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Submitted by
Shashwat Mishra
Roll No. 1700070A303
MBA -19
Under guidance of
Date of Submission:
NEED FOR THE PROJECT
With increasing globalization and robust performance of the economy, businesses in India have been
rapidly integrating with the world, especially in the past few years, forcing them to face the additional
risk of exchange rate fluctuations besides other risks.
The daily transacted volume of forex in India is estimated at $34 billion. According to the Bank for
International Settlements (2007), India’s share in global transactions has increased sharply in the past
three years from about 0.3% to the current 0.7%.
Before the launch of currency derivatives, risk management was mainly done through OTC forwards,
swaps, and options, but were accessible only to a few players. The OTC Currency Market broadly
comprised Forwards, prior to the introduction of Currency Futures. While nationalized banks and foreign
banks were the market makers; FII’s, importers, exporters, and Oil companies were the major market
takers. Hedging of transactions was backed by underlying exposures.
The following were the Key Onshore Regulations that governed the process:
o INR was freely convertible on current account and partially on Capital account
o Transaction, if on the basis of PPC, was not fully and freely re-bookable
Excess volatility in foreign exchange market has adverse impact on price discovery, export performance,
sustainability of current account balance, and balance sheets. Exchange traded currency futures &
options offer investors a transparent platform to manage volatility in the Indian currency market.
With a view to enable entities to manage currency market fluctuations better, RBI approved
introduction of currency futures in August 2008 with USD-INR pair. Three new currency pairs (EUR-INR,
GBP-INR, JPY-INR) were introduced in February 2010.
Exchange traded futures as compared to OTC forwards serve the same economic purpose, yet differ in
fundamental ways. An individual entering into a forward contract agrees to transact at a forward price
on a future date. On the maturity date, the obligation of the individual equals the forward price at which
the contract was executed. Except on the maturity date, no money changes hands.
On the other hand, in the case of an exchange traded futures contract, mark-to-market obligations are
settled on a daily basis. Since the profits or losses in the futures market are collected / paid on a daily
basis, the scope for building up of mark to market losses in the books of various participants gets
limited. The counterparty risk in a futures contract is further eliminated by the presence of a clearing
corporation, which by assuming counterparty guarantee eliminates credit risk.
Further, in an Exchange traded scenario where the market lot is fixed at a much lesser size than the OTC
market, equitable opportunity is provided to all classes of investors whether large or small to participate
in the futures market. The transactions on an Exchange are executed on a price time priority ensuring
that the best price is available to all categories of market participants irrespective of their size. Other
advantages of an Exchange traded market would be greater transparency, efficiency and accessibility.
Currency futures saw an exponential growth in the Indian market from USD 50 million at introduction to
USD 8-10 billion at present. They are currently trading through NSE and MCX-SX, with USE being a recent
addition.
KEY BENEFITS