CURRENCY DERIVATIVES

By GROUP 1 Vernon Fernandes Lorraine Godinho Sunayna Kunkolienkar Alisha Pereira Paloma Pereira

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Introduction to Currency Markets

Deals with the exchange of currencies in the foreign exchange market. A foreign exchange rate is the value of a foreign currency relative to the domestic currency. A foreign exchange deal is done using currency pairs.
US Dollar Indian Rupee (USD INR) 51.11 Euro Indian Rupee (EUR INR) 67.10 British Pound Sterling Indian Rupee (GBP INR) 81.14

Currency Pairs

USD INR
Base Currency Counter/ Terms/ Quote Currency

Expresses the worth of the base currency in terms of the counter currency. When USD is the: base currency direct quote counter currency indirect quote

Two methods of determining the value of domestic currency to other currencies: 1. Fixed Exchange Rate Regime
Also called as Pegged exchange rate Is a fixed ratio Government participates in the open currency market.

2. Floating Exchange Rate Regime

Referred to as Self-correcting

Factors affecting Exchange Rates

1) Fundamental factors
Economic policies followed by Government Balance of Payment Surplus favourable exchange rate

2) Technical factors
Interest rates Inflation rate Exchange rate policy

3) Political factors 4) Speculation

 Spot Transaction
Exchange of currency takes place on a value dated. Value date is two business days after the trade date. The price of the deal is called as spot rate/ benchmark price.

Forward Transaction
Exchange of currency takes place at a future specified date. Is more than two business days after the deal date. The rate of exchange is called as forward rate. The difference between the spot rate and forward rate is called as forward margin.