ACKNOWLEDGEMENT

On the occasion of completion and submission of project we would like to

express our deep sense of gratitude to USM, KUK for providing us Platform of
management studies. We thank to our Chairman Dr.D.D.Arora, and Facult members
for their moral support during the project.
We are too glad to give our special thanks to our project guide Mr. Shyam
Sunder for providing us an opportunit to carrout project on currenc derivatives and
also for their help and tips whenever needed. Without his co!operation it was impossible
to reach up to this stage.
"t last, # sincere regards to m parents and friends who have directl or indirectl
helped me in the project.
CONTENTS
CHAPTER
NO
SUBJECTS COERED PAGE
NO
!
"
#n$r%du&$'%n %( &urren&y der')a$')e*
C%m+any Pr%(',e
-
.
$ Re*ear&h Me$h%d%,%/y
%cope of &esearch
'pe of &esearch
%ource of (ata collection
Objective of the %tud
(ata collection
)imitations
!-
* #n$r%du&$'%n $% The $%+'&
#ntroduction of Financial (erivatives
'pes of Financial (erivatives
(erivatives #ntroduction in #ndia
+istor of currenc derivatives
,tilit of currenc derivatives
#ntroduction to Currenc (erivatives
#ntroduction to Currenc Future
!.
- Br'e( O)er)'e0 %( $he (%re'/n e1&han/e mar2e$
Overview of foreign exchange market in #ndia
Currenc (erivatives Products
Foreign .xchange %pot /arket
Foreign .xchange 0uotations
1eed for exchange traded currenc futures
&ationale for #ntroducing Currenc Future
Future 'erminolog
,ses of currenc futures
'rading and settlement Process
&egulator Framework for Currenc Futures
Comparison of Forward 2 Future Currenc
"3
Contracts
3 Ana,y*'*
#nterest &ate Parit Principle
Product (efinitions of currenc future
Currenc futures paoffs
Pricing Futures and Cost of Carr model
+edging with currenc futures
4"
5'nd'n/* *u//e*$'%n* and C%n&,u*'%n* 66
B'7,'%/ra+hy 68
#NTRODUCT#ON O5
CURRENC9 DER#AT#ES
#NTRODUCT#ON O5 CURRENC9 DER#AT#ES
.ach countr has its own currenc through which both national and international
transactions are performed. "ll the international business transactions involve an
exchange of one currenc for another.
For example,
#f an #ndian firm borrows funds from international financial market in ,%
dollars for short or long term then at maturit the same would be refunded in
particular agreed currenc along with accrued interest on borrowed mone. #t means
that the borrowed foreign currenc brought in the countr will be converted into
#ndian currenc, and when borrowed fund are paid to the lender then the home
currenc will be converted into foreign lender4s currenc. 'hus, the currenc units
of a countr involve an exchange of one currenc for another. 'he price of one
currenc in terms of other currenc is known as exchange rate.
'he foreign exchange markets of a countr provide the mechanism of exchanging
different currencies with one and another, and thus, facilitating transfer of purchasing
power from one countr to another.
With the multiple growths of international trade and finance all over the world,
trading in foreign currencies has grown tremendousl over the past several decades.
%ince the exchange rates are continuousl changing, so the firms are exposed to the
risk of exchange rate movements. "s a result the assets or liabilit 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.
'his variabilit in the value of assets or liabilities or cash flows is referred to
exchange rate risk. %ince the fixed exchange rate sstem has been fallen in the earl
5678s, specificall in developed countries, the currenc risk has become substantial
for man business firms. "s a result, these firms are increasingl turning to various
risk hedging products like foreign currenc futures, foreign currenc forwards,
foreign currenc options, and foreign currenc swaps.
COMPAN9 PRO5#LE
AnandRa$h' Se&ur'$'e* L'm'$ed

"nand&athi 9"&: is a leading full service securities firm providing the entire gamut of
financial services. 'he firm, founded in 566* b /r. "nand&athi, toda has a pan #ndia
presence as well as an international presence through offices in (ubai and ;angkok. "&
provides a breadth of financial and advisor services including wealth management,
investment banking, corporate advisor, brokerage 2 distribution of e<uities,
commodities, mutual funds and insurance, structured products ! all of which are
supported b powerful research teams.
"nand&athi is a leading full service securities firm providing the entire gamut of
financial services. 'he firm, founded in 566* b /r. "nand&athi, toda has a pan #ndia
presence as well as an international presence through offices in (ubai and ;angkok. "&
provides a breadth of financial and advisor services including wealth management,
investment banking, corporate advisor, brokerage 2 distribution of e<uities,
commodities, mutual funds and insurance, structured products ! all of which are
supported b powerful research teams.
'he firm=s philosoph is entirel client centric, with a clear focus on providing long
term value addition to clients, while maintaining the highest standards of excellence,
ethics and professionalism. 'he entire firm activities are divided across distinct client
groups> #ndividuals, Private Clients, Corporates and #nstitutions and was recentl
ranked b "sia /one ?883 poll amongst %outh "sia=s top - wealth managers for the
ultra!rich.
'he offices of "nand&athi in !3. &'$'e* a&r%** "8 &'$'e* and it has also branches in
Du7a' and Ban/2%2 with m%re $han --::: emploees. #t has dail $urn%)er 'n
e1&e** %( R*. -7',,'%n. #t has !,::,:::; &,'en$* na$'%n0'de. #t is also ,ead'n/
D'*$r'7u$%r %( #PO<*
#n ear ?887 Citigroup @enture Capital #nternational joined the group as a financial
partner.
#n #nd'a AnandRa$h' '* +re*en$ 'n "! S$a$e*=
"ndhraPardesh , "ssam, ;ihar , Chhatisgarh, (elhi , Aoa, Aujrat, +arana Bammu 2
Cashmir, Bharkhand, Carnataka, Cerala,,/adhaPardesh, /aharashtra, Orissa, Punjab,
&ajasthan, 'amil 1adu, ,ttarPardesh, ,ttranchal, West;engal.
M'**'%n
'o be #ndia=s first multinational providing complete financial services solution acrossthe
globe
'*'%n
D'o be a shining example as leader in innovation and the first choice for clients 2
emploeesD
M',e*$%ne*
!33-=
%tarted activities in consulting and #nstitutional e<uit sales with staff of 5-
!334=
%et up a research desk and empanelled with major institutional investors
!33.=
#ntroduced investment banking businesses
&etail brokerage services launched
!333=
)ead managed first #PO and executed first / 2 " deal
"::!=
#nitiated Wealth /anagement %ervices
"::"=
&etail business expansion recommences with ownership model
"::>=
Wealth /anagement assets cross &s5-88 crores
#nsurance broking launched
)aunch of Wealth /anagement services in (ubai
&etail ;ranch network exceeds -8

Pr%du&$*
.<uit 2 (erivatives
/utual Funds
(epositor %ervices
Commodities
#nsurance ;roking
#POs

E?u'$y @ der')a$')e* 7r%2era/e
"nand&athi provides end!to!end e<uit solutions to institutional and individual
investors. Consistent deliver of high <ualit advice on individual stocks, sector trends
and investment strateg has established us a competent and reliable research unit across
the countr.

Clients can trade through us online on ;%. and 1%. for both e<uities and derivatives.
'he are supported b dedicated sales 2 trading teams in our trading desks across the
countr. &esearch and investment ideas can be accessed b clients either through their
designated dealers, email, web or %/%.
Mu$ua, (und*
"& is one of #ndia=s top mutual fund distribution houses. Our success lies in our
philosoph of providing consistentl superior, independent and unbiased advice to our
clients backed b in!depth research. We firml believe in the importance of selecting
appropriate asset allocations based on the client=s risk profile.

We have a dedicated mutual fund research cell for mutual funds that consistentl churns
out superior investment ideas, picking best performing funds across asset classes and
providing insights into performances of select funds.
De+%*'$%ry *er)'&e*
"& (epositor %ervices provides ou with a secure and convenient wa for holding
our securities on both C(%) and 1%().

Our depositor services include settlement, clearing and custod of securities,
registration of shares and dematerialiEation. We offer ou dail updated internet access
to our holding statement and transaction summar.
&%mm%d'$'e*
Commodities broking ! a whole new opportunit to hedge business risk and an
attractive investment opportunit to deliver superior returns for investors.

Our commodities broking services include online futures trading through 1C(.F and
/CF and depositor services through C(%). Commodities broking is supported b a
dedicated research cell that provides both technical as well as fundamental research.
Our research covers a broad range of traded commodities including precious and base
metals, Oils and Oilseeds, agri!commodities such as wheat, chana, guar, guar gum and
spices such as sugar, jeera and cotton.

#n addition to transaction execution, we provide our clients customiEed advice on
hedging strategies, investment ideas and arbitrage opportunities.
'n*uran&e 7r%2'n/
"s an insurance broker, we provide to our clients comprehensive risk management
techni<ues, both within the business as well as on the personal front. &isk management
includes identification, measurement and assessment of the risk and handling of the
risk, of which insurance is an integral part. 'he firm deals with both life insurance and
general insurance products across all insurance companies.

Our guiding philosoph is to manage the clients= entire risk set b providing the optimal
level of cover at the least possible cost. 'he entire sales process and product selection is
research oriented and customiEed to the client=s needs. We la strong emphasis on
timel claim settlement and post sales services.
#PO
We are a leading primar market distributor across the countr. Our strong performance
in #POs has been a result of our vast experience in the Primar /arket, a wide network
of branches across #ndia, strong distribution capabilities and a dedicated research team

We have been consistentl ranked among the top 58 distributors of #POs on all major
offerings. Our #PO research team provides clients with indepth overviews of
forthcoming #POs as well as investment recommendations. Online filling of forms is
also available.
G,%7a, Pr%du&$*
%tructuring of trusts G investment companies
Offshore /utual Funds
%tructured Products G (eposits including capital!guaranteed notes on
'rading in global markets 9.<uities, ;onds, Commodities:
&eal .state investments
"lternative investments 9including hedge funds and fund!of!hedge funds:
Our *er)'&e*
&isk /anagement
(ue diligence and research on policies available
&ecommendation on a comprehensive insurance cover based on clients needs
/aintain proper records of client policies
"ssist client in paing premiums
Continuous monitoring of client account
"ssist client in claim negotiation and settlement
Mana/emen$ Team
"& brings together a highl professional core management team that comprises of
individuals with extensive business as well as industr experience. Our senior
/anagement comprises a diverse talent pool that brings together rich experience from
across industr as well as financial services.

/r. "nand &athi ! Aroup Chairman
Chartered "ccountant
Past President, ;%.
+eld several %enior /anagement positions with one of #ndia=s largest industrial groups
/r. Pradeep Aupta ! @ice Chairman
Plus 57 ears of experience in Financial %ervices
/r. "mit &athi ! /anaging (irector
Chartered "ccountant 2 /;"
Plus 55 ears of experience in Financial %ervices
Why &h%%*e ARA
%uperior understanding of the #ndian econom 2 markets
"bilit to structure and manage our tax and regulator compliances
(edicated relationship team
,nparalleled product range ! #ndian and Alobal
RESEARCH METHODOLOG9
RESEARCH METHODOLOG9
T9PE O5 RESEARCH
#n this project (escriptive research methodologies were use.
'he research methodolog adopted for carring out the stud was at the first
stage theoretical stud is attempted and at the second stage observed online trading
on 1%.G;%..
SOURCE O5 DATA COLLECT#ON
%econdar data were used such as various books, report submitted b
&;#G%.;# committee and 1CF/G;CF/ modules.
OBJECT#ES O5 THE STUD9
'he basic idea behind undertaking Currenc (erivatives project to gain
knowledge about currenc future market.
'o stud the basic concept of Currenc future
'o stud the exchange traded currenc future
'o understand the practical considerations and was of considering currenc
future price.
'o analEe different currenc derivatives products.
L#M#TAT#ON O5 THE STUD9
The ,'m'$a$'%n* %( $he *$udy 0ere
'he analsis was purel based on the secondar data. %o, an error in the
secondar data might also affect the stud undertaken.
'he currenc future is new concept and topic related book was not available in
librar and market.
#NTRODUCT#ON TO THE TOP#C
#NTRODUCT#ON TO 5#NANC#AL DER#AT#ES
H; far the most significant event in finance during the past decade has been the
extraordinar development and expansion of financial derivativesI'hese
instruments enhances the abilit to differentiate risk and allocate it to those investors
most able and willing to take it! a process that has undoubtedl improved national
productivit growth and standards of livings.J

A,an Green*+an, 5%rmer Cha'rman.
US 5edera, Re*er)e Ban2
'he past decades has witnessed the multiple growths in the volume of international
trade and business due to the wave of globaliEation and liberaliEation all over the
world. "s a result, the demand for the international mone and financial instruments
increased significantl at the global level. #n 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. #t is therefore, to manage such risksK the
new financial instruments have been developed in the financial markets, which are
also popularl known as financial derivatives.
BBDE5#N#T#ON O5 5#NANC#ALDER#AT#ESBB
" word formed b derivation. #t means, this word has been arisen b derivation.
%omething derivedK it means that some things have to be derived or arisen out of
the underling variables. " financial derivative is an indeed derived from the
financial market.
(erivatives are financial contracts whose valueGprice is independent on the
behavior of the price of one or more basic underling assets. 'hese contracts are
legall binding agreements, made on the trading screen of stock exchanges, to
bu or sell an asset in future. 'hese assets can be a share, index, interest rate,
bond, rupee dollar exchange rate, sugar, crude oil, sobeans, cotton, coffee and
what ou have.
" ver simple example of derivatives is curd, which is derivative of milk. 'he
price of curd depends upon the price of milk which in turn depends upon the
demand and suppl of milk.
The Under,y'n/ Se&ur'$'e* (%r Der')a$')e* are =
Commodities> Castor seed, Arain, Pepper, Potatoes, etc.
Precious /etal > Aold, %ilver
%hort 'erm (ebt %ecurities > 'reasur ;ills
#nterest &ates
Common sharesGstock
%tock #ndex @alue > 1%. 1ift
Currenc > .xchange &ate
T9PES O5 5#NANC#AL DER#AT#ES
Financial derivatives are those assets whose values are determined b the value of
some other assets, called as the underling. Presentl there are Complex varieties of
derivatives alread in existence and the markets are innovating newer and newer
ones continuousl. For example, various tpes of financial derivatives based on
their different properties like, plain, simple or straightforward, composite, joint or
hbrid, snthetic, leveraged, mildl leveraged, O'C traded, standardiEed or
organiEed exchange traded, etc. are available in the market. (ue to complexit in
nature, it is ver difficult to classif the financial derivatives, so in the present
context, the basic financial derivatives which are popularl in the market have been
described. #n the simple form, the derivatives can be classified into different
categories which are shown below >
DER#AT#ES
5'nan&'a,* C%mm%d'$'e*
Ba*'&* C%m+,e1
!. 5%r0ard* !. S0a+*
". 5u$ure* ".E1%$'&* CN%n STDD
>. O+$'%n*
-. Warran$* and C%n)er$'7,e*
One form of classification of derivative instruments is between commodit
derivatives and financial derivatives. 'he basic difference between these is the nature
of the underling instrument or assets. #n commodit derivatives, the underling
instrument is commodit which ma be wheat, cotton, pepper, sugar, jute, turmeric,
corn, crude oil, natural gas, gold, silver and so on. #n financial derivative, the
underling instrument ma be treasur bills, stocks, bonds, foreign exchange, stock
index, cost of living index etc. #t is to be noted that financial derivative is fairl
standard and there are no <ualit issues whereas in commodit derivative, the <ualit
ma be the underling matters.

"nother wa of classifing the financial derivatives is into basic and complex. #n
this, forward contracts, futures contracts and option contracts have been included in
the basic derivatives whereas swaps and other complex derivatives are taken into
complex categor because the are built up from either forwardsGfutures or options
contracts, or both. #n fact, such derivatives are effectivel derivatives of derivatives.
Der')a$')e* are $raded a$ %r/an'Eed e1&han/e* and 'n $he O)er The C%un$er
C OTC D mar2e$ =
Der')a$')e* Trad'n/ 5%rum
Or/an'Eed E1&han/e* O)er The C%un$er

Commodit Futures Forward Contracts
Financial Futures %waps
Options 9stock and index:
%tock #ndex Future
(erivatives traded at exchanges are standardiEed contracts having standard deliver
dates and trading units. O'C derivatives are customiEed contracts that enable the
parties to select the trading units and deliver dates to suit their re<uirements.
" major difference between the two is that of counterparty riskLthe risk of default
b either part. With the exchange traded derivatives, the risk is controlled b
exchanges through clearing house which act as a contractual intermediar and
impose margin re<uirement. #n contrast, O'C derivatives signif greater
vulnerabilit.
DER#AT#ES #NTRODUCT#ON #N #ND#A
'he first step towards introduction of derivatives trading in #ndia was the
promulgation of the %ecurities )aws 9"mendment: Ordinance, 566-, which
withdrew the prohibition on options in securities. %.;# set up a ?* M member
committee under the chairmanship of (r. ).C. Aupta on 1ovember 5N, 5663 to
develop appropriate regulator framework for derivatives trading in #ndia, submitted
its report on /arch 57, 566N. 'he committee recommended that the derivatives
should be declared as Osecurities4 so that regulator framework applicable to trading
of Osecurities4 could also govern trading of derivatives.
'o begin with, %.;# approved trading in index futures contracts based on %2P C1F
1ift and ;%.!$8 9%ensex: index. 'he trading in index options commenced in Bune
?885 and the trading in options on individual securities commenced in Bul ?885.
Futures contracts on individual stocks were launched in 1ovember ?885.
H#STOR9 O5 CURRENC9 DER#AT#ES
Currenc futures were first created at the Chicago /ercantile .xchange 9C/.: in
567?.'he contracts were created under the guidance and leadership of )eo /elamed,
C/. Chairman .meritus. 'he FF contract capitaliEed on the ,.%. abandonment of the
;retton Woods agreement, which had fixed world exchange rates to a gold standard
after World War ##. 'he abandonment of the ;retton Woods agreement resulted in
currenc values being allowed to float, increasing the risk of doing business. ;
creating another tpe of market in which futures could be traded, C/. currenc futures
extended the reach of risk management beond commodities, which were the main
derivative contracts traded at C/. until then. 'he concept of currenc futures at C/.
was revolutionar, and gained credibilit through endorsement of 1obel!priEe!winning
economist /ilton Friedman.
'oda, C/. offers *5 individual FF futures and $5 options contracts on 56 currencies,
all of which trade electronicall on the exchange4s C/. Alobex platform. #t is the
largest regulated marketplace for FF trading. 'raders of C/. FF futures are a diverse
group that includes multinational corporations, hedge funds, commercial banks,
investment banks, financial managers, commodit trading advisors 9C'"s:, proprietar
trading firmsK currenc overla managers and individual investors. 'he trade in order
to transact business, hedge against unfavorable changes in currenc rates, or to
speculate on rate fluctuations.
Source: - (NCFM-Currency future Module)
UT#L#T9 O5 CURRENC9 DER#AT#ES
Currenc!based derivatives are used b exporters invoicing receivables in foreign
currenc, willing to protect their earnings from the foreign currenc depreciation b
locking the currenc conversion rate at a high level. 'heir use b importers hedging
foreign currenc paables is effective when the pament currenc is expected to
appreciate and the importers would like to guarantee a lower conversion rate. #nvestors
in foreign currenc denominated securities would like to secure strong foreign earnings
b obtaining the right to sell foreign currenc at a high conversion rate, thus defending
their revenue from the foreign currenc depreciation. /ultinational companies use
currenc derivatives being engaged in direct investment overseas. 'he want to
guarantee the rate of purchasing foreign currenc for various paments related to the
installation of a foreign branch or subsidiar, or to a joint venture with a foreign partner.
" high degree of volatilit of exchange rates creates a fertile ground for foreign
exchange speculators. 'heir objective is to guarantee a high selling rate of a foreign
currenc b obtaining a derivative contract while hoping to bu the currenc at a low
rate in the future. "lternativel, the ma wish to obtain a foreign currenc forward
buing contract, expecting to sell the appreciating currenc at a high future rate. #n
either case, the are exposed to the risk of currenc fluctuations in the future betting on
the pattern of the spot exchange rate adjustment consistent with their initial
expectations.
'he most commonl used instrument among the currenc derivatives are currenc
(%r0ard &%n$ra&$*. 'hese are large notional value selling or buing contracts obtained
b exporters, importers, investors and speculators from banks with denomination
normall exceeding ? million ,%(. 'he contracts guarantee the future conversion rate
between two currencies and can be obtained for an customiEed amount and an date in
the future. 'he normall do not re<uire a securit deposit since their purchasers are
mostl large business firms and investment institutions, although the banks ma re<uire
compensating deposit balances or lines of credit. 'heir transaction costs are set b
spread between bank=s bu and sell prices.
.xporters invoicing receivables in foreign currenc are the most fre<uent users of these
contracts. 'he are willing to protect themselves from the currenc depreciation b
locking in the future currenc conversion rate at a high level. " similar foreign currenc
forward selling contract is obtained b investors in foreign currenc denominated bonds
9or other securities: who want to take advantage of higher foreign that domestic interest
rates on government or corporate bonds and the foreign currenc forward premium.
'he hedge against the foreign currenc depreciation below the forward selling rate
which would ruin their return from foreign financial investment. #nvestment in foreign
securities induced b higher foreign interest rates and accompanied b the forward
selling of the foreign currenc income is called a &%)ered 'n$ere*$ ar7'$ra/e.
Source :-( Recent e!elop"ent in #nternational Currency eri!ati!e Market $y
%uc&an '. (rlo)ski)
#NTRODUCT#ON TO CURRENC9 DER#AT#ES
.ach countr has its own currenc through which both national and international
transactions are performed. "ll the international business transactions involve an
exchange of one currenc for another.
For example,
#f an #ndian firm borrows funds from international financial market in ,%
dollars for short or long term then at maturit the same would be refunded in
particular agreed currenc along with accrued interest on borrowed mone. #t means
that the borrowed foreign currenc brought in the countr will be converted into
#ndian currenc, and when borrowed fund are paid to the lender then the home
currenc will be converted into foreign lender4s currenc. 'hus, the currenc units
of a countr involve an exchange of one currenc for another.
'he price of one currenc in terms of other currenc is known as exchange rate.
'he foreign exchange markets of a countr provide the mechanism of exchanging
different currencies with one and another, and thus, facilitating transfer of purchasing
power from one countr to another.
With the multiple growths of international trade and finance all over the world,
trading in foreign currencies has grown tremendousl over the past several decades.
%ince the exchange rates are continuousl changing, so the firms are exposed to the
risk of exchange rate movements. "s a result the assets or liabilit 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.
'his variabilit in the value of assets or liabilities or cash flows is referred to
exchange rate risk. %ince the fixed exchange rate sstem has been fallen in the earl
5678s, specificall in developed countries, the currenc risk has become substantial
for man business firms. "s a result, these firms are increasingl turning to various
risk hedging products like foreign currenc futures, foreign currenc forwards,
foreign currenc options, and foreign currenc swaps.
#NTRODUCT#ON TO CURRENC9 5UTURE
" futures contract is a standardiEed contract, traded on an exchange, to bu or sell a
certain underling asset or an instrument at a certain date in the future, at a specified
price. When the underling asset is a commodit, e.g. Oil or Wheat, the contract is
termed a
H
commodit futures contract
J
. When the underling is an exchange rate, the
contract is termed a
F
&urren&y (u$ure* &%n$ra&$
G
. #n other words, it is a contract to
exchange one currenc for another currenc at a specified date and a specified rate in
the future.
'herefore, the buer and the seller lock themselves into an exchange rate for a
specific value or deliver date. ;oth parties of the futures contract must fulfill their
obligations on the settlement date.
Currenc futures can be cash settled or settled b delivering the respective obligation
of the seller and buer. "ll settlements however, unlike in the case of O'C markets,
go through the exchange.
Currenc futures are a linear product, and calculating profits or losses on Currenc
Futures will be similar to calculating profits or losses on #ndex futures. #n
determining profits and losses in futures trading, it is essential to know both the
contract siEe 9the number of currenc units being traded: and also what is the tick
value. " tick is the minimum trading increment or price differential at which traders
are able to enter bids and offers. 'ick values differ for different currenc pairs and
different underling. For e.g. in the case of the ,%(!#1& currenc futures contract
the tick siEe shall be 8.?- paise or 8.88?- &upees. 'o demonstrate how a move of one
tick affects the price, imagine a trader bus a contract 9,%( 5888 being the value of
each contract: at &s.*?.?-88. One tick move on this contract will translate to
&s.*?.?*7- or &s.*?.?-?- depending on the direction of market movement.
Pur&ha*e +r'&e= R* .-"."4::
Pr'&e 'n&rea*e* 7y %ne $'&2= ;R*. ::.::"4
Ne0 +r'&e= R* .-"."4"4
Pur&ha*e +r'&e= R* .-"."4::
Pr'&e de&rea*e* 7y %ne $'&2= HR*. ::.::"4
Ne0 +r'&e= R*.-". "-.4
'he value of one tick on each contract is &upees ?.-8. %o if a trader bus - contracts
and the price moves up b * tick, she makes &upees -8.
%tep 5> *?.?388 M *?.?-88
%tep ?> * ticks P - contracts Q ?8 points
%tep $> ?8 points P &upees ?.- per tick Q &upees -8
BR#E5 OER#EW O5 5ORE#GN EICHANGE
MARKET
OER#EW O5 THE 5ORE#GN EICHANGE MARKET #N #ND#A
(uring the earl 5668s, #ndia embarked on a series of structural reforms in the foreign
exchange market. 'he exchange rate regime, that was earlier pegged, was partiall
floated in /arch 566? and full floated in /arch 566$. 'he unification of the exchange
rate was instrumental in developing a market!determined exchange rate of the rupee and
was an important step in the progress towards total current account convertibilit, which
was achieved in "ugust 566*.
"lthough liberaliEation helped the #ndian forex market in various was, it led to
extensive fluctuations of exchange rate. 'his issue has attracted a great deal of concern
from polic!makers and investors. While some flexibilit in foreign exchange markets
and exchange rate determination is desirable, excessive volatilit can have an adverse
impact on price discover, export performance, sustainabilit of current account
balance, and balance sheets. #n the context of upgrading #ndian foreign exchange
market to international standards, a well! developed foreign exchange derivative market
9both O'C as well as .xchange!traded: is imperative.
With a view to enable entities to manage volatilit in the currenc market, &;# on "pril
?8, ?887 issued comprehensive guidelines on the usage of foreign currenc forwards,
swaps and options in the O'C market. "t the same time, &;# also set up an #nternal
Working Aroup to explore the advantages of introducing currenc futures. 'he &eport
of the #nternal Working Aroup of &;# submitted in "pril ?858, recommended the
introduction of .xchange 'raded Currenc Futures.
%ubse<uentl, &;# and %.;# jointl constituted a %tanding 'echnical Committee to
analEe the Currenc Forward and Future market around the world and la down the
guidelines to introduce .xchange 'raded Currenc Futures in the #ndian market. 'he
Committee submitted its report on /a ?6, ?858. Further &;# and %.;# also issued
circulars in this regard on "ugust 83, ?858.
Currentl, #ndia is a ,%( $* billion O'C market, where all the major currencies like
,%(, .,&O, R.1, Pound, %wiss Franc etc. are traded. With the help of electronic
trading and efficient risk management sstems, .xchange 'raded Currenc Futures will
bring in more transparenc and efficienc in price discover, eliminate counterpart
credit risk, provide access to all tpes of market participants, offer standardiEed
products and provide transparent trading platform. ;anks are also allowed to become
members of this segment on the .xchange, thereb providing them with a new
opportunit. Source :-( Report of the R*#-S+*#
standing technical co""ittee on exchange traded currency futures) ,-.-.
CURRENC9 DER#AT#E PRODUCTS
(erivative contracts have several variants. 'he most common variants are forwards,
futures, options and swaps. We take a brief look at various derivatives contracts that
have come to be used.
5ORWARD =
'he basic objective of a forward market in an underling 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 an risk of loss which might incur due
to fluctuations in the price of underling asset.
" forward contract is customiEed contract between two entities, where settlement
takes place on a specific date in the future at toda4s pre!agreed price. 'he
exchange rate is fixed at the time the contract is entered into. 'his is known as
forward exchange rate or simpl forward rate.
5UTURE =
" currenc futures contract provides a simultaneous right and obligation to bu
and sell a particular currenc at a specified future date, a specified price and a
standard <uantit. #n another word, a future contract is an agreement between
two parties to bu or sell an asset at a certain time in the future at a certain price.
Future contracts are special tpes of forward contracts in the sense that the are
standardiEed exchange!traded contracts.
SWAP =
%wap is private agreements between two parties to exchange cash flows in the
future according to a prearranged formula. 'he can be regarded as portfolio of
forward contracts.
'he currenc swap entails swapping both principal and interest between the
parties, with the cash flows in one direction being in a different currenc than
those in the opposite direction. 'here are a various tpes of currenc swaps like
as fixed!to!fixed currenc swap, floating to floating swap, fixed to floating
currenc swap.
#n a swap normall three basic steps are involveSSS
95: #nitial exchange of principal amount
9?: Ongoing exchange of interest
9$: &e ! exchange of principal amount on maturit.
OPT#ONS =
Currenc option is a financial instrument that give the option holder a right and
not the obligation, to bu or sell a given amount of foreign exchange at a fixed
price per unit for a specified time period 9 until the expiration date :. #n other
words, a foreign currenc option is a contract for future deliver of a specified
currenc in exchange for another in which buer of the option has to right to bu
9call: or sell 9put: a particular currenc at an agreed price for or within specified
period. 'he seller of the option gets the premium from the buer of the option for
the obligation undertaken in the contract. Options generall have lives of up to
one ear, the majorit of options traded on options exchanges having a maximum
maturit of nine months. )onger dated options are called )arrants and are
generall traded O'C.
5ORE#GN EICHANGE SPOT CCASHD MARKET
'he foreign exchange spot market trades in different currencies for both spot and
forward deliver. Aenerall the do not have specific location, and mostl take
place primaril b means of telecommunications both within and between countries.
#t consists of a network of foreign dealers which are oftenl banks, financial
institutions, large concerns, etc. 'he large banks usuall make markets in different
currencies.
#n the spot exchange market, the business is transacted throughout the world on a
continual basis. %o it is possible to transaction in foreign exchange markets ?* hours
a da. 'he standard settlement period in this market is *N hours, i.e., ? das after the
execution of the transaction.
'he spot foreign exchange market is similar to the O'C market for securities. 'here
is no centraliEed meeting place and no fixed opening and closing time. %ince most
of the business in this market is done b banks, hence, transaction usuall do not
involve a phsical transfer of currenc, rather simpl book keeping transfer entr
among banks.
.xchange rates are generall determined b de"and and supply force in this
market. 'he purchase and sale of currencies stem partl from the need to finance
trade in goods and services. "nother important source of demand and suppl arises
from the participation of the central banks which would emanate from a desire to
influence the direction, extent or speed of exchange rate movements.
5ORE#GN EICHANGE JUOTAT#ONS
Foreign exchange <uotations can be confusing because currencies are <uoted in terms
of other currencies. #t means exchange rate is relative price.
For example,
#f one ,% dollar is worth of &s. *- in #ndian rupees then it implies that
*- #ndian rupees will bu one dollar of ,%", or that one rupee is worth of 8.8?? ,%
dollar which is simpl reciprocal of the former dollar exchange rate.
EICHANGE RATE
D're&$ #nd're&$
'he number of units of domestic 'he number of unit of foreign
Currenc stated against one unit currenc per unit of domestic
of foreign currenc. currenc.
&eGT Q *-.7?-8 9 or : &e 5 Q T 8.8?5N7
T5 Q &s. *-.7?-8
'here are two was of <uoting exchange rates> the direct and indirect.
/ost countries use the direct method. #n global foreign exchange market, two rates
are <uoted b the dealer> one rate for buing C7'd ra$eD, and another for selling Ca*2
%r %((ered ra$eD for a currenc. 'his is a uni<ue feature of this market. #t should be
noted that where the bank sells dollars against rupees, one can sa that rupees
against dollar. #n order to separate buing and selling rate, a small dash or obli<ue
line is drawn after the dash.
For example,
#f ,% dollar is <uoted in the market as &s *3.$-88G$--8, it means that
the forex dealer is read to purchase the dollar at &s *3.$-88 and read to sell at &s
*3.$--8. 'he difference between the buing and selling rates is called spread.
#t is important to note that selling rate is alwas higher than the buing rate.
'raders, usuall large banks, deal in two wa prices, both buing and selling, are
called "arket "akers.
Ba*e Curren&yK Term* Curren&y=
#n foreign exchange markets, the base currenc is the first currenc in a currenc pair.
'he second currenc is called as the terms currenc. .xchange rates are <uoted in
per unit of the base currenc. 'hat is the expression (ollar!&upee, tells ou that the
(ollar is being <uoted in terms of the &upee. 'he (ollar is the base currenc and the
&upee is the terms currenc.
.xchange rates are constantl changing, which means that the value of one currenc
in terms of the other is constantl in flux. Changes in rates are expressed as
strengthening or weakening of one currenc vis!U!vis the second currenc.
Changes are also expressed as appreciation or depreciation of one currenc in terms
of the second currenc. Whenever the base currenc bus more of the terms
currenc, the base currenc has strengthened G appreciated and the terms currenc has
weakened G depreciated.
For example,
#f (ollar M &upee moved from *$.88 to *$.?-. 'he (ollar has
appreciated and the &upee has depreciated. "nd if it moved from *$.8888 to *?.7-?-
the (ollar has depreciated and &upee has appreciated.
NEED 5OR EICHANGE TRADED CURRENC9 5UTURES
With a view to enable entities to manage volatilit in the currenc market, &;# on
"pril ?8, ?887 issued comprehensive guidelines on the usage of foreign currenc
forwards, swaps and options in the O'C market. "t the same time, &;# also set up an
#nternal Working Aroup to explore the advantages of introducing currenc futures.
'he &eport of the #nternal Working Aroup of &;# submitted in "pril ?858,
recommended the introduction of exchange traded currenc futures. .xchange traded
futures as compared to O'C forwards serve the same economic purpose, et differ in
fundamental was. "n individual entering into a forward contract agrees to transact at
a forward price on a future date. On the maturit date, the obligation of the individual
e<uals the forward price at which the contract was executed. .xcept on the maturit
date, no mone changes hands. On the other hand, in the case of an exchange traded
futures contract, mark to market obligations is settled on a dail basis. %ince the
profits or losses in the futures market are collected G paid on a dail basis, the scope
for building up of mark to market losses in the books of various participants gets
limited.
'he counterpart risk in a futures contract is further eliminated b the presence of a
clearing corporation, which b assuming counterpart guarantee eliminates credit
risk.
Further, in an .xchange traded scenario where the market lot is fixed at a much lesser
siEe than the O'C market, e<uitable opportunit is provided to all classes of investors
whether large or small to participate in the futures market. 'he transactions on an
.xchange are executed on a price time priorit ensuring that the best price is
available to all categories of market participants irrespective of their siEe. Other
advantages of an .xchange traded market would be greater transparenc, efficienc
and accessibilit.
Source :-( Report of the R*#-S+*# standing technical co""ittee on exchange
traded currency futures) ,-.-.
RAT#ONALE 5OR #NTRODUC#NG CURRENC9 5UTURE
Futures markets were designed to solve the problems that exist in forward markets. "
futures contract is an agreement between two parties to bu or sell an asset at a certain
time in the future at a certain price. ;ut unlike forward contracts, the futures contracts
are standardiEed and exchange traded. 'o facilitate li<uidit in the futures contracts, the
exchange specifies certain standard features of the contract. " futures contract is
standardiEed contract with standard underling instrument, a standard <uantit and <ualit
of the underling instrument that can be delivered, 9or which can be used for reference
purposes in settlement: and a standard timing of such settlement. " futures contract ma
be offset prior to maturit b entering into an e<ual and opposite transaction.
The *$andard'Eed '$em* 'n a (u$ure* &%n$ra&$ are=
0uantit of the underling
0ualit of the underling
'he date and the month of deliver
'he units of price <uotation and minimum price change
)ocation of settlement
'he rationale for introducing currenc futures in the #ndian context has been outlined
in the &eport of the #nternal Working Aroup on Currenc Futures 9&eserve ;ank of #ndia,
"pril ?858: as followsK
'he rationale for establishing the currenc futures market is manifold. ;oth residents and
non!residents purchase domestic currenc assets. #f the exchange rate remains unchanged
from the time of purchase of the asset to its sale, no gains and losses are made out of
currenc exposures. ;ut if domestic currenc depreciates 9appreciates: against the
foreign currenc, the exposure would result in gain 9loss: for residents purchasing foreign
assets and loss 9gain: for non residents purchasing domestic assets. #n this backdrop,
unpredicted movements in exchange rates expose investors to currenc risks.
Currenc futures enable them to hedge these risks. 1ominal exchange rates are often
random walks with or without drift, while real exchange rates over long run are mean
reverting. "s such, it is possible that over a long M run, the incentive to hedge currenc
risk ma not be large. +owever, financial planning horiEon is much smaller than the long!
run, which is tpicall inter!generational in the context of exchange rates. "s such, there
is a strong need to hedge currenc risk and this need has grown manifold with fast growth
in cross!border trade and investments flows. 'he argument for hedging currenc risks
appear to be natural in case of assets, and applies e<uall to trade in goods and services,
which results in income flows with leads and lags and get converted into different
currencies at the market rates. .mpiricall, changes in exchange rate are found to have
ver low correlations with foreign e<uit and bond returns. 'his in theor should lower
portfolio risk. 'herefore, sometimes argument is advanced against the need for hedging
currenc risks. ;ut there is strong empirical evidence to suggest that hedging reduces the
volatilit of returns and indeed considering the episodic nature of currenc returns, there
are strong arguments to use instruments to hedge currenc risks.
5UTURE TERM#NOLOG9
SPOT PR#CE =
'he price at which an asset trades in the spot market. 'he transaction in which
securities and foreign exchange get traded for immediate deliver. %ince the
exchange of securities and cash is virtuall immediate, the term, cash market, has
also been used to refer to spot dealing. #n the case of ,%(#1&, spot value
is ' V ?.
5UTURE PR#CE =
'he price at which the future contract traded in the future market.
CONTRACT C9CLE =
'he period over which a contract trades. 'he currenc future contracts in #ndian
market have one month, two month, three month up to twelve month expir
ccles. #n 1%.G;%. will have 5? contracts outstanding at an given point in time.
ALUE DATE K 5#NAL SETTELMENT DATE =
'he last business da of the month will be termed the value date Gfinal settlement
date of each contract. 'he last business da would be taken to the same as that
for inter bank settlements in /umbai. 'he rules for inter bank settlements,
including those for Oknown holidas4 and would be those as laid down b Foreign
.xchange (ealers "ssociation of #ndia 9F.("#:.
EIP#R9 DATE =
#t is the date specified in the futures contract. 'his is the last da on which the
contract will be traded, at the end of which it will cease to exist. 'he last trading
da will be two business das prior to the value date G final settlement date.
CONTRACT S#LE =
'he amount of asset that has to be delivered under one contract.
"lso called as lot siEe. #n case of ,%(#1& it is ,%( 5888.
BAS#S =
#n the context of financial futures, basis can be defined as the futures price minus
the spot price. 'here will be a different basis for each deliver month for each
contract. #n a normal market, basis will be positive. 'his reflects that futures
prices normall exceed spot prices.
COST O5 CARR9 =
'he relationship between futures prices and spot prices can be summariEed in
terms of what is known as the cost of carr. 'his measures the storage cost plus
the interest that is paid to finance or Ocarr4 the asset till deliver less the income
earned on the asset. For e<uit derivatives carr cost is the rate of interest.
#N#T#AL MARG#N =
When the position is opened, the member has to deposit the margin with the
clearing house as per the rate fixed b the exchange which ma var asset to
asset. Or in another words, the amount that must be deposited in the margin
account at the time a future contract is first entered into is known as initial
margin.
MARK#NG TO MARKET =
"t the end of trading session, all the outstanding contracts are reprised at the
settlement price of that session. #t means that all the futures contracts are dail
settled, and profit and loss is determined on each transaction. 'his procedure,
called marking to market, re<uires that funds charge ever da. 'he funds are
added or subtracted from a mandator margin 9initial margin: that traders are
re<uired to maintain the balance in the account. (ue to this adjustment, futures
contract is also called as dail reconnected forwards.
MA#NTENANCE MARG#N =
/ember4s account are debited or credited on a dail basis. #n turn customers4
account are also re<uired to be maintained at a certain level, usuall about 7-
percent of the initial margin, is called the maintenance margin. 'his is somewhat
lower than the initial margin.
'his is set to ensure that the balance in the margin account never becomes
negative. #f the balance in the margin account falls below the maintenance
margin, the investor receives a margin call and is expected to top up the margin
account to the initial margin level before trading commences on the next da.
USES O5 CURRENC9 5UTURES
Hed/'n/=
Presume .ntit " is expecting a remittance for ,%( 5888 on ?7 "ugust 8N.
Wants to lock in the foreign exchange rate toda so that the value of inflow in
#ndian rupee terms is safeguarded. 'he entit can do so b selling one contract
of ,%(#1& futures since one contract is for ,%( 5888.
Presume that the current spot rate is &s.*$ and
O
,%(#1& ?7 "ug 8N4 contract is
trading at &s.**.?-88. .ntit " shall do the following>
%ell one "ugust contract toda. 'he value of the contract is &s.**,?-8.
)et us assume the &;# reference rate on "ugust ?7, ?858 is &s.**.8888. 'he
entit shall sell on "ugust ?7, ?858, ,%( 5888 in the spot market and get &s.
**,888. 'he futures contract will settle at &s.**.8888 9final settlement price Q
&;# reference rate:.
'he return from the futures transaction would be &s. ?-8, i.e. 9&s. **,?-8 M &s.
**,888:. "s ma be observed, the effective rate for the remittance received b the
entit " is &s.**. ?-88 9&s.**,888 V &s.?-8:G5888, while spot rate on that date
was &s.**.8888. 'he entit was able to hedge its exposure.
S+e&u,a$'%n= Bu,,'*h, 7uy (u$ure*
'ake the case of a speculator who has a view on the direction of the market. +e
would like to trade based on this view. +e expects that the ,%(!#1& rate
presentl at &s.*?, is to go up in the next two!three months. +ow can he trade
based on this beliefW #n case he can bu dollars and hold it, b investing the
necessar capital, he can profit if sa the &upee depreciates to &s.*?.-8.
"ssuming he bus ,%( 58888, it would re<uire an investment of &s.*,?8,888. #f
the exchange rate moves as he expected in the next three months, then he shall
make a profit of around &s.58888. 'his works out to an annual return of around
*.73X. #t ma please be noted that the cost of funds invested is not considered in
computing this return.
" speculator can take exactl the same position on the exchange rate b using
futures contracts. )et us see how this works. #f the #1&! ,%( is &s.*? and the
three month futures trade at &s.*?.*8. 'he minimum contract siEe is ,%( 5888.
'herefore the speculator ma bu 58 contracts. 'he exposure shall be the same as
above ,%( 58888. Presumabl, the margin ma be around &s.?5, 888. 'hree
months later if the &upee depreciates to &s. *?.-8 against ,%(, 9on the da of
expiration of the contract:, the futures price shall converge to the spot price 9&s.
*?.-8: and he makes a profit of &s.5888 on an investment of &s.?5, 888. 'his works
out to an annual return of 56 percent. ;ecause of the leverage the provide, futures
form an attractive option for speculators.
S+e&u,a$'%n= Bear'*h, *e,, (u$ure*
Futures can be used b a speculator who believes that an underling is over!
valued and is likel to see a fall in price. +ow can he trade based on his
opinionW #n the absence of a deferral product, there wasn
=
t much he could do to
profit from his opinion. 'oda all he needs to do is sell the futures.
)et us understand how this works. 'picall futures move correspondingl with
the underling, as long as there is sufficient li<uidit in the market. #f the
underling price rises, so will the futures price. #f the underling price falls, so
will the futures price. 1ow take the case of the trader who expects to see a fall
in the price of ,%(!#1&. +e sells one two!month contract of futures on ,%(
sa at &s. *?.?8 9each contact for ,%( 5888:. +e pas a small margin on the
same. 'wo months later, when the futures contract expires, ,%(!#1& rate let us
sa is &s.*?. On the da of expiration, the spot and the futures price converges.
+e has made a clean profit of ?8 paise per dollar. For the one contract that he
sold, this works out to be &s.?888.
Ar7'$ra/e=
"rbitrage is the strateg of taking advantage of difference in price of the same
or similar product between two or more markets. 'hat is, arbitrage is striking a
combination of matching deals that capitaliEe upon the imbalance, the profit
being the difference between the market prices. #f the same or similar product is
traded in sa two different markets, an entit which has access to both the
markets will be able to identif price differentials, if an. #f in one of the
markets the product is trading at higher price, then the entit shall bu the
product in the cheaper market and sell in the costlier market and thus benefit
from the price differential without an additional risk.
One of the methods of arbitrage with regard to ,%(!#1& could be a trading
strateg between forwards and futures market. "s we discussed earlier, the
futures price and forward prices are arrived at using the principle of cost of
carr. %uch of those entities who can trade both forwards and futures shall be
able to identif an mis!pricing between forwards and futures. #f one of them is
priced higher, the same shall be sold while simultaneousl buing the other
which is priced lower. #f the tenor of both the contracts is same, since both
forwards and futures shall be settled at the same &;# reference rate, the
transaction shall result in a risk less profit.
TRAD#NG PROCESS AND SETTLEMENT PROCESS
)ike other future trading, the future currencies are also traded at organiEed
exchanges. 'he following diagram shows how operation take place on currenc
future market>
#t has been observed that in most futures markets, actual phsical deliver of the
underling assets is ver rare and hardl it ranges from 5 percent to - percent. /ost
often buers and sellers offset their original position prior to deliver date b taking an
TRADER
C BU9ER D
TRADER
C SELLER D
MEMBER
C BROKER D
MEMBER
C BROKER D
CLEAR#NG
HOUSE
Purchase order %ales order
'ransaction on the floor 9.xchange:
#nforms
opposite positions. 'his is because most of futures contracts in different products are
predominantl speculative instruments. For example, F purchases "merican (ollar
futures and R sells it. #t leads to two contracts, first, F part and clearing house and
second R part and clearing house. "ssume next da F sells same contract to Y, then F
is out of the picture and the clearing house is seller to Y and buer from R, and hence,
this process is goes on.
REGULATOR9 5RAMEWORK 5OR CURRENC9 5UTURES
With a view to enable entities to manage volatilit in the currenc market, &;# on "pril
?8, ?887 issued comprehensive guidelines on the usage of foreign currenc forwards,
swaps and options in the O'C market. "t the same time, &;# also set up an #nternal
Working Aroup to explore the advantages of introducing currenc futures. 'he &eport
of the #nternal Working Aroup of &;# submitted in "pril ?858, recommended the
introduction of exchange traded currenc futures. With the expected benefits of
exchange traded currenc futures, it was decided in a joint meeting of &;# and %.;# on
Februar ?N, ?858, that an &;#!%.;# %tanding 'echnical Committee on .xchange
'raded Currenc and #nterest &ate (erivatives would be constituted. 'o begin with, the
Committee would evolve norms and oversee the implementation of .xchange traded
currenc futures. 'he 'erms of &eference to the Committee was as under>
5. 'o coordinate the regulator roles of &;# and %.;# in regard to trading of
Currenc and #nterest &ate Futures on the .xchanges.
?. 'o suggest the eligibilit norms for existing and new .xchanges for Currenc and
#nterest &ate Futures trading.
$. 'o suggest eligibilit criteria for the members of such exchanges.
*. 'o review product design, margin re<uirements and other risk mitigation
measures on an ongoing basis.
-. 'o suggest surveillance mechanism and dissemination of market information.
3. 'o consider microstructure issues, in the overall interest of financial stabilit.
COMPAR#S#ON O5 5ORWARD AND 5UTURES CURRENC9 CONTRACT
BAS#S 5ORWARD 5UTURES
%iEe %tructured as per
re<uirement of the parties
%tandardiEed
(eliver
date
'ailored on individual
needs
%tandardiEed
/ethod of
transaction
.stablished b the bank
or broker through
electronic media
Open auction among buers and seller
on the floor of recogniEed exchange.
Participants ;anks, brokers, forex
dealers, multinational
companies, institutional
investors, arbitrageurs,
traders, etc.
;anks, brokers, multinational
companies, institutional investors,
small traders, speculators, arbitrageurs,
etc.
/argins 1one as such, but
compensating bank
balanced ma be re<uired
/argin deposit re<uired
/aturit 'ailored to needs> from
one week to 58 ears
%tandardiEed
%ettlement "ctual deliver or offset
with cash settlement. 1o
separate clearing house
(ail settlement to the market and
variation margin re<uirements
/arket
place
Over the telephone
worldwide and computer
networks
"t recogniEed exchange floor with
worldwide communications
"ccessibilit

)imited to large
customers banks,
institutions, etc.
Open to an one who is in need of
hedging facilities or has risk capital to
speculate
(eliver /ore than 68 percent
settled b actual deliver
"ctual deliver has ver less even
below one percent
%ecured &isk is high being less
secured
+ighl secured through margin
deposit.
ANAL9S#S
#NTEREST RATE PAR#T9 PR#NC#PLE
For currencies which are full convertible, the rate of exchange for an date other
than spot is a function of spot and the relative interest rates in each currenc. 'he
assumption is that, an funds held will be invested in a time deposit of that
currenc. +ence, the forward rate is the rate which neutraliEes the effect of
differences in the interest rates in both the currencies. 'he forward rate is a function
of the spot rate and the interest rate differential between the two currencies, adjusted
for time. #n the case of full convertible currencies, having no restrictions on
borrowing or lending of either currenc the forward rate can be calculated as
followsK
Future &ate Q 9spot rate: Z5 V interest rate on home currenc P period[ K
Z5 V interest rate on foreign currenc P period[
For example,
"ssume that on Banuar 58, ?88?, six month annual interest rate was 7
percent p.a. on #ndian rupee and ,% dollar six month rate was 3 percent p.a. and
spot 9 &eGT : exchange rate was *3.$-88. ,sing the above e<uation the theoretical
future price on Banuar 58, ?88?, expiring on Bune 6, ?88? is > the answer will be
&s.*3.768N per dollar. 'hen, this theoretical price is compared with the <uoted
futures price on Banuar 58, ?88? and the relationship is observed.
PRODUCT DE5#N#T#ONS O5 CURRENC9 5UTURE ON
NSEKBSE
Under,y'n/
#nitiall, currenc futures contracts on ,% (ollar M #ndian &upee 9,%T!#1&:
would be permitted.
Trad'n/ H%ur*
'he trading on currenc futures would be available from 6 a.m. to - p.m.
S'Ee %( $he &%n$ra&$
'he minimum contract siEe of the currenc futures contract at the time of
introduction would be ,%T 5888. 'he contract siEe would be periodicall
aligned to ensure that the siEe of the contract remains close to the minimum
siEe.
Ju%$a$'%n
'he currenc futures contract would be <uoted in rupee terms. +owever, the
outstanding positions would be in dollar terms.
Ten%r %( $he &%n$ra&$
'he currenc futures contract shall have a maximum maturit of 5? months.
A)a',a7,e &%n$ra&$*
"ll monthl maturities from 5 to 5? months would be made available.
Se$$,emen$ me&han'*m
'he currenc futures contract shall be settled in cash in #ndian &upee.
Se$$,emen$ +r'&e
'he settlement price would be the &eserve ;ank &eference &ate on the date of
expir. 'he methodolog of computation and dissemination of the &eference
&ate ma be publicl disclosed b &;#.
5'na, *e$$,emen$ day
'he currenc futures contract would expire on the last working da 9excluding
%aturdas: of the month. 'he last working da would be taken to be the same as
that for #nterbank %ettlements in /umbai. 'he rules for #nterbank %ettlements,
including those for Oknown holidas4 and Osubse<uentl declared holida4 would
be those as laid down b F.("#.
'he contract specification in a tabular form is as under>
Under,y'n/ &ate of exchange between one ,%( and
#1&
Trad'n/ H%ur*
CM%nday $% 5r'dayD
86>88 a.m. to 8->88 p.m.
C%n$ra&$ S'Ee ,%( 5888
T'&2 S'Ee 8.?- paisa or #1& 8.88?-
Trad'n/ Per'%d /aximum expiration period of 5? months
C%n$ra&$ M%n$h* 5? near calendar months
5'na, Se$$,emen$ da$eK
a,ue da$e
)ast working da of the month 9subject to
holida calendars:
La*$ Trad'n/ Day 'wo working das prior to Final
%ettlement
Se$$,emen$ Cash settled
5'na, Se$$,emen$ Pr'&e 'he reference rate fixed b &;# two
working das prior to the final settlement
date will be used for final settlement
CURRENC9 5UTURES PA9O55S
" paoff is the likel profitGloss that would accrue to a market participant with
change in the price of the underling asset. 'his is generall depicted in the
form of paoff diagrams which show the price of the underling asset on the F!
axis and the profitsGlosses on the R!axis. Futures contracts have linear paoffs.
#n simple words, it means that the losses as well as profits for the buer and the
seller of a futures contract are unlimited. Options do not have linear paoffs.
'heir pa offs are non!linear. 'hese linear paoffs are fascinating as the can be
combined with options and the underling to generate various complex paoffs.
+owever, currentl onl paoffs of futures are discussed as exchange traded
foreign currenc options are not permitted in #ndia.
Pay%(( (%r 7uyer %( (u$ure*= L%n/ (u$ure*
'he paoff for a person who bus a futures contract is similar to the paoff for a
person who holds an asset. +e has a potentiall unlimited upside as well as a
potentiall unlimited downside. 'ake the case of a speculator who bus a two!
month currenc futures contract when the ,%( stands at sa &s.*$.56. 'he
underling asset in this case is the currenc, ,%(. When the value of dollar
moves up, i.e. when &upee depreciates, the long futures position starts making
profits, and when the dollar depreciates, i.e. when rupee appreciates, it starts
making losses. Figure *.5 shows the paoff diagram for the buer of a futures
contract.
Pay%(( (%r 7uyer %( (u$ure=
'he figure shows the profitsGlosses for a long futures position. 'he
investor bought futures when the ,%( was at &s.*$.56. #f the price goes
up, his futures position starts making profit. #f the price falls, his futures
position starts showing losses.
Pay%(( (%r *e,,er %( (u$ure*= Sh%r$ (u$ure*
P
&
O
F
#
'
)
O
%
%
,%(
(
8
*$.56
'he paoff for a person who sells a futures contract is similar to the paoff for a
person who shorts an asset. +e has a potentiall unlimited upside as well as a
potentiall unlimited downside. 'ake the case of a speculator who sells a two
month currenc futures contract when the ,%( stands at sa &s.*$.56. 'he
underling asset in this case is the currenc, ,%(. When the value of dollar
moves down, i.e. when rupee appreciates, the short futures position starts ?-
making profits, and when the dollar appreciates, i.e. when rupee depreciates, it
starts making losses. 'he Figure below shows the paoff diagram for the seller
of a futures contract.
Pay%(( (%r *e,,er %( (u$ure=
'he figure shows the profitsGlosses for a short futures position. 'he investor
sold futures when the ,%( was at *$.56. #f the price goes down, his futures
position starts making profit. #f the price rises, his futures position starts
showing losses
PR#C#NG 5UTURES H COST O5 CARR9 MODEL
Pricing of futures contract is ver simple. ,sing the cost!of!carr logic, we
calculate the fair value of a futures contract. .ver time the observed price
deviates from the fair value, arbitragers would enter into trades to capture the
arbitrage profit. 'his in turn would push the futures price back to its fair value.
'he cost of carr model used for pricing futures is given below>
5MSeNCrOrf)T
where>
rQCost of financing 9using continuousl compounded interest rate:
rfQ one ear interest rate in foreign
'Q'ime till expiration in ears
.Q?.75N?N
'he relationship between F and % then could be given as
P
&
O
F
#
'
)
O
%
%
,%(
(
8
*$.56
F Se^9r rf :T ! Q
'his relationship is known as interest rate parit relationship and is used in
international finance. 'o explain this, let us assume that one ear interest rates
in ,% and #ndia are sa 7X and 58X respectivel and the spot rate of ,%( in
#ndia is &s. **.
From the e<uation above the one ear forward exchange rate should be
F Q ** P e^98.58!8.87 :P5Q*-.$*
#t ma be noted from the above e<uation, if foreign interest rate is greater than
the domestic rate i.e. rf \ r, then F shall be less than %. 'he value of F shall
decrease further as time ' increase. #f the foreign interest is lower than the
domestic rate, i.e. rf ] r, then value of F shall be greater than %. 'he value of F
shall increase further as time ' increases.
HEDG#NG W#TH CURENC9 5UTURES
.xchange rates are <uite volatile and unpredictable, it is possible that
anticipated profit in foreign investment ma be eliminated, rather even ma
incur loss. 'hus, in order to hedge this foreign currenc risk, the traders4 oftenl
use the currenc futures. For example, a long hedge 9#.e.., buing currenc
futures contracts: will protect against a rise in a foreign currenc value whereas
a short hedge 9i.e., selling currenc futures contracts: will protect against a
decline in a foreign currenc4s value.
#t is noted that corporate profits are exposed to exchange rate risk in man
situation. For example, if a trader is exporting or importing an particular
product from other countries then he is exposed to foreign exchange risk.
%imilarl, if the firm is borrowing or lending or investing for short or long
period from foreign countries, in all these situations, the firm4s profit will be
affected b change in foreign exchange rates. #n all these situations, the firm can
take long or short position in futures currenc market as per re<uirement.
'he general rule for determining whether a long or short futures position will
hedge a potential foreign exchange loss is>
)oss from appreciating in #ndian rupeeQ %hort hedge
)oss form depreciating in #ndian rupeeQ )ong hedge
The &h%'&e %( under,y'n/ &urren&y
'he first important decision in this respect is deciding the currenc in which
futures contracts are to be initiated. For example, an #ndian manufacturer wants
to purchase some raw materials from Aerman then he would like future in
Aerman mark since his exposure in straight forward in mark against home
currenc 9#ndian rupee:. "ssume that there is no such future 9between rupee and
mark: available in the market then the trader would choose among other
currencies for the hedging in futures. Which contract should he chooseW
Probabl he has onl one option rupee with dollar. 'his is called cross hedge.
Ch%'&e %( $he ma$ur'$y %( $he &%n$ra&$
'he second important decision in hedging through currenc futures is selecting
the currenc which matures nearest to the need of that currenc. For example,
suppose #ndian importer import raw material of 588888 ,%( on 5
st
1ovember
?858. "nd he will have to pa 588888 ,%( on 5
st
Februar ?855. "nd he
predicts that the value of ,%( will increase against #ndian rupees nearest to due
date of that pament. #mporter predicts that the value of ,%( will increase more
than -5.8888.
%o what he will do to protect against depreciating in #ndian rupeeW %uppose
spots value of 5 ,%( is *6.N-88. Future @alue of the 5,%( on 1%. as below>
Pr'&e Wa$&h

Order
B%%2

C%n$ra&$
Be*$
Buy J$y
Be*$
Buy Pr'&e
Be*$
Se,, Pr'&e
Be*$
Se,, J$y
LTP %,ume
O+en
#n$ere*$
,%(#1&
?3558N
*3* *6.N--8 *6.N-7- 75? *6.N--8 -N-83 *$7N-
,%(#1&
?65?8N
5N6 *6.36?- *6.7888 35? *6.7$88 573*-$ 555N$8
,%(#1&
?N8586
5 *6.NN-8 *6.6?-8 ? *6.6*-8 --6N 53N86
,%(#1&
?-8?86
588 -8.5888 -8.??7- 5 -8.56?- $775 3$37
,%(#1&
?78$86
588 *6.6??- -8.-888 - *6.65?- $55 N6?
,%(#1&
?N8*86
5 -8.8888 -5.8888 - -8.-888 ! ?7N
,%(#1&
?78-86
! ! -5.8888 - *7.5888 ! -83
,%(#1&
?38386
?- *6.8888 ! ! -8.8888 ! 553
,%(#1&
?68786
5 *N.8N7- ! ! *6.5-88 ! **
,%(#1&
?78N86
? *N.53?- -8.-888 5 -8.$888 3 ??5-
,%(#1&
?N8686
5 *N.?$7- ! ! -5.?888 ! 76
,%(#1&
?N5886
5 *N.$588 -$.5688 ? -8.6688 ! ?
,%(#1&
?35586
5 *N.$N?- ! ! -8.6?7- ! !
%,ume A* On "6ONOO":!: !.=::=::
H%ur* #ST
1o. of Contracts
?**3*-

&ules, ;elaws 2 &egulations
/embership
Circulars
"rchives
A* On "6ON%)O":!! !"=::=:: H%ur* #ST
,nderling &;# reference rate
,%(#1& *6.N-88
)ist of +olidas
S%,u$'%n=
+e should bu ten contract of ,%(#1& ?N85?855 at the rate of *6.NN-8. @alue
of the contract is 9*6.NN-8P5888P588: Q*6NN-88. 9@alue of currenc future per
,%(Pcontract siEeP1o of contract:.
For that he has to pa -X margin on -6NN-88. /eans he will have to pa
&s.?66*?- at present.
"nd suppose on settlement da the spot price of ,%( is -5.8888. On settlement
date paoff of importer will be 9-5.8888!-6.NN-8: Q5.55- per ,%(. "nd
95.55-P588888: Q555-88.&s.
Ch%'&e %( $he num7er %( &%n$ra&$* Ched/'n/ ra$'%D
"nother important decision in this respect is to decide hedging ratio +&. 'he
value of the futures position should be taken to match as closel as possible the
value of the cash market position. "s we know that in the futures markets due to
their standardiEation, exact match will generall not be possible but hedge ratio
should be as close to unit as possible. We ma define the hedge ratio +& as
follows>
+&Q @F / @c
Where, @F is the value of the futures position and @c is the value of the cash
position.
%uppose value of contract dated ?N
th
Banuar ?855 is *6.NN-8.
"nd spot value is *6.N-88.
+&Q*6.NN-8G*6.N-88Q5.885.
5#ND#NGS
Cost of carr model and #nterest rate parit model are useful tools to find
out standard future price and also useful for comparing standard with
actual future price. "nd it4s also a ver help full in "rbitraging.
1ew concept of .xchange traded currenc future trading is regulated b
higher authorit and regulator. 'he whole function of .xchange traded
currenc future is regulated b %.;#G&;#, and the established rules and
regulation so there is ver safe trading is emerged and counter part risk
is minimiEed in currenc Future trading. "nd also time reduced in
Clearing and %ettlement process up to 'V5 da4s basis.
)arger exporter and importer has continued to deal in the O'C counter
even exchange traded currenc future is available in markets because,
'here is a limit of ,%( 588 million on open interest applicable to trading
member who are banks. "nd the ,%( ?- million limit for other trading
members so larger exporter and importer might continue to deal in the
O'C market where there is no limit on hedges.
#n #ndia &;# and %.;# has restricted other currenc derivatives except
Currenc future, at this time if an person wants to use other instrument
of currenc derivatives in this case he has to use O'C.
SUGGEST#ONS
Curren&y 5u$ure need $% &han/e *%me re*$r'&$'%n '$ 'm+%*ed *u&h a* &u$ %((
,'m'$ %( 4 m',,'%n USD, Ban %n NR#P* and 5##P* and Mu$ua, 5und* (r%m
Par$'&'+a$'n/.
N%0 'n e1&han/e $raded &urren&y (u$ure *e/men$ %n,y %ne +a'r USDO#NR '*
a)a',a7,e $% $rade *% $here '* a,*% %ne m%re demand 7y $he e1+%r$er* and
'm+%r$er* $% 'n$r%du&e an%$her +a'r 'n &urren&y $rad'n/. L'2e POUNDO#NR,
CADO#NR e$&.
#n OTC $here '* n% ,'m'$ (%r $rader $% 7uy %r *h%r$ Curren&y (u$ure* *% $here
demand ar'*e* $ha$ 'n E1&han/e $raded &urren&y (u$ure *h%u,d ha)e
'n&rea*e ,'m'$ (%r Trad'n/ Mem7er* and a,*% a$ &,'en$ ,e)e,, 'n re*u,$ OTC
u*er* 0',, d')er$ $% E1&han/e $raded &urren&y 5u$ure*.
#n #nd'a $he re/u,a$%ry %( 5'nan&'a, and Se&ur'$'e* mar2e$ CSEB#D ha* Ban %n
%$her Curren&y Der')a$')e* e1&e+$ Curren&y 5u$ure*, *% $h'* re*$r'&$'%n
*eem unrea*%na7,e $% e1+%r$er* and 'm+%r$er*. And a&&%rd'n/ $% #nd'an
('nan&'a, /r%0$h n%0 '$P* 7e&%me ne&e**ary $% 'n$r%du&'n/ %$her &urren&y
der')a$')e* 'n E1&han/e $raded &urren&y der')a$')e *e/men$.
CONCLUS#ONS
By (ar $he m%*$ *'/n'('&an$ e)en$ 'n ('nan&e dur'n/ $he +a*$ de&ade ha* 7een $he
e1$ra%rd'nary de)e,%+men$ and e1+an*'%n %( ('nan&'a, der')a$')e*QThe*e
'n*$rumen$* enhan&e* $he a7','$y $% d'((eren$'a$e r'*2 and a,,%&a$e '$ $% $h%*e 'n)e*$%r*
m%*$ a7,e and 0',,'n/ $% $a2e '$O a +r%&e** $ha$ ha* und%u7$ed,y 'm+r%)ed na$'%na,
+r%du&$')'$y /r%0$h and *$andard* %( ,')'n/*.
The &urren&y (u$ure /')e* $he *a(e and *$andard'Eed &%n$ra&$ $% '$* 'n)e*$%r* and
'nd')'dua,* 0h% are a0are a7%u$ $he (%re1 mar2e$ %r +red'&$ $he m%)emen$ %( e1&han/e
ra$e *% $hey 0',, /e$ $he r'/h$ +,a$(%rm (%r $he $rad'n/ 'n &urren&y (u$ure. Be&au*e %(
e1&han/e $raded (u$ure &%n$ra&$ and '$* *$andard'Eed na$ure /')e* &%un$er +ar$y r'*2
m'n'm'Eed.

#n'$'a,,y %n,y NSE had $he +erm'**'%n 7u$ n%0 BSE and MCI ha* a,*% *$ar$ed &urren&y
(u$ure. #$ '* *h%0* $ha$ h%0 &urren&y (u$ure &%)er* /r%und 'n $he &%m+are %( %$her
a)a',a7,e der')a$')e* 'n*$rumen$*. N%$ %n,y 7'/ 7u*'ne**men and e1+%r$er and
'm+%r$er* u*e $h'* 7u$ 'nd')'dua, 0h% are 'n$ere*$ed and ha)'n/ 2n%0,ed/e a7%u$ (%re1
mar2e$ $hey &an a,*% 'n)e*$ 'n &urren&y (u$ure.
E1&han/e 7e$0een USDO#NR mar2e$* 'n #nd'a '* )ery 7'/ and $he*e e1&han/e $raded
&%n$ra&$ 0',, /')e m%re a0arene** 'n mar2e$ and a$$ra&$ $he 'n)e*$%r*.
B#BL#OGRAPH9
5'nan&'a, Der')a$')e* C$he%ry, &%n&e+$* and +r%7,em*D By= S.L. Gu+$a.
NC5M= Curren&y (u$ure M%du,e.
BC5M= Curren&y 5u$ure M%du,e.
Cen$er (%r *%&'a, and e&%n%m'& re*ear&hD P%,and
Re&en$ De)e,%+men$ 'n #n$erna$'%na, Curren&y Der')a$')e Mar2e$ 7y= Lu&Ran T.
Or,%0*2'D
Re+%r$ %( $he RB#OSEB# *$and'n/ $e&hn'&a, &%mm'$$ee %n e1&han/e $raded &urren&y
(u$ure*D ":!!
Re+%r$ %( $he #n$erna, W%r2'n/ Gr%u+ %n Curren&y 5u$ure* CRe*er)e Ban2 %( #nd'a,
A+r', ":!!D
We7*'$e*=
000.*e7'./%).'n
000.r7'.%r/.'n
000.(r%*$.&%m
000.0'2'+ed'a.&%m
000.e&%n%my0a$&h.&%m
000.7*e'nd'a.&%m
000.n*e'nd'a.&%m