2. A brief history to FOREX
Derivative
The Changes in macroeconomic factors led to the market risk
and the demand for foreign exchange derivatives
Volatility :
Firms were exposed to a FX risk(also known as systematic risk).
The operation of Bretton Woods Agreement signed by most of
the economically powerful countries in the year 1944 and
introduction of flexible exchange rate regime in the year 1972,
made the movement of the exchange rates very volatile
Hedging :
The transaction exposure can be affectively minimized by
hedging which is achieved successfully by various tools such as
currency options, currency futures, cross currency swaps.
3. Currency Futures in India
Indian financial markets have achieved another milestone with
the launch currency futures at National Stock Exchange (NSE),
on 29 August, 2008.
Currency futures are derivatives that allow investors to buy or sell
a currency on a future date at a previously fixed price.
Futures’ trading with currencies as the underlying assumes
importance in the context of growing integration of the economy
with the rest of the world and rapid development of the financial
markets.
There has been an upsurge in currency volatility in India and fear
of foreign exchange losses have been continuously haunting
Indian corporate.
4. Foreign Exchange Market
Participants
Corporates
Commercial Banks
Exchange Brokers
Central Bank
Hedge funds
Individual traders
Purpose of transacting
Hedgers (method of entering into an opposite position in the
market)
Speculators (deals to make profits)
Arbitrageurs (simultaneously buys and sells in different
markets)
5. FX Markets – Transactions
Cash orTomTransactions
A cash transaction is an exchange of currencies between two counterparties
on the date of the trade (T) i.e. 2 business days before spot
A tom transaction is an exchange of currencies between two
counterparties one day after the trade date (T+1) i.e. 1 business day
before spot
As in case of forward transaction, the premia / discount for cash
and tom transactions is also basis the interest rate differentials
between the two currencies for which the trade is being done.
In case of premia / discount quotes on cash and tom transactions,
overnight rates are used.
6. Effect of FOREX rate changes on
industries
Companies having highest market cap in their
specific industries are taken as a sample data
Sample data of 2 f.y has been taken (2016-
2017)
For a percent change in Forex Returns, the
impact on corresponding industries has been
calculated.
Rit = α + β1eit + β2Rmt + vi
7. REGRESSION RESULT
Name of company Percentage effect of FOREX on
companies
1.TCS 24 %
2. SUN PHARMA 23 %
3. IOC -38%
4. MARUTI 13 %
5. ITC -23 %
8. Risk management
•When you trade without risk management rules, you are in fact
gambling.
•You are not looking at the long-term return on your investment.
Instead, you are only looking for that “jackpot.”
9. Brief about Risk management
• The Forex market is one of the biggest financial markets on
the planet
Ironically, this is one of the most overlooked areas in
trading.
• With everyday transactions totalling more than 1.4 trillion
US dollars.
• Banks, financial establishments and individual investors
therefore have the potential to make huge profits and
losses.
10. Why Risk management is
important?
Brokers in the industry like to talk about the benefits of
using leverage and keep the focus off of the drawbacks.
It causes traders to come to the trading platform with the
mindset that they should be taking a large risk and aim
for the big bucks.
It seems all too easy for those that have done it with
a demo account, but once real money and emotions
come in, things change. It is where true risk management
is important.
11. MARGINS
NSCCL has developed a comprehensive risk containment
mechanism for the Currency derivatives segment.
The most critical component of a risk containment
mechanism for NSCCL is the online position monitoring
and margining system.
NSCCL uses the SPAN' (Standard Portfolio Analysis of
Risk) system for the purpose of margining, which is a
portfolio based system.
12. Initial Margin
Initial margin requirements are based on 99% value at risk
over a one day time horizon.
In the case of futures contracts, before the commencement of
trading on the next day, the initial margin is computed over a
two-day time horizon.
Initial margin requirements are based on 99% value at risk
over a one day time horizon.
For Future currency contracts it is impossible to collect MtM
settlement value.
13. Currency margin requirement for
a member:
For client positions - is netted at the level of individual
client and grossed across all clients, at theTrading/
Clearing Member level, without any setoffs between
clients.
For proprietary positions - is netted atTrading/ Clearing
Member level without any setoffs between client and
proprietary positions.
14. Extreme loss margin:
Clearing members are subject to extreme loss margins in
addition to initial margins.
The applicable extreme loss margin on the MtM value of the
gross open positions is as follows or as may be specified by
the relevant authority from time to time.
15. Currency wise loss margin
USDINR EURINR GBPINR JPYINR
Futures: 1% of the
value of gross open
position
Options: 1.5% of
the value of gross
open position (For
short option
positions)
0.3% of the value of
gross open position
0.5% of the value of
gross open position
0.7% of the value of
gross open position
