPAN) methodology is adopted to take an

integrated view of the risk involved in the portfolio of each individual client comprising his
positions in futures contracts across different maturities. The client-wise margin is grossed across
various clients at the Trading / Clearing Member level. The proprietary positions of the Trading /
Clearing Member are treated as that of a client.

Real-Time Computation

The computation of worst scenario loss has two components. The first is the valuation of
the portfolio under the various scenarios of price changes. At the second stage, these scenario
contract values are applied to the actual portfolio positions to compute the portfolio values and
the initial margin. The Exchange updates the scenario contract values at least 5 times in the day,
which is carried out by taking the closing price of the previous day at the start of trading, at the
prices at 11:00 a.m., 12:30 p.m., 2:00 p.m, and at the end of the trading session. The latest
available scenario contract values are applied to member/client portfolios on a realtime basis.
Calendar Spread Margins

A currency futures position at one maturity which is hedged by an offsetting position at a

different maturity is treated as a calendar spread. The calendar spread margin is at a value of Rs.
250 for all months of spread.
The benefit for a calendar spread continues till expiry of the near-month contract. For a calendar
spread position, the extreme loss margin is charged on one-third of the mark-to-market value of
the far-month contract.

Extreme Loss Margin

Extreme loss margin is computed at 1% on the mark-to-market value of the Gross Open
Position. It shall be deducted from the liquid assets of the Clearing Member.

Liquid Net worth

The initial margin and the extreme loss margin are deducted from the liquid assets of the
clearing member. The clearing member’s liquid net worth after adjusting for the initial margin
and extreme loss margin requirements must be at least Rs. 50 lakhs at all points in time. The
minimum liquid net worth is treated as a capital cushion for days of unforeseen market volatility.

Liquid Assets

The liquid assets for trading in currency futures are maintained separately in the currency
futures segment of the clearing corporation. However, the permissible liquid assets, the
applicable haircuts and minimum cash equivalent norms would be same as that are applicable for
the equity derivatives segment.

Mark-to-Market Settlement

The mark-to-market gains and losses are settled in cash before the start of trading on T+1
day. If mark-to market obligations are not collected before start of the next day’s trading, the
clearing corporation collects correspondingly higher initial margin to cover the potential for
losses over the time elapsed in the collection of margins.

Margin collection and enforcement

The client margins (initial margin, extreme-loss margin, calendar-spread margin, and
mark-to-market settlements) are compulsorily collected and reported to the Exchange by the
members. The Exchange imposes stringent penalty on members who do not collect margins from
their clients. The Exchange also conducts regular inspections to ensure margin collection from
clients.
The Mechanics Of Currency Trading

Buying And Selling Simultaneously:

The biggest mental hurdle facing newcomers to currencies, especially trader’s familiar with other
markets, is getting their head around the idea that each currency trade consists of a simultaneous
purchase and sale. In the stock market, for instance, if you buy 100 shares of Google, it’s pretty
clear that you now own 100 shares and hope to see the price go up. When you want to exit that
position, you simply sell what you bought earlier. But in currencies, the purchase of one currency
involves the simultaneous sale of another currency. This is the exchange in foreign exchange. To
put it another way, if you are looking for a dollar to go higher, the question is “higher against
what?” the answer has to be the other currency. In relative terms, if the dollar goes up against
another currency, it also means that the other currency has gone down against dollar

Currencies Come In Pairs

Currency markets refer to trading currencies by pairs, with names that combine the two
different currencies being traded against each other, or exchanged for one another. most currency
nicknames or abbreviations, which reference the pair and not necessarily the individual
currencies involved

Major Currency Pairs

The major currency pairs all involve the U.S. dollar on one side of the deal. The
designations of the major currencies are expressed using international standardization
organization (ISO) codes for each currency

Major Cross Currency Pairs

Although the vast majority of currency trading takes place in the dollar pairs, cross –
currency pairs serve as an alternative to always trading the U.S. dollar.
A Cross- currency pair, or cross or crosses for short, is any currency pair that does not include
the U.S. dollar. Cross rates are derived from respective USD pairs but are quoted independently
and usually with a narrower spread than you could get by trading in the dollar pairs directly.
Crosses enable traders to more directly target trades to specific individual currencies to take
advantage of news or events. For example, your analysis may suggest that the Japanese yen has
the worst prospects of all the major currencies going forward, based on interest rates or the
economic outlook.
Cross trades are especially effective when major cross- border mergers and acquisitions are
announced. If a UK conglomerate is buying a Canadian utility company, the UK Company is
going to need to sell GBP and buy CAD to fund the purchase. The key to trading on M&A
activity is to note the cash portion of the deal. If the deal is all stock, then you don’t need to
exchange currencies to come up with the foreign cash.

The most actively traded crosses focus on the three major non- USD currencies (namely EUR,
JPY, and GBP) and are referred to as euro crosses, yen crosses and sterling crosses. The
remaining currencies (CHF, AUD, CAD, and NZD) are also traded in cross pairs.

Profit And Loss

Profit and loss (P &L) is how traders measure success and failure. You don’t want to be
looking at the market as some academic or thrill- seeking exercise. Real money is made and lost
every minute of every day. If you are going to trade currencies actively, you need to get up close
and personal with P&L.
A clear understanding of how P&L works is especially critical to online margin trading, where
your P&L directly affects the amount of margin you have to work with

Margin Balances And Liquidations

When you open an online currency trading account, you will need to pony up cash as
collateral to support the margin requirements established by your broker. That initial margin
deposit becomes your opening margin balance and is the basis on which all your subsequent
trades are collateralized. Unlike futures markets or margin- based equity trading, mostly online
brokerages do not issue margin calls. Instead, they establish ratios of margin balances to open
positions that must be maintained at all times.

Understanding Rollovers And Interest Rates

 One market unique to currencies is rollovers. A rollover is a transaction where an open
position from one value date (settlement date) is rolled over into the nest value date. Rollovers
represent the intersection of interest-rate markets.

Currency Is Money, After All

Rollover rates are based on the difference in interest rates of the two currencies in the pair
you are reading. That’s because what you are actually trading is good old-fashioned cash. That’s
right: currency is cold, hard cash with a fancy name. When you are long a currency (cash), it’s
like having a deposit in the bank. If you are short currency (cash), it’s like having borrowed a
loan. Just as you would expect to earn interest on a bank deposit or pay interest on a loan, you
would expect an interest gain/ expense for holding a currency position over the change in value.

The catch currency in currency trading is that if you carry over an open position from one
value date to the nest, you have two bank accounts involved. Think of it as one account with a
positive balance (the currency you are long) and one with a negative balance (the currency you
are short). But because your accounts are in two different currencies, the two interest rates of the
different countries will apply.

The difference between the interest rates in the two countries is called the interest-rate
differential. The larger the interest-rate differential, the larger the impact from rollovers. The
narrower the interest- rate differential, the smaller the effect from rollovers. So how do interest
rates get turned into currency rates? After all, interest rates are in percent and currency rates are,
well, not in percent. The answer is that deposit rates yield actual returns, which are netted,
producing a net cash return. That net cash return is then divided by the net position size, which
gives you the currency pips, which is rollover rate.

Understanding Currency Prices

 Now we are getting down to the brass tasks of actually making trades in the currency
market. Before we get ahead of ourselves, though, it’s critical to understand exactly how
currency prices work and what they mean to you as a trader. Keep in mind that different online
brokers use different formats to display prices on their trading platforms. A thorough picture of
what the prices mean will allow you to navigate different broker’s platforms and know what you
are looking at.

Bids and offers

When you are in the front of your screen and looking at an online broker’s trading
platform, you will see two prices for each company pair. The price on the left-hand side is called
the bid and the price on the right hand side is called the offer (some call this the ask). Some
brokers display the prices above and below each other, with the bid o the bottom and the offer on
the top. The easy way to tell the difference is that the bid price will always be lower than the
offer price.
The price quotation of each bid and offer you see will have two components: the big figure and
the dealing price.

Spreads
A spread is the difference between the bid price and the offer price. Most online brokers
utilize spread- based trading platforms for individual traders. In one sense you can look at the spread
as the commission that the online brokers charge for executing your trades. So even if they say you
are commission free, they may be earning difference when one trader sells at the bid price and
another trader buys at the offer price. Another way to look at the spread is that it’s the compensation
the broker receives for being the market-maker and providing a regular two-way market.

Executing A Trade
There are two main ways of executing trades in the FX market: live trades and orders. If you
are an adrenaline junkie, don’t focus only on the “ live dealing” section- the orders section gives you
a plenty of juice to keep you going, too.
Trading Online

Clicking and dealing

Most broking firm provide live streaming prices that you can deal on with a simple click of your
computer mouse. On these platforms to execute a trade:
1. Specify the amount of the trade you want to make.
2. Click on the buy or sell button to execute the trade you want.

The trading platform will respond back, usually within second or two, to let you know whether
the trade went through:
 If the trade went through, you will see the trade and your new position appear in your
platform’s list of trades.
 If the trade failed because of a price change, you need to start again from the top.
 If the trade failed because the trade was too large based on your margin, you need to
reduce the size f the trade.

When the trade goes through, you have a position in the market and you will see your unrealized
P&L, begin updating according to market price fluctuations.

Here are the parameters that you can usually set up in advance:

✔ Present trade amounts

✔ Automatic stop-loss orders at a predetermined distance from the trade- entry price.
✔ Square buttons

Some online brokers advertise narrower trading spreads as a way to attract traders. If you click-
and-deal trade attempts frequently fail, and the platform then asks if you would like to make the
trade at a worse price, you are probably being re- quoted.

PHONE TRADING
Placing live trades over the phone is available from most online broking firms. You need to find from
your broker whether it offers this service and exactly what its procedures are before you can ready to
use it.

To place a trade over the phone, you will need to:

1. Call the telephone number at your broker for placing a trade.

2. When you are connected to a representative, identity yourself by name and give your trading

account number.

3. Ask what the current price is for the currency pair you are trading.

4. If you don’t want the price, say, “NO, thank you”.

5. If you want the price, specify exactly what trade you would like to make.

6. Confirm with your broker exactly what trade you just made.

7. Get the name of the broker’s representative you just made the trade with in case you have to call

back.

ORDERS

Currency traders use orders to catch market movements when they are not in front of their
screens. The currency market is open 24hours a day. A market move is just as likely to happen
while you are asleep or in the shower as it is while you are watching your screen. If you are not a
full- time trader, then you have to probably get a full-time job that requires your attention when
you are at work- at least your boss hopes he has your attention.

Experienced currency traders also routinely use orders to:

✔ Implement a trade strategy from entry to exit.
✔ Capture sharp, short-term price fluctuations.
✔ Limit risk in volatile or uncertain markets.
✔ Preserve trading capital from unwanted losses.
✔ Maintain trading discipline.
✔ Protect profits and minimize losses.

Types Of Orders

1. Take –profit orders

An order used by currency traders specifying the exact rate or number of pips from
the current price point where to close out their current position for a profit. The rate
deemed to be the level where the trader wants to take a profit is sometimes referred
to as the "take-profit point".
As the name suggests, take-profit orders are used to lock in profits in the event the
rate moves in a favorable direction.
For example, if you are long a currency pair
position and believe the price will rise to a certain level, but are unsure what it will
do beyond that level, placing a take-profit order at that point will automatically close
out your position allowing you to lock in profit.
Place a take-profit order at 108.80. Price then rises from 107.40 to 108.80 Take-
profit order automatically executed to sell $100 and buy 10,880 yen
Profit of 140 yen realized.

2. Limit orders
To avoid buying or selling a stock at a price higher or lower than you wanted, you need to place
a limit order rather than a market order. A limit order is an order to buy or sell a security at a
specific price. A buy limit order can only be executed at the limit price or lower, and a sell limit
order can only be executed at the limit price or higher. When you place a market order, you can't
control the price at which your order will be filled.

For example, if you want to buy the stock of a "hot" IPO that was initially offered at $9, but don't
want to end up paying more than $20 for the stock, you can place a limit order to buy the stock at
any price up to $20. By entering a limit order rather than a market order, you will not be caught
buying the stock at $90 and then suffering immediate losses if the stock drops later in the day or
the weeks ahead.

3. Stop loss orders

What does stop loss order Mean?

An order placed with a broker to sell a security when it reaches a certain price. It is designed to
limit an investor's loss on a security position.

Also known as a "stop order" or "stop-market order".

In other words, setting a stop-loss order for 10% below the price you paid for the stock would
limit your loss to 10%.

It's also a great idea to use a stop order before you leave for holidays or enter a
situation in which you will be unable to watch your stocks for an extended period of
time.

A stop loss is an order to buy (or sell) a security once the price of the security climbed above (or
dropped below) a specified stop price. When the specified stop price is reached, the stop order is
entered as a market order (no limit) or a limit order (fixed or pre-determined price).
With a stop order, the trader does not have to actively monitor how a stock is performing.
However because the order is triggered automatically when the stop price is reached, the stop
price could be activated by a short-term fluctuation in a security's price. Once the stop price is
reached, the stop order becomes a market order or a limit order.

4. Trading stop loss orders

A stop loss is an order that is sold automatically if the currency trading venture you invest in
reaches a certain price, preventing more losses to occur. When you place a stop order, you
need to set an exit point, to happen if the trade losses a specific value. The stop order is
basically what it sounds like, it stops your losses and lowers your risks, and so even if the
trading in foreign currency fails to make a profit, your investment is relatively safe

Cross Currency Pair:

A cross currency pair is any currency pair that does not have the U.S. dollar as one of the
currencies in the pairing. For example, one of the most active crosses is EUR/JPY, pitting the
two largest currencies outside the U.S. dollar directly against each other. But the EUR/JPY rate
at any given instant is a function of the current EUR/USD and USD/JPY rates.
The most popular cross pairs involve the most actively traded major currencies, like EUR/GBP,
EUR/GBP, and EUR/CHF. According to the 2004 BIS survey of foreign exchange market
activity, direct cross trading accounted for a relatively small percentage of global daily volume-
less than 10 percent for the major crosses combined.

Why Trade The Crosses?

Cross pairs represent entirely new sets of routinely fluctuating currency pairs that offer
another universe of trading opportunities beyond the primary USD pairs. Developments in
the currency market are not always a simple but on what’s happening to the U.S. dollar.
Crosses are the other half of the story, and their significance appears to be increasing
dramatically as a result of electronic trading.
Cross trading offers the following advantages:

✔ You can pinpoint trade opportunities based on news or fundamentals.

✔ You can take advantage of interest-rate differentials.
✔ You can exploit technical trading opportunities.
✔ You can expand the horizon of trading opportunities.
✔ You can go with the flow.

5.11 Technical Analysis Of Currency Trading :

 There are many different methods and tools utilized in technical analysis, but they all rely
on the same principles - that price patterns and price trends exist in the market and that they can
be identified and turned into profit opportunities.

Technical Analysis in currency trading is based on three core principles:

 Markets Discount:

The actual price is a reflection of everything known to the market that could possibly
have an affect on price movement and includes supply and demand, political factors, and the
market sentiment.

The pure technical analyst is only concerned with price movements, NOT the reasons behind the
price movements.

 Prices Move in Trends:

Prices can move in three directions - they can move up, down or sideways. Once a trend
in any of these directions is in effect it usually, will persist and create a trend. The market trend
is simply defined as the direction of market prices, a concept that is essential to the success of
technical analysis in currency trading.

Identifying trends in theory is simple; a price chart will usually indicate the prevailing trend as
characterized by a series of waves with obvious peaks and troughs.

It is the direction of these peaks and troughs that constitutes the market trend, if they move up,
the trend is bullish, if they move down the trend is bearish and of course if they move sideways
then the market is in a period of consolidation.

 History Tends to Repeat Itself:

 To a technical analyst in currency trading, the trader psychology that affects prices is
extremely important, as human nature is repetitive and this shows up in repetitive price patterns.

This allows anyone using technical analysis in currency trading to predict where prices are likely
to go next and traders can then act upon this information for profit.

The market price reflects everything

Technical analysis in currency trading is primarily concerned with price trends and everything
that can possibly affect a currency is reflected in price action.

1. Technical Indicators

The logic of technical analysis for currency trading is universally accepted, and there are
numerous ways to execute technical trading systems, with the huge amount of available indictors
used either alone, or in combination.

We will look at the different indicators below and some that have proved highly effective in the
technical analysis of currency trading. Any traders, who wish to profit from the currency
markets, should consider these indicators.

2. Trend Indicators

A trend is a term used to describe the persistence of price movement in one direction over time.
The easiest way to spot trends is via trend lines, drawn below price lows or above price highs.

While basic trend lines have gone out of fashion in recent years in favor of more complicated
indicators, they are still one of the most effective ways to technically analyze currency
movements.

3. Support/Resistance Indicators
Support and resistance describes the price levels where markets repeatedly rise or fall and then
reverse. This phenomenon reflects basic supply and demand and when prices break above or
below significant support or resistance, a big move can follow very quickly.

Again, the best method for spotting and acting on these breaks is the humble trend line.

We believe that trend lines should be the basis on which ANY technical analysis of currencies
should be based on - and the indicators below are for confirmation:

4. Volatility Indicators

Volatility is a general term used to describe the magnitude, or size, of day-to-day price
fluctuations independent of their direction. Generally, changes in volatility tend to lead changes
in prices.

One great indicator to use is the Bollinger band.

Any trader should look at Bollinger Bands, as they represent one of the most effective indicators
for the technical analysis of currency markets.

Not only is it good for predicting trend movements, but also it is useful for timing entry and exit
levels, as well as when to increase or decrease position size.

5. Cycle Indicators

A cycle is a term to indicate repeating patterns of market movement, specific to recurrent events,
such as elections, year-end monetary repatriation etc.

Cycle indicators determine the timing of a particular market patterns. A good example would be
Elliott Wave theory. Cycle indicators however in our view are of little or no use, in the technical
analysis of currencies.
 6. Momentum Indicators

Momentum is a general term used to describe the speed at which prices move over given time
periods.

Momentum indicators determine the strength or weakness of a trend as it progresses over time.
Momentum is generally highest at the start of a trend and lowest at market turning points.

Any divergence of directions in price and momentum is a warning of weakness; if price extremes
occur with weak momentum, then an end of movement in the current direction could occur.

If however momentum is trending strongly and prices are flat, it signals a potential change in
price direction. Examples of momentum indicators include Stochastic, MACD and RSI.

The most effective momentum indictor is the stochastic and using stochastic crossovers to time
entry and exit levels, can be highly effective.

7. Sentiment Indicators

Many technical analysts in currency trading monitor surveys of investor sentiment such as net
trader's positions and bullish consensus.

These indicators attempt to gauge the general attitude of the investment community, to determine
whether investors are bearish or bullish.

These indicators are only to be used when extremes of sentiment are reached, either bullish or
bearish.

If used in this way, they are one of the most powerful warning signs of significant market turning
points and can be used in technical analysis of currency markets to huge effect.
 8. Putting it all Together

Traders make money from the technical analysis of currency markets in many different ways,
however we believe that trend lines backed up by just a few additional indicators (to help time
market entry exit and stop levels) can be very effective.

The ones we favor are: Bollinger bands, stochastic and market sentiment indicators, as filters for
traditional trend lines.

The best way to succeed in technical analysis of currency trading is to use a simple robust system
based on trend lines and just a few filter indicators such as the ones above and you will soon find
yourself catching the big trends that yield the big profits.
 Chapter - 6

FINDINGS & INFERENCES

Cost of carry model and Interest rate parity model are useful tools to find out standard
future price and also useful for comparing standard with actual future price. And it’s also
a very help full in Arbitraging.

New concept of Exchange traded currency future trading is regulated by higher authority
and regulatory. The whole function of Exchange traded currency future is regulated by
SEBI/RBI, and they established rules and regulation so there is very safe trading is
emerged and counter party risk is minimized in currency Future trading. And also time
reduced in Clearing and Settlement process up to T+1 day’s basis.

Larger exporter and importer has continued to deal in the OTC counter even exchange
traded currency future is available in markets because,

There is a limit of USD 100 million on open interest applicable to trading member who
are banks. And the USD 25 million limit for other trading members so larger exporter and
importer might continue to deal in the OTC market where there is no limit on hedges.

In India RBI and SEBI has restricted other currency derivatives except Currency future,
at this time if any person wants to use other instrument of currency derivatives in this
case he has to use OTC.
6.1 EXAMPLES OF HEDGING

6.1.1

Suppose an edible oil importer wants to import edible oil worth USD 100,000 and
places his import order on June 17, 2010, with the delivery date being 4 months ahead. At the
time of placing the contract one USD is worth Rs 46.50 in the spot market. But, suppose the
Indian Rupee depreciates to INR 46.75 per USD when the payment is due in October 2010, the
value of the payment for the importer goes up to Rs 4,675,000, rather than Rs 4,650,000. The
hedging strategy for the importer, thus, would be:

Current Spot Rate (17th June 10) 46,5000

Buy 100 USD-INR Oct’ 10 Contracts on 17th
June’ 10
Sell 100 USD-INR Oct’10 contracts in Oct’10
Profit/Loss (future market)
Purchase in spot market @ 46.75 Total cost of
hedged transaction
(1000* 46.5500) * 100 (Assuming the Oct’10
contracts is trading at 46.5500 on 17th june’10 )
46.7500
1000 * (46.75 – 46.55) * 100= 20,000
46.75 * 100,000
100,000 * 46.75 – 20,000 = Rs 4,655,000

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
 One USD - INR contract size USD 1,000
Sell 50 USD - INR Dec '10 Contracts
(on 17th June '10) 47.2925

Buy 50 USD - INR Dec '10 Contracts in Dec 47.1025

'10
Sell USD 50,000 in spot market @ 47.1025 in Dec '10 (Assume that initially Indian rupee
depreciated , but later appreciated to 47.1025 per USD as foreseen by the exporter by end of Dec
'10)
50 * 1000 *(47.2925 ± 47.1025)
Profit/Loss from futures (Dec '10 contract) = 0.19 *50 * 1000 = Rs 9,500

The net receipt in INR for the hedged transaction would be: 50,000 *47.1025 + 9,500 =2,355,125
+ 9500 = Rs 2,364,625. Had he not participated in futures market, he would have got only Rs
2,355,125. Thus, he kept his sales unexposed to foreign exchange rate risk

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.

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.
 SUGGESTIONS/RECOMMENDATION

Currency Future need to change some restriction it imposed such as cut off limit of 5
million USD, Ban on NRI’s and FII’s and Mutual Funds from Participating.

Now in exchange traded currency future segment only one pair USD/INR is available to
trade so there is also one more demand by the exporters and importers to introduce
another pair in currency trading like POUND-INR, CAD-INR etc.

In OTC there is no limit for trader to buy or short Currency futures sot here demand
arises that in Exchange traded currency future should have increase limit for Trading
Members and also at client level, in result OTC users will divert to Exchange traded
currency Futures.

In India the regulatory of Financial and Securities market (SEBI) has ban on other
Currency Derivatives except Currency Futures, so this restriction seem unreasonable to
exporters and importers. And according to Indian financial growth now it’s become
necessary to introducing other currency derivatives in Exchange traded currency
derivative segment.
 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 give 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
Religare 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.
 BIBLOGRAPHY

WEBSITES:

www.sebi.gov.in
www.rbi.org.in
www.frost.coms
www.wikipedia.com
www.religare.in
www.economywatch.com
www.bseindia.com
www.nseindia.com

BOOKS

NCFM: Currency future modules

CDBM Workbook
Recent Development in International Currency Derivative Market

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 Reserve Bank of
India, April 2008
 ANNEXURE

QUESTIONNAIRE

Personal Details.

Name:_________________________________________________________

Contact No.:____________________________________________________

Age: Below 25 yrs  25 yrs- 35 yrs 

36yrs-45yrs  above 45 yrs 

Occupation: Service  Business 

1. What is your monthly Income (Approx.)?

Below Rs 10,000  Rs 10,000- Rs 20,000 

Rs 20,000-Rs 30,000  Rs 30,000- Rs 40,000 

Rs 40,000-Rs 50,000  above Rs 50,000 

2. What is your monthly Saving (Approx.)?

Below Rs 5,000  Rs 5,000- Rs 15,000 

Rs 15,000- Rs 25,000  above Rs 25,000 

3. In which of the followings do you invest?

Bank FD  Insurance 

Post Office  Govt. bonds 

Equity  Derivatives 

Mutual Funds  Any Other 

4. Since how long have you been investing in Derivatives?

Less than 6 months  6 months-12 months 

12 months-24 months  above 24 months 

5. Where you prefer to invest in Derivatives?

Stock option  Futures option 

Index option  Index future 

6 Do you have any knowledge about Currency Derivative?

Yes  No 

7. Do you hedge your future options to minimize risk?

Yes  No 
8. Are you aware of the standard Strategies of options?

Yes  No 

9. Do you square off your position before expiry?

Yes  No 

10. Which tool do you use for analysis before investing?

Fundamental  Technical 

Both  None 

11. Do you suggest others to invest in Derivatives?

Yes  No 