Mcx sx faq

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Mcx sx faq

  1. 1. Currency FuturesHedging against fluctuating currency rates About MCX Stock Exchange Currency futures market - A perspective Participants of a currency futures market FAQs Product Specifications
  2. 2. About MCX Stock ExchangeMCX-SX, Indias New Stock Exchange commenced operations inOctober 7, 2008, under the regulatory framework of Securities &Exchange Board of India (SEBI) and Reserve Bank of India (RBI).Currently, MCX-SX offers an electronic platform for trading incurrency futures contracts. Clearing and settlement is conductedthrough the MCX-SX Clearing Corporation Ltd. (MCX-SX CCL).Within a year of its inception, MCX-SX has achieved stupendousgrowth in average daily turnover and open interest. The averagedaily turnover increased from Rs. 355.66 cr during the first monthof operations to Rs. 16,980 cr for the month of February 2010.MCX-SX is now the leader in the currency derivatives segment.MCX-SX witnesses participation from 498 cities and towns acrossIndia and has a strong member base of 652. A whole array offinancial market participants including hedgers (i.e. exporters,importers, corporates and Banks), investors and arbitrageurs usethe exchange platform.True to its philosophy of ‘Systematic development of marketsthrough Information, Innovation, Education and Research’,MCX-SX endeavours to ensure continuous innovation and tointroduce products for optimising the needs of diverse marketparticipants under the extant regulatory framework. The Exchangeis committed to expand its product offerings and provide tradingin other asset classes like equity, debt, interest rates, index andexchange traded funds, subject to necessary regulatoryclearances.Currency futures market -A perspectiveGlobalization and integration of financial markets, coupled withprogressive increase of cross-border flow of capital, havetransformed the dynamics of Indian financial markets. This hasincreased the need for dynamic currency risk management. Thesteady rise in India’s foreign trade along with liberalization inforeign exchange regime has led to large inflow of foreigncurrency into the system in the form of FDI and FII investments.In order to provide a liquid, transparent and vibrant market forforeign exchange rate risk management, Securities & ExchangeBoard of India (SEBI) and Reserve Bank of India (RBI) have allowedtrading in currency futures on stock exchanges for the first time inIndia, initially based on the USDINR exchange rate andsubsequently on three other currency pairs – EURINR, GBPINR and02
  3. 3. JPYINR. The USDINR futures contract is already being traded onMCX-SX with more than US$ 2 billion average daily turnover. Thiswould give Indian businesses another tool for hedging theirforeign exchange risk effectively and efficiently at transparentrates on an electronic trading platform. The primary purpose ofexchange-traded currency derivatives is to provide a mechanismfor price risk management and consequently provide price curveof expected future prices to enable the industry to protect itsforeign currency exposure. The need for such instrumentsincreases with increase of foreign exchange volatility.Participants of acurrency futures marketA host of benefits are available to a wide range of financial marketparticipants, including hedgers (exporters, importers, corporatesand Banks), investors and arbitrageurs on MCX-SX.Hedgers: A high-liquidity platform for hedging against the effects of unfavourable fluctuations in the foreign exchange markets is available on exchange. Banks, importers, exporters and corporate houses hedge on MCX-SX.Investors: All those interested in taking a view on appreciation (or depreciation) of exchange rate in the long and short term can participate in the MCX-SX currency futures. For example, if one expects depreciation of the Indian Rupee against the US dollar, then he can hold on long (buy) position in USDINR contract for returns. Contrarily, he can sell the contract if he sees appreciation of the Indian Rupee.Arbitrageurs: Arbitrageurs get the opportunity of trading in currency futures by simultaneous purchase and sale in two different markets, taking advantage of price differential between the markets. 03
  4. 4. FAQsWhat is currency trading?While trade is international, currencies are national. Asinternational transactions are settled in global currencies,usually they are brought/sold for one another and thisconstitutes ‘currency trading’.What are the factors that affect the exchange rate of acurrency?A country’s currency exchange rate is typically affected by thesupply and demand for the country’s currency in theinternational foreign exchange market. The demand andsupply dynamics is principally influenced by factors likeinterest rates, inflation, trade balance and economic & politicalscenarios in the country. The level of confidence in theeconomy of a particular country also influences the currencyof that country.How and why does the demand and supply of a currencyincrease and decrease?There are several reasons. A rise in export earnings of acountry increases foreign exchange supply. A rise in importsincreases demand. These are the objective reasons, but thereare many subjective reasons too. Some of the subjectivereasons are: directional viewpoints of market participants,expectations of national economic performance, confidence ina country’s economy and so on.What is a currency futures contract?A currency futures contract is a standardized version of aforward contract that is traded on a regulated exchange. It isan agreement to buy or sell a specified quantity of anunderlying currency on a specified date in future at a specifiedrate (e.g., USD 1 = INR 46.00).(Note: USD is abbreviation for the US Dollar, and INR for theIndian Rupee).What is the need of currency futures?Currency futures are needed if your business is influenced byfluctuations in currency exchange rates. If you are in India andare importing something, you have done the costing of yourimports on the basis of a certain exchange rate between the04
  5. 5. Indian Rupee and the relevant foreign currency. By the time youactually import, the value of the Indian Rupee may have gonedown and you may lose out on your income in terms of IndianRupees by paying higher. On the contrary, if you are exportingsomething and the value of the Indian Rupee has gone up, youearn less in terms of Rupees than you had anticipated. Currencyfutures help you hedge against these exchange rate risks.Does the national economy of India need currency futures?Every business exposed to foreign exchange risk needs to havea facility to hedge against such risk. Exchange-traded currencyfutures, as on MCX-SX, are a superior tool for such hedgingbecause of greater transparency, liquidity, counterpartyguarantee and accessibility. Since the economy is made up ofbusinesses of all sizes, anything that is good for business is alsogood for the national economy.Why exchange-traded futures? What’s wrong with thecurrency forward market that has been existing in India fora long time?The exchange-traded futures, as compared to OTC forwards,serve the same economic purpose, yet differ in fundamentalways. Exchange-traded contracts are standardised. In anexchange-traded scenario where the market lot is fixed at amuch lesser size than the OTC market, equitable opportunity isprovided to all classes of investors whether large or small toparticipate in the futures market. The other advantages of anExchange traded market would be greater transparency,efficiency and accessibility.The counterparty risk (credit risk) in a futures contract iseliminated by the presence of a clearing house/ corporation,which by assuming counterparty guarantee, eliminates defaultrisk. Thus, introduction of exchange-traded futures help inoverall development of the forex market in the country.Who can participate in a currency futures market?Any resident Indian or company including Banks and financialinstitutions can participate in the futures market. However, atpresent, Foreign Institutional Investors (FIIs) and Non-ResidentIndians (NRIs) are not permitted to participate in currencyfutures market.What are the terms and conditions set by RBI for Banks toparticipate in exchange traded fx futures?RBI has allowed Banks to participate in currency futures market.The AD Category I Banks which fulfill stipulated prudential 05
  6. 6. requirements are eligible to become a clearing member and / ortrading member of the currency derivatives segment of MCX-SX.AD Category I Banks which are urban co-operative banks orstate co-operative banks can participate in the currency futuresmarket only as a client, subject to approval thereof, from therespective regulatory department of RBI.If I am an AD Category I Bank, why should I become amember of a currency futures exchange? I have theinterbank market, anyway.The interbank market is a market for Banks. Small and medium-sized clients of Banks cannot directly participate in theinterbank market. If a Bank is a member of a currency futuresexchange, it can trade on behalf of its small and medium-sizedclients, who otherwise would not have been able to benefitfrom fluctuations in currency exchange rates. Thus, Banks canincrease their customer base if they become a member of acurrency futures exchange. Banks themselves can also benefitfrom a currency futures exchange by arbitraging between theexisting interbank market and the currency futures exchange.Larger participation in a currency futures exchange gives theexchange platform a greater vibrancy than the interbankmarket, which is limited to Banks.Can currency futures help small traders?Yes. The minimum size of the USDINR futures contract is USD1,000. Similarly EURINR future contract is EURO 1000, GBPINRfuture contract is GBP 1000 and JPYINR future contract is YEN1,00,000. These are well within the reach of most small traders.All transactions on the Exchange are anonymous and areexecuted on a price time priority ensuring that the best price isavailable to all categories of market participants irrespective oftheir size. As the profits or losses in the futures market are alsopaid / collected on a daily basis, the scope of accumulation oflosses for participants gets limited.If I am an individual with no exposure to foreign exchangerisks, does a currency futures exchange mean anything to me?Yes, it does, if you want to invest purely as an investor. You canbenefit from exchange rate fluctuations just as you can benefitby investing in equities in the stockmarket. However, as in thestockmarkets, you also stand to lose money if the pricemovements are not in keeping with what you had anticipated.Participating in a currency futures exchange is risky, just as thestockmarket is. You should therefore be knowledgeable aboutthe currency market if you want to participate as an investor.06
  7. 7. How do exchange-traded currency futures enable hedgingagainst currency risk?On a currency exchange platform, you can buy or sell currencyfutures. If you are an importer, you can buy futures to “lock in” aprice for your purchase of actual foreign currency at a futuredate. You thus avoid exchange rate risk that you wouldotherwise have faced. On the other hand, if you are an exporter,you sell currency futures on the exchange platform and “lock in”a sale price at a future date. However, it may be noted that thecontract will be marked to market at the daily settlement priceand profit or loss will be paid / collected on a daily basis.What are the risks involved in currency futures market?Risks in currency futures pertain to movements in the currencyexchange rate. There is no rule of thumb to determine whethera currency rate will rise or fall or remain unchanged. Ajudgement on this will depend on the knowledge andunderstanding of the variables that affect currency rates.Which are the global exchanges that provide trading incurrency futures?Internationally, exchanges such as Chicago Mercantile Exchange(CME), Johannesburg Stock Exchange, Euronex t.liffe,BM&FBOVESPA and Tokyo Financial Exchange provide trading incurrency futures.Why should one trade in Indian exchanges as compared tointernational exchanges?Indian currency futures enable individuals and companies inIndia to hedge and trade their Indian Rupee risk. Mostinternational exchanges offer contracts denominated in othercurrencies.What is the minimum trading unit (i.e. contract size) andtenure of the USDINR, EURINR, GBPINR and JPYINR futurescontract?The contract size of the USDINR futures contract is USD 1,000,EURINR future contract is EURO 1,000, GBPINR future contract isGBP 1,000 and JPYINR future contract is YEN 1,00,000. Thecontracts shall have a maximum maturity of twelve months. Allmonthly maturities from 1 to 12 months are available. 07
  8. 8. What is the last trading day of these currency futurescontract?The last trading day of a futures contract on MCX-SX shall betwo working days prior to the last working day (excludingSaturdays) of the month. The settlement price is the ReserveBank of India’s reference rate on the last trading day.In which currency are the currency futures contracts settled?They are settled in cash in Indian Rupees.What are the various types of margins that are levied tomanage the risk?The trading of currency futures is subject to maintenance ofinitial, extreme loss, and calendar spread margins with theclearing house / corporation. The details of the margins leviedare mentioned in the respective product specifications.What are the currencies traded on MCX-SX?In the first phase of operations, only the USDINR currency pairwas traded on MCX-SX. With the changing need of theparticipants, the regulators have allowed MCX-SX to facilitatetrading in other major currency pairs as EURINR, GBPINR andJPYINR future contracts.What are the trading hours on MCX-SX?Trading in currency futures is on all working days from Mondayto Friday and is between 9.00 am to 5.00 pm.08
  9. 9. Product Specifications - EURINRSymbol EURINRInstrument Type FUTCURUnit of trading 1 (1 unit denotes 1000 EURO)Underlying EUROQuotation/Price Quote Rs. per EURTick size 0.25 paise or INR 0.0025Trading hours Monday to Friday - 9:00 a.m. to 5:00 p.m.Contract trading cycle 12 month trading cycle.Settlement price RBI Reference Rate on the date of expiryLast trading day Two working days prior to the last business day of the expiry month at 12 noon.Final settlement day Last working day (excluding Saturdays) of the expiry month. The last working day will be the same as that for Interbank Settlements in Mumbai.Base price Theoretical price on the 1st day of the contract. On all other days, DSP of the contractPrice operating range Tenure upto 6 months: +/-3 % of base price Tenure greater than 6 months: +/- 5% of base pricePosition limitsClients Higher of 6% of total open interest or EUR 5 millionTrading Members Higher of 15% of the total open interest or EUR 25 millionBanks Higher of 15% of the total open interest or EUR 50 millionMinimum initial margin 2.8% on First day & 2% thereafterExtreme loss margin 0.3% of MTM value of gross open positions.Calendar spreads Rs.700/- for a spread of 1 month, 1000/- for a spread of 2 months, Rs.1500/- for a spread of 3 months or moreSettlement Daily settlement : T + 1 Final settlement : T + 2Mode of settlement Cash settled in Indian RupeesDaily settlement price DSP shall be calculated on the basis of the last(DSP) half an hour weighted average price of such contract or such other price as may be decided by the relevant authority from time to time.Final settlement price RBI reference rate(FSP) 09
  10. 10. Product Specifications - GBPINRSymbol GBPINRInstrument Type FUTCURUnit of trading 1 (1 unit denotes 1000 POUND STERLING)Underlying POUND STERLINGQuotation/Price Quote Rs. per GBPTick size 0.25 paise or INR 0.0025Trading hours Monday to Friday - 9:00 a.m. to 5:00 p.m.Contract trading cycle 12 month trading cycle.Settlement price Exchange rate published by the Reserve Bank in its Press Release captioned RBI Reference Rate for US$ and Euro.Last trading day Two working days prior to the last business day of the expiry month at 12 noon.Final settlement day Last working day (excluding Saturdays) of the expiry month. The last working day will be the same as that for Interbank Settlements in Mumbai.Base price Theoretical price on the 1st day of the contract. On all other days, DSP of the contractPrice operating range Tenure upto 6 months: +/-3 % of base price Tenure greater than 6 months: +/- 5% of base pricePosition limitsClients Higher of 6% of total open interest or GBP 5 millionTrading Members Higher of 15% of the total open interest or GBP 25 millionBanks Higher of 15% of the total open interest or GBP 50 millionMinimum initial margin 3.2% on first day & 2% thereafterExtreme loss margin 0.5% of MTM value of gross open positions.Calendar spreads Rs.1500/- for a spread of 1 month, 1800/- for a spread of 2 months, Rs.2000/- for a spread of 3 months or moreSettlement Daily settlement : T + 1 Final settlement : T + 2Mode of settlement Cash settled in Indian RupeesDaily settlement price DSP shall be calculated on the basis of the last(DSP) an hour weighted average price of such contract or such other price as may be decided by the relevant authority from time to time.Final settlement price Exchange rate published by the Reserve Bank(FSP) in its Press Release captioned RBI Reference Rate for US$ and Euro.10
  11. 11. Product Specifications - JPYINRSymbol JPYINRInstrument Type FUTCURUnit of trading 1 (1 unit denotes 100000 YEN)Underlying JPYQuotation/Price Quote Rs per 100 YENTick size 0.25 paise or INR 0.0025Trading hours Monday to Friday - 9:00 a.m. to 5:00 p.m.Contract trading cycle 12 month trading cycle.Settlement price Exchange rate published by the Reserve Bank in its Press Release captioned RBI Reference Rate for US$ and Euro.Last trading day Two working days prior to the last business day of the expiry month at 12 noon.Final settlement day Last working day (excluding Saturdays) of the expiry month. The last working day will be the same as that for Interbank Settlements in Mumbai.Base price Theoretical price on the 1st day of the contract. On all other days, DSP of the contractPrice operating range Tenure upto 6 months: +/-3 % of base price Tenure greater than 6 months: +/- 5% of base pricePosition limitsClients Higher of 6% of total open interest or JPY 200 millionTrading Members Higher of 15% of the total open interest or JPY 1000 millionBanks Higher of 15% of the total open interest or JPY 2000 millionMinimum initial margin 4.50% on first day & 2.30% thereafterExtreme loss margin 0.7% of MTM value of gross open positions.Calendar spreads Rs. 600 for a spread of 1 month; Rs 1000 for a spread of 2 months and Rs 1500 for a spread of 3 months or moreSettlement Daily settlement : T + 1 Final settlement : T + 2Mode of settlement Cash settled in Indian RupeesDaily settlement price DSP shall be calculated on the basis of the(DSP) last half an hour weighted average price of such contract or such other price as may be decided by the relevant authority from time to time.Final settlement price Exchange rate published by the Reserve(FSP) Bank in its Press Release captioned RBI Reference Rate for US$ and Euro. 11
  12. 12. Product Specifications - USDINR Symbol USDINR Instrument Type FUTCUR Unit of trading 1 (1 unit denotes 1000 USD) Underlying The exchange rate in Indian Rupees for a US Dollar Tick size 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. Last trading day Two working days prior to the last business day of the expiry month at 12 noon. Final settlement day Last working day (excluding Saturdays) of the expiry month. The last working day will be the same as that for Interbank Settlements in Mumbai. Base price Theoretical price on the 1st day of the contract. On all other days, DSP of the contract Price operating range Tenure upto 6 months: +/-3 % of base price Tenure greater than 6 months: +/- 5% of base price Position limits Clients Higher of 6% of total open interest or USD 10 million Trading Members Higher of 15% of the total open interest or USD 50 million Banks Higher of 15% of the total open interest or USD 100 million Minimum initial margin 1.75% on first day & 1% thereafter Extreme loss margin 1% of MTM value of gross open position. Calendar spreads Rs. 400/- for a spread of 1 month, Rs. 500/- for a spread of 2 months, Rs. 800/- for a spread of 3 months & Rs. 1000/- for a spread of 4 months or more Settlement Daily settlement : T + 1 Final settlement : T + 2 Mode of settlement Cash settled in Indian Rupees Daily settlement price DSP shall be calculated on the basis of the (DSP) last half an hour weighted average price of such contract or such other price as may be decided by the relevant authority from time to time. Final settlement price RBI reference rate (FSP) MCX Stock Exchange Ltd.Exchange Square, Suren Road, Andheri (East), Mumbai 400 093, India. Tel.: +91-22-6731 9000, Fax: +91-22-6731 9004 info@mcx-sx.com • www.mcx-sx.com March2010

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