Forex

NPTEL
International Finance
Vinod Gupta School of Management, IIT.Kharagpur.
Module - 9
Foreign Exchange Contracts:
Spot and Forward Contracts
Developed by: Dr. Prabina Rajib

Associate Professor (Finance & Accounts)
Vinod Gupta School of Management
IIT Kharagpur, 721 302
Email: prabina@vgsom.iitkgp.ernet.in
Joint Initiative IITs and IISc Funded by MHRD -1-

NPTEL
Lesson - 9
Foreign Exchange Contracts:
Spot and Forward Contracts
Highlight & Motivation:
Forex market players can trade foreign exchange in differing maturities and using
different types of instruments i.e, cash, tom, spot, forward, futures, swaps and options
market. In this session, different aspects spot, forward and futures contracts are
discussed. The difference between forward contract and futures contracts is also part of
this session. Different dimensions of contract specification of futures contract traded at
National stock exchange have also been elaborated.
Hence the objective of this module is to understand:

Cash, Tom, Spot trading
o Trade date, settlement date
o Spot trading rollover mechanism.
Foreign Exchange Forward contracts
o Fixed maturity contract
o Partially optional contract
o Fully optional contract
o Non-delivery forward contracts.
Foreign Exchange Futures Contract
o Different dimensions of foreign exchange future contract specification
trading at National Stock Exchange of India.

NPTEL
9.1: Introduction:
Forex rates can be quoted as spot or, forward contracts. When buyers and sellers agree
to trade at the current exchange rate for immediate delivery, it is known as spot
transaction or cash transaction. The word immediate has different meaning in this case.
It can at that instance can go upto maximum of two days.
In forex market parlance, the trade date is the day on which both parties agree to buy
and sell. The settlement date/value date is the day on which funds are actually
transferred between the buyer and seller. On settlement/value date, the buying or selling
actions will be realized by settlement of payment and receipt. Depending upon the gap
between trade and value date, spot forex trading can either be categorized as cash, tom or
spot transaction.
In the next section, Section 9.2 the spot transactions details are elaborated.
9.2: Spot forex transactions:

When a person goes to money changer/bank and buys one currency by paying another
currency is an example of spot transaction (or spot delivery) and the rate quoted by the
money changer/bank is the spot rate. For example, in India, some hotels buy or sell
foreign currency over the counter. Normally the hotel/antique shops will have a display
board mentioning different INR rates for different currency. Any guest visiting the hotel
can buy or sell foreign currency at the rate displayed on the board. This is an example of
cash transaction where the trade date and settlement date coincide.
Similarly in the interbank market, banks & financial institutions buy and sell currencies at
a rate prevailed on the trade date. However, the actual settlement for the agreed amount
may take place on T+1 or latest by T+2 days. With the advance in communication
technology and electronic fund transfer mechanism, settlement date is narrowing down to
trade date.
In India, the delivery under a spot transaction can be settled as ready/cash, Tom or Spot
as given in Table 9.1.

NPTEL
Table 9.1: Different types of delivery/settlement under spot transaction.
Ready or cash The transaction to be settled on the same day
Tom The delivery of foreign exchange to be made on the day next

(tomorrow) to the date of transaction.
Spot Delivery of foreign exchange would take place on the 2nd working
day from the trade date.
9.3: Roll over of Spot/Tom contract:
Many-a-times, settlement for spot/tom transactions may not happen on the T+1 or T+2,
but gets rolled over. In a typical spot/tom transaction, actual delivery of one currency
and receipt of other currency happens between two parties. However, most forex traders
are speculators. They do not trade with the intention of delivering (the currency they have
sold) or receiving currency (the currency they have bought), but wants to make profit
from speculation. Hence, forex brokers allow these speculators to rollover the contracts.
Rollover delays the actual settlement of the trade and it goes on until the trader closes its
position.
For deferring the settlement, forex brokers pay or receive interest from the trader. A
trader receives interest on the currency that has been bought and pays interest for the
currency that has been sold. Interest is calculated every day i.e, even for weekends.
Depending on the prevailing interest rate in the respective currencies, net interest is either
added or subtracted from traders account. This goes on until the trader squares up his
open position. By providing rollover facilities, forex brokers also earn significant
brokerage fee.
For example, on Day 1, a trader has entered into a spot transaction to sell USD 1000
to a forex broker and receive INR 47680. In other words, the trader sells USD and
buys INR. On the settlement day, (on Day 3), the trader should deliver USD 1000
and take INR 47680. However, both the trader and the broker agree not to settle but
defer the settlement by another two days. Hence, on Day 5, the trader pays USD
1000 and receives INR 47680.
By deferring the settlement, it can be understood that the trader has given a loan of
INR 47680 to the broker. Simultaneously, the broker has given a loan of USD 1000
to the trader. Hence both owe each other interest for 2-days.

NPTEL
Hence, the trader pays interest rate on USD 1000 for two days. Similarly, the broker
pays interest rate on INR 47680 for two days. The interest payment and receipt is
netted off. After two days, either the trader or the broker pays interest rate
differential.
For providing this roll over facilities, the brokers charge different types of margins.
Forex brokers and traders enter into an agreement that forms the basis for the rollover
facility provided by brokers. The Box 9.1 highlights the policy statements regarding
rollover and interest rate for rollover spot transaction of iFinixforex brokers.
Box 9.1: Rollover & Interest Policy for spot forex trades.
Source: http://www.ifinixforex.com/2policy_rollover_interest.html
iFinix Forex policy statements provide our clients with the utmost in transparency and
client service in order to maximize their Forex trading experience.
Rollover & Interest Policy
In the spot forex market trades settle in two business days. If a trader sells 10,000 Euros on
Tuesday, the seller must deliver 10,000 Euros on Thursday unless the position is held open
and "rolled" over to the next value date. As a service to our traders, iFinix Forex
automatically rolls over all open positions to the next settlement date at 17:00 Eastern
Time.
Rollover or "cost-of-carry" involves the applying of a daily debit or credit to a trading

account based on positions held open at 17:00 Eastern Time and on the interest differential
between the two currencies in the pair(s) being traded. In the majority of cases, if a trader
is "short" the currency bearing the higher interest rate then their account will be
debited, if they are long then their account will be credited. For example, a short
USD/JPY position will incur an interest charge as one is effectively "short" US Dollars and
"long" Japanese Yen. Dollar short-term interest rates are currently at 3.5% while Yen rates
are around 0.5%, a negative 3% difference. This interest differential forms the basis of the
daily premium debit/credit which is applied to all open trades at 17:00 Eastern Time,
Monday through Friday each week.
Let us go back to our example of forex trader and forex broker. The trader has given a
loan of INR 47680 and taken a loan of USD 1000. Suppose interest per annum in INR is
8% while that of USD is 4%. The trader should receive INR interest for two days and pay
USD interest for 2 days. Hence the traders receipt would be (INR 20.9) and payment

NPTEL
would be (USD 0.2191). Suppose the INR/US$ rate is INR 47.75 on day 2. Traders
payment in INR terms is INR 10.465. With netting off the trader receives INR10.435.
Forex rates can be quoted as spot or, forward contracts. When buyers and sellers agree
to trade at the current exchange rate for immediate delivery, it is known as spot
transaction or cash transaction. The word immediate has different meaning in this case.
It can at that instance can go upto maximum of two days.
In forex market parlance, the trade date is the day on which both parties agree to buy
and sell. The settlement date is the day on which funds are actually transferred between
the buyer and seller.
9.4: Forward forex transactions

In a forward contract both parties enter into a contract on a given day and lock in a
fixed rate on specific future date. In such types of contract, the terms of the purchase
(buy or sell) are agreed up front (trade execution date) but actual exchange take place on
a date in the future (maturity date). On the maturity date, both parties exchange the pre-
negotiated rate. For example, an Indian company which is likely to earn foreign currency
i.e, Euro on account of an export order after one month, may enter into a contract today (
trade execution date) to sell Euro and receive Indian Rupees after 1 month ( maturity
date). The rate is fixed on the trade date and the rate is be known as Fwd- 1 month rate.
Suppose on trade date, the Indian exporter agrees to sell EURO 1000 and receive INR
72450. On the maturity date, he delivers EURO 1000 and receives INR 72450. Such
types of forward contracts are known as outright forward contracts (OFTs).
The OFT exchange rate are quoted as differentials that is at a premium or discount from
the spot rate. For example, if the base currency earns a lower interest rate than the term
currency, then the base currency will trade at a forward premium or above the spot rate.
More details about forward premium and discount aspects are discussed in Session 14.
As forward contracts are OTC contracts, there are many variants to it. Forward contracts
can be many types depending on the rigidness associated with the maturity date. In a
Fixed Maturity Contract, the maturity date is fixed. The payment and receipt happens
on the maturity date. Partially Optional Contracts provide some flexibility. In such type
of contract, there are three dates, trade execution date, option start date and maturity

NPTEL
date. On the trade execution date, two parties agree to exchange and the rate of exchange
is fixed. In addition, the parties can settle the transaction any time during the option start
date and on before maturity date. In other words, in this contract, the maturity date spans
across days rather than a single day. In Fully Optional Contract, the contract may end
anytime during the life of the contract i.e, anytime during trade execution date and
maturity date. Figs.9(a), 9(b) and 9(c) graphically represents fixed maturity contract,
partially optional contracts and fully optional contract respectively. Like the spot
contracts, in forward contracts, the actual settlement happens within two-business day
from the maturity date.
Execution Maturity
Date Date
Fig 9(a) Fixed Maturity Contract
Execution Option start On or Before

Date Date Maturity Date
Fig 9(b) Partially Option Contract
Execution Option start On or Before

Date Date Maturity Date
Fig 9(c) Fully Optional Contract
Almost all banks provide the forward contracts to their clients. The forward contract
duration can go as long as 2 years into future. There is no standard clause regarding the
duration of the forward contract. As these are OTC contracts, as long as both parties
agree, forward contract maturity can be of any duration.

NPTEL
Forward contracts can be closed early, extended or cancelled altogether. But it comes
with some cost.
The following example highlights this aspect. On Day 1, an Indian importer had entered
into a forward contract with a bank to buy USD after 3 months. However, after 15 days
of entering the forward contract, the importer wants to shorten the contract duration as it
has to prepay USD to the US company for some reason. The importer asks the bank to
predeliver the contract. The bank may quote an amended forward rate. If the exporter
agrees with the new rate, then the old contract is cancelled and some fee charged.
Similarly forward contract maturity date can be extended. If an importer wants to extend
the maturity date, the bank still fulfills the commitment and delivers the USD to the
importer and receives INR for the extended date. Banks charge an extension margin to
the original rate negotiated. In case, an exporter, (who has entered into a contract to sell
USD forward) cannot abide by the contract, he has to buy the foreign currency from the
spot market and delivers it to the bank on the maturity date. Both exporter and bank enter
into another fresh forward contract for the extended maturity period.
Forward contracts can also be cancelled. If the importer/exporter can not use the forward
contract, the contract can be cancelled by settling the difference in exchange between the
forward contract rate and current days spot rate.
However, these flexibilities in forward contracts (closing early, extension and

cancellation) may vary form bank to bank and from client to client in a bank. These
options are exceptions rather than norms.
Normally, parties in a foreign currency forward contract cannot unwind their position. On
the contract maturity date, one party gains at the cost of other. For example, suppose an
Indian exporter expecting to receive USD1 mn after a year, enters into 1-yaer forward
contract at INR 46.75 with XYZ bank. The exporter is expecting that without the contract
he may have to sell USD at rate lesser than INR 46.75.
Suppose on trade date, the Indian exporter agrees to sell USD 1000 and receive INR
46750. On the maturity date, the Indian exporter delivers 1000 and receives INR 46750.

NPTEL
INR 46.75/ USD INR 46.75/USD
Fig. 9.(d) Exporters Payoff Fig 9.(e) Banks Payoff
Forward contracts are zero-sum game. Figure 9(d) and Figure 9(e) explains the zero
sum game. These two figures should be mirror image of each other. An exporter and a
bank enter into the forward contract where the exporter agrees to buy INR (of course sale
USD) at a price of INR 46.75. The exporter has taken a long forward position and the
bank has takes the short forward position. On the expiry date, if the spot rate is greater
than INR 46.75, the exporter looses and the bank gains. If the spot rate were higher than
INR 46.75, then the exporter would have been better off without the contract. Similarly,
on the expiry date, if the spot rate would be lesser than INR 46.75, the exporter gains.
With a forward contract, the exporter is benefiting compared to an unhedged position.
In a similar token, an Indian importer benefits if INR depreciates after the forward
contract rate has been decided.
The following Economic Times article, given in Box 9.2 explains the difficulties faced by
Indian exporters who had entered into the forward contract, but ended up incurring
significant loss as their expectation regarding future exchange rate was quite off the
mark!.

NPTEL
Box 9.2. Leading exporters unwinding forward contracts

The Economic Times, 23rd July 2008.
http://economictimes.indiatimes.com/articleshow/msid-3266587,prtpage-1.cms
A 10% dip in the value of the rupee against the dollar in three months should have resulted
in windfall profits for exporters. But for many, there have been no gains. Forward
contracts to sell the rupee at a fixed rate is leaving little opportunity for exporters to make
money even though the exchange rate has swung the other way, with the rupee weakening.
In 2007, hit by a 13% rise in the value of the rupee, many exporters entered into forward
contracts even for long-term receivables, as in for payments expected over two-three
years. However, these contracts are now tying corporates to unprofitable exchange rates.
Now, the latest trend is for exporters in IT and pharma sectors to unwind these forward
agreements and to go in for currency options instead.
Unlike forward contracts, which tie exporters to a preset deal, the options function as
insurance cover. Companies need to exercise their option to sell dollars in the future only
if the deal rate is favourable compared with the prevailing market rate. These are
somewhat similar to employee stock options, which allow employees to buy equity shares
at a fixed price. But unlike stock options, companies have to pay a premium to acquire a
currency option.
Says TCS chief financial officer S Mahalingam, Entering into a forward contract limits
the companys ability to protect its revenues. Such contracts are good only for a short
period, say a quarter or two, wherein the company has a fair idea of how much its
expenses would be.
Leading technology companies have already begun switching over to options, moving
away from forwards. Says Patni Computer Systems chief financial officer Surjeet Singh,
Over the past two-three quarters, we have witnessed a shift in our hedging
structure. Majority of our hedges now are in the form of option instruments. This is a
good strategy in times of high exchange rate volatility.
Joint Initiative IITs and IISc Funded by MHRD - 10

-
NPTEL
5.4: Non delivery Forward Contract:
9.4.1: Non-Delivery Forward Contract:

A special type of forward contract is known as Non-Deliverable Forward (NDF) contract.
NDFs are cash-settled and the settlement is done by calculating the difference between
agreed upon forward rate and spot rate on the settlement date for an agreed upon notional
amount of funds.
In an NDF, the principal amount, the forward exchange rate, fixing date etc. are agreed
by both parties on the trade execution date. For example, an importer and a bank enter
into an agreement where the importer would buy USD 1mn, six months from today by
paying a negotiated rate of INR48.35/USD. USD1 mn is the notional principal amount.
Suppose the fixing date is 1 week before the maturity date of six months. On the fixing
date i.e, one week before the maturity date, the prevailing spot exchange rate is compared
with the agreed forward exchange rate. These two rates will govern the NDF settlement
on the maturity date. Suppose the spot rate on the fixing date is INR 47.75/USD.Both
payment and receipt are netted off and on the maturity date, the importer pays INR
600,000 to the bank. In effect, the importer bought USD1 mn at an INR 48.35/USD and
selling back to the bank USD 1 mn of INR 47.75/USD. Hence the importer pays INR
600,000 (the netted off amount). If, on fixing date, the exchange rate would have been
INR 49.20/USD, the bank would pay the netted amount to the importer.
In an NDF, no exchange of foreign currency takes place.
In the above example, though USD leg of the contract is not delivered but actually,
the amount settled is always in a convertible currency like USD. As most of the trading
in NDF happens in offshore centers, settlement amount is always in the convertible
currency.
Details given in Box 9.3, highlights the impact of NDF contracts traded outside India and
its impact on INR/USD exchange rate.

-
NPTEL
Box 9.3.Rupee hit by an invisible force.

DNA MONEY 16th June 2008.
http://sify.com/finance/fullstory.php?id=14759072
An invisible force is stalking the dollar/rupee market and the Reserve Bank of India could
do little to stanch the local currency's fast plunge. Blame the "illegal" overseas non-
deliverable forward (NDF) market. Illegal, because such trades are not sanctioned by
the Reserve Bank of India.
A NDF, as the name suggests, is a non-deliverable forward contract, in which banks

buy forward dollars (book dollars today for delivery at a specified future date) in the
local market for their clients and, simultaneously, sell equivalent dollars abroad, or
vice-versa, so that on the delivery date they make a profit or loss, which is the
difference between both the rates.
Globally, such deals are done in currencies that are not fully convertible to take advantage
of - or "arbitrage" the difference in the domestic forward rate and the NDF rate.
Contracts can range from one week to a year and Indian deals are mostly done in markets
such as Hong Kong, Singapore and London (because their time zones match with the
dealing room time here).
For example, the one-year forward rate in the domestic market is INR46.70/$1 (46.05 is
the rupee rate plus a 65 paise forward premium), but in Hong Kong, the same forward is
quoting at INR 47.68/$1 - a clear arbitrage of 98 paise.
The RBI can't do anything to stop the trades since they are executed outside its
jurisdiction, on foreign shores.
"It's illegal so we can't even talk about it. But it's a peculiar situation because the rupee is
not fully convertible here, but countries where these trades are settled have fully
convertible currencies. Also, the RBI can't just go ahead and legalise these trades because
it would mean that they are jumping the regulation just because there are some players
using this route," said a senior official of the Foreign Exchange Dealers Association of
India.
Forex watchers said such deals have primarily pulled the rupee down to 46.05 from 42.65
a month back, a fall of nearly 8%.Dipti Deodhar, manager risk advisory, at forex
consultant Mecklai & Mecklai, said hedge funds and foreign investors have made merry.
"NDF arbitrage has without doubt played a crucial part in the rupee weakness. Indian
diamond companies with offices in markets like Hong Kong are also trading in NDF.
Foreign institutional investors pulling out of India have also used this route to hedge
bets," she said.

-
NPTEL
Does NDF market peculiar to INR? Definitely not. For any currency, there is some form
of convertibility restrictions, the NDF evolves. NDF market can also evolve is there is no
forward market exists for the currency in the domestic market.
9.5: Forex futures contract:

A exchange traded forward contract is known as futures contract. Forward contracts are
tailor made depending on the requirement of the contract buyers or sellers. However
being exchange traded, futures contracts are standardized contract size, maturity period
etc. Being exchange traded, futures contract can be squared off easily which may not be
possible in case of forward contract. In case of futures contract, the clearing house
associated with exchange takes the counterparty risk risk that the loss making party
does not deliver during the maturity period. Traders also have to pay margins initial
and daily margin as exchanges require all traders to pay margin.
In India, forex futures contracts on INR/US$, INR/Euro, INR/Pound Sterling and

INR/Japanese Yen are traded at some Indian exchanges like National Stock Exchange
and United Stock Exchange. Annexure 9.1 shows the contracts specifications for the
INR/USD trading at National Stock Exchange. Different aspects of the futures contract
are given in Section 9.5.1.
9.5.1: Understanding forex futures contract specification:
Unit of trading of USD 1000 indicates that whenever a trader is taking position in 1
futures contract, the trader is taking position to buy/sell 1000 USD. For example, if a
trader is taking 1 long futures contract at say INR 45.25 per USD, it indicates that the
trader has agreed to buy 1000 USD and pay INR 45,250 in future. Tick size of INR0.25
indicates that, price quotations can very in multiple of INR 0.25. In other words, a trader
can quote a price of INR45.25/INR 45. 50/INR45.75 etc. but the trader can not quote
INR 45.23. Contract cycle of 12 months indicate that a trader can take position
maximum upto 12 months. For example, in the month of August 2011, a trader can enter
into a contract to buy/sell futures for August 2011, September 2011 upto July 2012. In
other words, at a given point of time, 12 monthly contracts are available. Base price
indicates the theoretical price based on spot rate and interest rate prevailing in both
countries (explained later). Price operating range indicates the maximum
price variation which can happen on a given day akin to circuit filter in stock trading.
Position limit indicates the maximum open position a trader can take depending on
whether a trader is a retail client or a trading member or a bank. Minimum initial
-
NPTEL
margin is the amount a trader pays the moment he/she takes a futures position. The open
position is also marked-to-market (M-T-M) on daily basis. Based on M-T-M loss the
trader pays additional margin known as extreme loss margin.
M-T-M margin works like this: Suppose on day T, a trader takes a long futures position
to buy 1000 USD at INR 43.50. The contract is going to mature after 3 months. On day
T+1 day, suppose Indian rupee has appreciated and is quoting at INR 43.15. This
indicates that the trader is buying 1 USD by paying INR 43.50 whose value is INR 43.15
today. Hence the trader is making loss. The trader has to pay M-T-M margin based on the
loss. If the spot exchange rate would have been appreciated, then the trader would not
have to pay the margin but the counterparty to the trader (short futures position holder)
would pay the margin. To summarize, on Day T, the trader pays, the initial margin.
Everyday the open positions are M-T-M and daily margin is calculated. Everyday the
open positions are also settled based on the settlement price. Settlement price on the
expiry date is different than the settlement price on the contract maturity date. On any
non-expiry day, the settlement price is calculated as last half an hour weighted average
price. On the expiry date, the settlement price is given by RBI known as RBI reference
rate.
Theoretical price or base price is calculated by taking into consideration the spot price
and interest rates associated with a currency pair.
(1+ rIndia *T )
Forware Rate(FINR /USD ) = Spot Rate(SINR /USD ) ....( Eq.6.1)
(1+ rUS *T )
Where rIndia and rUS indicates the interest rate in India and Us respectively. T indicates the
maturity period of the contract. For example spot rate on Day T is INR43.50/USD.
Suppose the contract is for 4 months. Interest rate in India is 8% per annum while in USA
is 5% per annum.
4
(1 + .08 * )
Forware Rate( FINR / USD ) = INR 43.50 * 12 = INR 43.92 / USD
4
(1 + .05 * )
12
As the interest rate in India is higher than the interest rate in USA, Indian rupee is
expected to depreciate in future. Hence on Day T, theoretical price is INR 43.92/USD.

-
NPTEL
The electronic order book for USDINR 290709 is given in Table 9.2 taken from
National stock Exchange website. Best bid and best ask prices are quotations
respectively from the buyers and sellers side. Order matching happens when best buy
order matches with the best ask price.
Table 9.2 : Snapshot of the electronic order book for USDINR 290709
Source http://www.nseindia.com

-
NPTEL
All most all major exchanges offer foreign currency futures for different currency pairs.
For example, at the CME, futures on around 40 different currency pairs available for
trading. http://www.cmegroup.com/trading/fx/ lists the currency pairs, duration of
futures contract, trading and settlement details. The exchange website mentions the
following details regarding futures and options on currency pairs: CME Group offers
the largest regulated foreign exchange marketplace in the world, and the second
largest electronic FX market. We provide trading of 49 futures contracts and 32
options contracts based on 20 global currencies, including major world currencies
and currencies of emerging markets.
Multiple Choice Questions and Fill in the blanks.
1. Gap between ___________ and ____________ dates makes a forex trade as

cash/tom/spot trade.
a. Value Date and Settlement date
b. Trade date and T+1
c. Trade Date and T+2
d. Trade Date and value date
2. A trader intending to rollover its contract will never take a position in

a. Cash
b. Tom
c. Spot
d. Outright forward contract.
3. If a company contracts today for some future date of actual currency exchange,
they will be making use of a:
a) forward rate.
b) stock rate.
c) futures rate.
d) variable rate.
4. An Indian importer with foreign currency payables enters into a forward contract.
His expectation is
a. Indian Rupee to Depreciate
b. Indian Rupee to Appreciate
c. None of the above.
5. OTC stands for

-
NPTEL
a. Over the client
b. Over the customer
c. Over the counter
d. None of these.
6. Forward contracts are _________ while futures contracts are ___________

products.
a. Exchange traded, OTC

b. OTC, exchange traded
c. Non deliverable, deliverable
d. Deliverable, Non-Deliverable
7. Forward contracts:
a. contain a commitment by the owner, and are standardized.
b. contain a commitment by the owner, and can be tailored to the desire of
the owner.
c. contain a right but not a commitment by the owner, and can be tailored to
the desire of the owner.
d. contain a right but not a commitment by the owner, and are standardized.
8. Futures contracts are typically _______; forward contracts are typically _______.
a) sold on an exchange; sold on an exchange
b) offered by commercial banks; sold on an exchange
c) sold on an exchange; offered by commercial banks
d) offered by commercial banks; offered by commercial banks
9. Dell, Inc. is a U.S.-based MNC that frequently imports raw materials from Korea.
Dell is typically invoiced for these goods in Korean Won and is concerned that
the Korean Won will appreciate in the near future. Which of the following is not
an appropriate hedging technique under these circumstances?
a. purchase Korean Won forward.

b. purchase Korean Won futures contracts.
c. purchase Korean Won put options.
d. purchase Korean Won call options.
10. A U.S. company is expected to receive 100,000 in 120 days. If the company
wants to minimize the risk of foreign exchange, then it would .
a) buy British pounds forward
b) sell British pounds forward
c) buy British pounds 120 days from now
d) sell British pounds 120 days from now
e) sell British pounds in the current spot market
Short
Joint Questions:
Initiative IITs and IISc Funded by MHRD - 17
-
NPTEL
1. What is the difference between trade date and value/settlement date?
2. What is the difference among Ready/Tom/Spot forex contracts?
3. Why traders roll over spot contracts? How these rollover contracts are settled?
4. Explain why forward/futures/option contracts are zero-sum game?
5. In which situation a company would like to enter into fully optional forward
contract?
6. Todays spot price is INR 46.75. Indias interest rate 7.25% per annum while US
interest rate is 5.5% per annum. Find out the theoretical price for contracts
maturing on 6th month and 8th month from today.
Answers to Multiple Choice Questions:
1.d
2.a (as the trader is interested to earn interest , he would not enter into cash transaction
where trades have to be settled on the same day).
3.a
4.a
5.c
6.b
7.b
8.c
9.c
10. (d)
References:
-
NPTEL
Rollover & Interest Policy for spot forex trades

http://www.ifinixforex.com/2policy_rollover_interest.html
Leading exporters unwinding forward contracts, The Economic Times, 23rd July
2008. http://economictimes.indiatimes.com/articleshow/msid-3266587,prtpage-
1.cms
Rupee hit by an invisible force. DNA MONEY 16th June 2008.

http://sify.com/finance/fullstory.php?id=1475907
Foreign Exchange Futures contract. http://www.nseindia.com
Foreign Exchange Option contract. http://www.cmegroup.com/trading/fx/
Annexure 9.1
Source: http://www.nseindia.com

-
NPTEL
Contract Specifications INR/USD FUTURES at NSE.
Symbol USDINR
Instrument Type FUTCUR
Unit of trading 1 - 1 unit denotes 1000 USD
Underlying The exchange rate in Indian Rupees for US Dollars
Tick size Rs.0.25 paise or INR 0.0025
Trading hours Monday to Friday 9:00 a.m. to 5:00 p.m.
Contract trading cycle 12 month trading cycle.
Two working days prior to the last business day of the expiry month at
Last trading day
12 noon.
Last working day (excluding Saturdays) of the expiry month.

Final settlement day The last working day will be the same as that for Interbank Settlements
in Mumbai.
Theoretical price on the 1st day of the contract.

Base price
On all other days, DSP of the contract
Tenure upto 6 months Tenure greater than 6 months

Price operating range
+/-3 % of base price +/- 5% of base price
Clients Trading Members Banks

higher of 6% of total higher of 15% of the higher of 15% of the
Position limits
open interest or USD 5 total open interest or total open interest or
million USD 25 million USD 100 million
Minimum initial
1.75% on day 1, 1% thereafter
margin
Extreme loss margin 1% of MTM value of open position.
Settlement Daily settlement : T + 1 Final settlement : T + 2
Mode of settlement Cash settled in Indian Rupees
Daily settlement price Calculated on the basis of the last half an hour weighted average
(DSP) price.
Final settlement price

RBI reference rate
(FSP)

-

Forex

Enviado por

Dados do documento

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Forex

Enviado por

Direitos autorais:

Formatos disponíveis

NPTEL

Developed by: Dr. Prabina Rajib

Joint Initiative IITs and IISc Funded by MHRD -1-

Highlight & Motivation:

Hence the objective of this module is to understand:

o Trade date, settlement date

o Spot trading rollover mechanism.

Foreign Exchange Forward contracts

o Fixed maturity contract

o Partially optional contract

o Fully optional contract

o Non-delivery forward contracts.

Foreign Exchange Futures Contract

o Different dimensions of foreign exchange future contract specification

trading at National Stock Exchange of India.

Joint Initiative IITs and IISc Funded by MHRD -2-

9.2: Spot forex transactions:

Joint Initiative IITs and IISc Funded by MHRD -3-

Ready or cash The transaction to be settled on the same day

Tom The delivery of foreign exchange to be made on the day next

9.3: Roll over of Spot/Tom contract:

Joint Initiative IITs and IISc Funded by MHRD -4-

Rollover & Interest Policy

Rollover or "cost-of-carry" involves the applying of a daily debit or credit to a trading

Joint Initiative IITs and IISc Funded by MHRD -5-

9.4: Forward forex transactions

Joint Initiative IITs and IISc Funded by MHRD -6-

Fig 9(a) Fixed Maturity Contract

Execution Option start On or Before

Fig 9(b) Partially Option Contract

Execution Option start On or Before

Fig 9(c) Fully Optional Contract

Joint Initiative IITs and IISc Funded by MHRD -7-

However, these flexibilities in forward contracts (closing early, extension and

Joint Initiative IITs and IISc Funded by MHRD -8-

INR 46.75/ USD INR 46.75/USD

Fig. 9.(d) Exporters Payoff Fig 9.(e) Banks Payoff

Joint Initiative IITs and IISc Funded by MHRD -9-

Box 9.2. Leading exporters unwinding forward contracts

Joint Initiative IITs and IISc Funded by MHRD - 10

5.4: Non delivery Forward Contract:

9.4.1: Non-Delivery Forward Contract:

In an NDF, no exchange of foreign currency takes place.

Joint Initiative IITs and IISc Funded by MHRD - 11

Box 9.3.Rupee hit by an invisible force.

A NDF, as the name suggests, is a non-deliverable forward contract, in which banks

Joint Initiative IITs and IISc Funded by MHRD - 12

9.5: Forex futures contract:

In India, forex futures contracts on INR/US$, INR/Euro, INR/Pound Sterling and

9.5.1: Understanding forex futures contract specification:

Joint Initiative IITs and IISc Funded by MHRD - 14

Joint Initiative IITs and IISc Funded by MHRD - 15

Multiple Choice Questions and Fill in the blanks.

1. Gap between ___________ and ____________ dates makes a forex trade as

2. A trader intending to rollover its contract will never take a position in

5. OTC stands for

6. Forward contracts are _________ while futures contracts are ___________

a. Exchange traded, OTC

a. purchase Korean Won forward.

1. What is the difference between trade date and value/settlement date?

2. What is the difference among Ready/Tom/Spot forex contracts?

4. Explain why forward/futures/option contracts are zero-sum game?

Answers to Multiple Choice Questions:

Rollover & Interest Policy for spot forex trades

1. Gap between _ and __ dates makes a forex trade as

6. Forward contracts are _ while futures contracts are ___