Smart Disha Workshop-07 April-Risk Management in Stock Market with Career Options

1
2 Days Workshop –Part-2
AT
G. H. Patel College of Engineering
and Technology, Anand
06-07 April 2017

BULL & BEAR: Game called
- INVESTMENT-
M- 70436 90580 www.smartdisha.com

www.smartdisha.com info@smartdisha.com M-70436 90580 LL- 079 4800 7780
Risk Management Through Derivative
The Game called
“INVESTMENT”

WHAT IS RISK?WHAT IS RISK?
Types of Risk
Systematic Risk
Unsystematic Risk
Measures of Risk
Standard Deviation
Beta

Session-4 Derivative Market Analysis

MEANINGMEANING
Derivative is a contract whose value is derived from
value of some other assets known as underlying. Its on
wide range of underlying like
Metals – gold, silver, zinc, copper, nickel etc.
Energy – Oil, Gas, Coal, Electricity
Agri commodity – wheat, sugar, coffee
Financial Assets – shares, bonds, currency

EVOLUTIONEVOLUTION
Forward Market Evolution
Agriculture related products
Future Market Evolution
Standardized forward contract

HISTORYHISTORY
12th Century- In European trade fairs, sellers signed contracts
promising future delivery of the items they sold.
13th Century- There are many examples of contracts entered
into by English Cistercian Monasteries, who frequently sold their
wool up to 20 years in advance, to foreign merchants.
1634-1637 Tulip Mania in Holland. Fortunes were lost in after a
speculative boom in tulip futures burst.

HISTORYHISTORY
In 1848, The Chicago Board of Trade (CBOT) facilitated trading of
forward contracts on various commodities
In 1865, the CBOT went a step further and listed the first “exchange
traded” derivative contract in the US. These contracts were called
“futures contracts”.
In 1972, Chicago Mercantile Exchange created International Monetary
Market, which allowed trading in currency futures.
In 1975, CBOT introduced Treasury bill futures contract. It was the first
successful pure interest rate futures.
In 1983, Chicago Board Options Exchange decided to create
an option on an index of stocks.

INDIAN DERIVATIVE MARKETINDIAN DERIVATIVE MARKET
In 1999, The Securities Contract Regulation Act (SCRA) was amended to
include “derivatives” within the domain of securities’ and regulatory
framework was developed for governing derivatives trading.
The exchange traded derivatives started in India in June 2000 with
index futures contracts based on CNX Nifty and S&P BSE Sensex.
Later, trading in Index options commenced in June 2001 and trading in
options on individual stocks commenced in July 2001. Futures contracts
on individual stocks started in November 2001.
Futures contracts on Volatility Index were launched in 2014.

MARKET PARTICIPANTSMARKET PARTICIPANTS
Hedgers
Speculators/Traders
Arbitrageurs

TYPES OF DERIVATIVE MARKETTYPES OF DERIVATIVE MARKET
Organized Exchanges –Exchange Traded
Derivatives
Over The Counter Derivative Market

PRODUCTS IN DERIVATIVE MARKETPRODUCTS IN DERIVATIVE MARKET

FORWARD CONTRACTFORWARD CONTRACT
Meaning:
It is a contractual agreement between two
parties to buy/sell an underlying asset at a
certain future date for a particular price that is
pre-decided on the date of contract. These are
OTC contracts.

FORWARD MARKET FEATURESFORWARD MARKET FEATURES
Operational Mechanism – Traded on OTC
Specification – As per needs of parties involved
Counter Party Risk – Exist, reduced by guarantee
Liquidity – Low
Example – Currency Forward

FUTURE CONTRACTSFUTURE CONTRACTS
Meaning:
Exchange Traded Standardized Forward Contract

FUTURE MARKETFUTURE MARKET
Operational Mechanism – Traded on Exchange
Specification – Standardized
Counter Party Risk – Exist, but clearing agency
becomes counter party
Liquidity – High
Example – Commodity Future, Stock Future, Index
Future, Currency Future

SWAPSSWAPS
Meaning:
A swap is an agreement made between two parties to
exchange cash flows in the future according to a
prearranged formula. Swaps are series of forward
contracts. Swaps help market participants manage risk
associated with volatile interest rates, currency
exchange rates and commodity prices.

OPTIONS CONTRACTOPTIONS CONTRACT
Meaning:
An Option is a contract that gives the right, but not an
obligation, to buy or sell the underlying on or before a
stated date and at a stated price. While buyer of option
pays the premium and buys the right, writer/seller of
option receives the premium with obligation to sell/ buy
the underlying asset, if the buyer exercises his right.

FACTORS AFFECTING DERIVATIVE MARKETFACTORS AFFECTING DERIVATIVE MARKET
Increased fluctuation in market price of financial assets
Integration of financial market globally
Use of latest technology
Frequent innovation in derivative markets

PRICING FORWARD AND FUTUREPRICING FORWARD AND FUTURE
CONTRACTSCONTRACTS

CASH AND CARRY ARBITRAGECASH AND CARRY ARBITRAGE
Forward Price = Cash Price + Interest Cost +
Carrying Cost
FP = [SP * e^(RT)] + Other Carrying Cost
E = exponential function
R = rate of interest
T = time period of holding

BUYER OF FORWARD / FUTUREBUYER OF FORWARD / FUTURE
Obligation – to pay settlement price
Margin requirement – Yes
Risk – Unlimited, if price goes down
Profit – Unlimited, if price goes up

BUYER OF FORWARD / FUTUREBUYER OF FORWARD / FUTURE
If a stock future is bought @100, the pay-off diagram is
as follow.
-60
-40
-20
0
20
40
60
50 60 70 80 90 100 110 120 130 140 150
Series1

SELLER OF FORWARD / FUTURESELLER OF FORWARD / FUTURE
Obligation – to deliver underlying
Margin requirement – Yes
Risk – Unlimited, if price goes up
Profit – Unlimited, if price goes down

SELLER OF FORWARD / FUTURESELLER OF FORWARD / FUTURE
If a stock future is bought @100, the pay-off diagram is
as follow.
-60
-40
-20
0
20
40
60
50 60 70 80 90 100 110 120 130 140 150
Series1

TERMS USED IN OPTIONS CONTRACTTERMS USED IN OPTIONS CONTRACT
 Call Options – gives buyer the right to buy the
underlying
 Put Options - gives buyer the right to sell the
underlying
 Buyer of options pays premium
 Seller/writer of options receives premium
 Premium is a price of options contract
 Strike Price / Exercise Price ( K ) – price of
underlying at which it is purchased or sold

TERMS USED IN OPTIONS CONTRACTTERMS USED IN OPTIONS CONTRACT
 Spot Price – Current Market Price
 Exercise of options – buying/selling of
underlying in an options contract by buyer of
the options contract
 Expiration day – the day on which options
stops to exist
 Tenor of options – life of options contract
 Lot size – number of units of underlying in
an options contract

MONEYNESS OF OPTIONSMONEYNESS OF OPTIONS
CALL PUT
IN – THE – MONEY S > K S < K
AT – THE – MONEY S = K S = K
OUTOF – THE – MONEY S < K S > K

POSITION OF CALL OPTIONS BUYERPOSITION OF CALL OPTIONS BUYER
 Right - Buy underlying at strike price.
 Obligation - Nil.
 Premium paid or received - Paid.
 Margin requirement - No.
 Risk profile - Limited, to the extent of
premium paid.
 Profit potential - Unlimited, if prices go up.
 Breakeven point = Strike price + Premium.

PAYOFF OF CALL BUY POSITIONPAYOFF OF CALL BUY POSITION
Price
Cash In
Flow
Premiu
m
P & L
490 0 -10 -10
495 0 -10 -10
500 0 -10 -10
505 5 -10 -5
510 10 -10 0
515 15 -10 5
520 20 -10 10
525 25 -10 15
530 30 -10 20
Bought/long Tisco call option with strike price of 500 @ Rs. 10/-
-15
-10
-5
0
5
10
15
20
25
490495500505510 515520525530
Series1

POSITION OF CALL OPTIONS SELLERPOSITION OF CALL OPTIONS SELLER
 Right – Nil.
 Obligation - Sell underlying at strike price /
Pay settlement difference.
 Premium paid or received - Received.
 Margin requirement - Yes.
 Risk profile - Unlimited, if prices go up.
 Profit potential - Limited, to the extent of
premium received.
 Breakeven point = Strike price + Premium.

PAYOFF OF CALL SELL POSITIONPAYOFF OF CALL SELL POSITION
Price Cash Flow Premium P & L
490 0 10 10
495 0 10 10
500 0 10 10
505 5 10 5
510 10 10 0
515 15 10 -5
520 20 10 -10
525 25 10 -15
530 30 10 -20 -25
-20
-15
-10
-5
0
5
10
15
490 495 500 505 510 515 520 525 530
Series1
Sold/Write Tisco call option with strike price of 500 @ Rs. 10/-

POSITION OF PUT OPTIONS BUYERPOSITION OF PUT OPTIONS BUYER
 Right - Sell underlying at strike price.
 Obligation - Nil.
 Premium paid or received - Paid.
 Margin requirement - No.
 Risk profile - Limited, to the extent of premium
paid.
 Profit potential - Unlimited*, if prices go down.
 Breakeven point = Strike price - Premium.

PAYOFF OF PUT BUY POSITIONPAYOFF OF PUT BUY POSITION
Price Cash Flow Premium P & L
470 30 -10 20
480 20 -10 10
490 10 -10 0
500 0 -10 -10
510 0 -10 -10
520 0 -10 -10
Bought/long Tisco Put option with strike price of 500 @ Rs. 10/-
-15
-10
-5
0
5
10
15
20
25
470 480 490 500 510 520
Series1

POSITION OF PUT OPTIONS SELLERPOSITION OF PUT OPTIONS SELLER
 Right - Nil.
 Obligation - Buy underlying at strike price / Pay
settlement difference.
 Premium paid or received - Received.
 Margin requirement - Yes.
 Risk profile - Unlimited*, if prices go down.
 Profit potential - Limited, to the extent of premium
received.
 Breakeven point = Strike price – Premium.

PAYOFF OF PUT SELL POSITIONPAYOFF OF PUT SELL POSITION
Price
Cash
Flow
Premium P & L
470 30 10 -20
480 20 10 -10
490 10 10 0
500 0 10 10
510 0 10 10
520 0 10 10
Sold/Write Tisco Put option with strike price of 500 @ Rs. 10/-
-25
-20
-15
-10
-5
0
5
10
15
470 480 490 500 510 520
Series1

OPTIONS STRATEGIESOPTIONS STRATEGIES

LONG STRADDLE
A Straddle is a volatility strategy and is used when the stock price / index is expected to
show large movements. A long straddle is a combination of buying a call and
buying a put, both with the same strike price and expiration. Together, they
produce a position that should profit if the stock makes a big move either up or down.
LONG STRADDLE Construction
Buy 1 ATM Call
Buy 1 ATM Put
Unlimited Profit Potential
By having long positions in both call and put
options, straddles can achieve large profits no
matter which way the underlying stock price
heads, provided the move is strong enough.
Limited Risk
Maximum loss for long straddles occurs when the underlying stock price on expiration date
is trading at the strike price of the options bought. At this price, both options expire
worthless and the options trader loses the entire initial debit taken to enter the trade.
Max Loss = Net Premium Paid

SHORT STRADDLE
The Opposite strategy to the long straddle is the short straddle. Short straddles are
used when little movement is expected of the underlying stock price. He sells a Call and
a Put on the same stock / index for the same maturity and strike price. It creates a net
income for the investor.
SHORT STRADDLE Construction
Sell 1 ATM Call
Sell 1 ATM Put
Limited Profit
In short straddle the profit potential is limited up
to the premium received by the investor .
Unlimited Risk
Large losses for the short straddle can be
incurred when the underlying stock price makes
a strong move either upwards or downwards at
expiration, causing the short call or the short
put to expire deep in the money.

LONG STRANGLE
The long strangle, also known as buy strangle or simply "strangle", is a neutral strategy in
options trading that involve the simultaneous buying of a slightly out-of-the-money put and
a slightly out-of-the-money call of the same underlying stock and expiration date.
How to construct a Long Strangle.
Buy 1 out-of-the-money put
Buy 1 out-of-the-money call
Looking for sharp move in underlying stock,
either up or down, during the life of the
options
Max Loss
The maximum loss is limited. The maximum loss occurs
if the underlying stock remains between the strike
prices until expiration. If at expiration the stock's price
is between the strikes, both options will expire
worthless and the entire premium paid will have been
lost.Max Gain
The maximum gain is unlimited. The maximum gain occurs if the underlying stock goes to infinity,
and a very substantial gain would occur if the stock became worthless. The gross profit at expiration
would be the difference between the stock's price and either (a) the call strike price if the stock price
is higher or (b) the put strike price if the stock price is lower. The net profit is the gross profit less the
premium paid for the options. There is no limit to the upside potential and the downside potential is
limited only because the stock price cannot go below zero

SHORT STRANGLE
A Short Strangle is a slight modification to the Short Straddle. This strategy involves the
simultaneous selling of a slightly out-of-the-money put and a slightly out-of-the-money
call of the same underlying stock and expiration date.
How to construct a Short Strangle.
Sell 1 out-of-the-money put
Sell 1 out-of-the-money call
When to Use This options trading
strategy is taken when the options investor thinks
that the underlying stock will experience little
volatility in the near term.
Maximum profit loss.
Max profit - limited to the net credits received.
Max loss - unlimited. (Large losses for the short
strangle can be experienced when the
underlying stock price makes a strong move
either upwards or downwards at expiration)

Covered Call strategy
You own shares in a company which you feel may rise but not much in the near term (or
would not get exercised unless the stock price increases above the strike price.
You own shares in a company which you feel may rise but not much in the near term (or
at best stay sideways). You would still like to earn an income from the shares. The
covered call is a strategy in which an investor Sells a Call option on a stock he owns
(netting him a premium). The Call Option which is sold in usually an OTM Call. The Call
would not get exercised unless the stock price increases above the strike price.
Anticipations A downward move in the underlying asset.
Maximum Profit / Loss - short Call
Max profit - limited.
Max loss - unlimited.
Creating
Sell call option and buy underlying security.
When to Use: This is often employed when an investor has a short-term neutral to
moderately bullish view on the stock he holds. He takes a short position on the
Call option to generate income from the option premium.

IMPACT OF CHANGE IN OPTIONIMPACT OF CHANGE IN OPTION
PARAMETERS ON CALL AND PUTPARAMETERS ON CALL AND PUT
PRICING FACTOR CALL OPTIONS PUT OPTIONS
CMP INCREASE DECREASE
STRIKE PRICE DECREASE INCREASE
VOLATILITY INCREASE INCREASE
TIME TO EXPIRATION INCREASE INCREASE
INTEREST RATE INCREASE DECREASE
Effect of an increase in each pricing factor on the
option value, holding other factors constant:

IMPORTANCE OF RISK MANAGEMENTIMPORTANCE OF RISK MANAGEMENT
 Profit can be maximized
 Loss can be minimized
 Impact of uncertainty can be reduced
 Minimization of loss by keeping profit
potential can be attained
 Consistency of earning profit can be
maintained
 Discipline in investment management can be
developed
 Peace of mind

THANK YOUTHANK YOU
END OFEND OF SESSIONSESSION--44

Session-5A Commodity Market Analysis

WHATWHATISISAA COMMODITYCOMMODITYMARKET?MARKET?
A commodity market facilitates trading in
various commodities. It may be a spot or a
derivatives market. In spot market,
commodities are bought and sold for
immediate delivery, whereas in derivatives
market, various financial instruments based on
commodities are traded. These financial
instruments such as 'futures' are traded in
exchanges.
What is a Commodity?
Commodities are goods, uniform in quality, where each
portion is the same as the other. For example; oil is a
commodity because one barrel of oil is the same as the
next. Similarly, 1 ounce of gold is the same as the next.

• There are two ways that commodities are traded, in spot markets, or
as futures.
Spot market refers to trades that take place literally on the spot. The
commodity is traded right then and there, usually for cash. This is
spot trading.
Futures is not the actual good that is traded for; rather a contract to
buy or sell that particular commodity for a particular price and for a
certain date in the future. This is how most of the commodities
trading is done. This is futures trading.
Futures trading is organized in commodities permitted by the
government.
WHAT IS COMMODITY TRADING?WHAT IS COMMODITY TRADING?

• BULLION : Gold, Silver, Platinum
• BASE METALS : Nickel, Tin, Copper, Zinc, Aluminum, Lead
• FERROUS METALS : Steel Long
• CEREALS : Wheat, Maize, Barley
• SPICES : Pepper, Red Chilli, Jeera, Turmeric, Cardamom
• ENERGY & GAS : Crude Oil, Natural Gas, Gasoline, Heating Oil, ATF,
Electricity Futures
• OIL & OIL SEEDS : Castor Seeds, Soy Bean, Refined Soy oil
• FIBRE : Cotton
• PULSES : Chana
• PLANTATIONS : Rubber, Coffee
• OTHERS : Guar Seed, Gur, Sugar, Guargum, Mentha Oil, Potato
MAJOR COMMODITIES TRADED:MAJOR COMMODITIES TRADED:

 Trading in commodity futures and the relevant
exchanges viz. MCX (Multi Commodity
Exchange of India Ltd.), NCDEX (National
Commodity & Derivatives Exchange Ltd.), NMCE
(National Multi-Commodity Exchange of India
Limited), etc. are regulated by the Forward
Markets Commission (FMC).
WHO REGULATES THE COMMODITY MARKET?WHO REGULATES THE COMMODITY MARKET?

• Lowest Margins –5% margins.
• Extended Trading Hours –10.00am-11.30pm. So you can go trade
even after your office hours.
• Easy Access - Commodity trading uses a similar trading platform as
that of shares and stocks.
• Diversified Risk - Other than trading in Stocks & Shares, you can
spread your risk by investing in Commodities that offer varied
combination of risk-return trading strategies.
• Hedge against inflation -Trading in Commodities is a hedge against
inflation.
• Global Opportunity – Gold when traded on Commodity Exchanges
has international price benchmarking which does not allow anyone to
manipulate prices.
• Physical delivery of goods- not a compulsion.
ADVANTAGES OF COMMODITY TRADINGADVANTAGES OF COMMODITY TRADING

• 7,500 Mandis
•27,000 Haats (Rural Market Place)
•5 Million Commodity traders
•Daily Future turnover more than 23 ,000 Crores
•World leader in 17 Agro Commodities

Commodities Market
In India
New Delhi
Prepared for :

WHAT IS COMMODITY ?WHAT IS COMMODITY ?
The word “Commodity” came into use in English in the 15th century, being derived from
French word “Commodite” meaning “Convenience” in term of quality of service.
Commodity is a product having commercial value & which can be produced , bought ,
sold and consumed.
A Commodity is something that is relatively easily traded , that can be physically
delivered, and that can be stored for a reasonable period of time.
 No Complicated Manufacturing process
 Fairly standardized in quality
 Available in large volumes
 Presence of many competing buyers & Sellers and adequate self life.

BASIC HIERARCHY IN INDIAN EXCHANGESBASIC HIERARCHY IN INDIAN EXCHANGES
SEBI
NSEBSE
FMC
NCDEX
MCX
NMCE
21 Regional
Exchanges
Ministry of Finance Ministry of Consumer Affairs
CommoditiesEquities

FMCFMC –– FORWARD MARKET COMMISSIONFORWARD MARKET COMMISSION
 Headquarter at Mumbai
 Regulatory Authority for Commodity Derivative
Market in India.
 Body was setup in 1953 under Forward
Contract Regulation act 1952.
 FMC is supervised by Ministry of Consumer
Affairs, Food and Public Distribution, Govt. of
India.

20 Other Regional20 Other Regional
ExchangesExchanges
20 Other Regional20 Other Regional
ExchangesExchanges
NMCENMCENMCENMCE
CommodityCommodity ExchangesExchangesCommodityCommodity ExchangesExchanges
MCXMCXMCXMCX
Structure of Indian Commodity Futures Exchanges
NationalNational
exchangesexchanges
NationalNational
exchangesexchanges
RegionalRegional
exchangesexchanges
RegionalRegional
exchangesexchanges
FMCFMCFMCFMC
NBOTNBOTNBOTNBOTNCDEXNCDEXNCDEXNCDEX

COMPARISON BETWEEN STOCKS ANDCOMPARISON BETWEEN STOCKS AND
COMMODITIESCOMMODITIES
 Commodity is global and Stocks are local.
 Supply of Stocks remains constant where as supply and demand
of commodities vary widely.
 World can’t do without commodities, but It can do without stocks.
 Commodities need logistics but stocks do not
 Commodities has quality specification but stocks do not
 Intrinsic value of stock can be zero but this is not in case of
Commodity
 Commodities are internationally co-related but stocks depend on
company performance
 Commodities you can feel, touch and eat but stocks you can not
 Commodity related news is more frequent, stock news are
quarterly.
 Delivery of Commodity is a physical activity and delivery of shares
is an electronic activity.

INDIAN STOCK MARKET VS COMMODITY MARKETINDIAN STOCK MARKET VS COMMODITY MARKET
Criteria Commodity
Timings
Exchange
Future Duration
Delivery
Market Regulator
Sales Tax
Quotation
Transaction Tax
Margin
Underlying Asset
10 Am –11:55PM
MCX/NCDEX
1-6 months
possible
FMC
Applicable
Per Unit
Applicable
3 – 15 %
Commodity
Stock Futures
9:00 Am- 3:30 Pm
NSE/BSE
1-3 Months
Not -Possible
SEBI
NA (STT)
Per Share
NA
20-25%
Shares/Index

WHY INDIA NEED ORGANIZED COMMODITYWHY INDIA NEED ORGANIZED COMMODITY
EXCHANGES ?EXCHANGES ?
 Commodity Market have their presence in the country
for over 120 Years.
 Trade in Commodities has been unorganized in Regional
markets and local mandis.
 Physical Commodity Market size in India is estimated to
be around 15 Lac crore per annum.
 Need of Price Discovery and price risk management.

End Of Session-5A

Session-5B Currency Market

THETHE EXCHANGEEXCHANGE OFOF ONEONE CURRENCYCURRENCY FORFOR ANOTHER,ANOTHER,
OROR THETHE CONVERSIONCONVERSION OFOF ONEONE CURRENCYCURRENCY INTOINTO
ANOTHERANOTHER CURRENCYCURRENCY.. FOREIGNFOREIGN EXCHANGEEXCHANGE ALSOALSO
REFERSREFERS TOTO THETHE GLOBALGLOBAL MARKETMARKET WHEREWHERE
CURRENCIESCURRENCIES AREARE TRADEDTRADED VIRTUALLYVIRTUALLY AROUNDAROUND--THETHE--
CLOCKCLOCK.. THETHE TERMTERM FOREIGNFOREIGN EXCHANGEEXCHANGE ISIS USUALLYUSUALLY
ABBREVIATEDABBREVIATED ASAS ""FOREXFOREX"" ANDAND OCCASIONALLYOCCASIONALLY ASAS
"FX"FX..""
Forex MarketForex Market

Currency Currency Code Nation
United States dollar USD ($) USA
Euro EUR (€) Europe Union
Japanese yen JPY (¥) Japan
Pound sterling GBP (£) United Kingdom
Swiss franc CHF (Fr) Switzerland
US Dollar (USD)
The US Dollar is by far the most widely traded currency In part, the widespread use of
the US Dollar reflects its substantial international role as
investment currency in many capital markets
reserve currency held by many central banks
transaction currency in many international commodity markets
invoice currency in many contracts
intervention currency employed by monetary authorities in market operations to
influence their own exchange rates.

Euro (EUR)
Like the US Dollar, the Euro has a strong international presence and over
the years has emerged as a premier currency, second only to the US Dollar
Japanese Yen (JPY)
The Japanese Yen is the third most traded currency in the world. It has a
much smaller international presence than the US Dollar or the Euro. The
Yen is very liquid around the world, practically around the clock.
British Pound (GBP)
Until the end of World War II, the Pound was the currency of reference.
The nickname Cable is derived from the telegrams used to update the
GBPUSD rates across the Atlantic. The currency is heavily traded against
the Euro and the US Dollar, but it has a spotty presence against other
currencies.
Swiss Franc (CHF)
The Swiss Franc is the only currency of a major European country that
belongs neither to the European Monetary Union nor to the G-7 countries.
Although the Swiss economy is relatively small, the Swiss Franc is one of
the major currencies, closely resembling the strength and quality of the
Swiss economy and finance. Switzerland has a very close economic
relationship with Germany, and thus to the Euro zone. Typically, it is

Do you know what a currency pair is ?
A currency pair are two currencies set together to illustrate
currency valuation relative to one another in the Foreign Exchange
Market . In currency market, while initiating a trade you buy one
currency and sell another currency. Therefore same currency will have
very different value against every other currency.
For example, same USD is valued at say 45 against INR and say 82
against JPY.
USD INR
USD INR
What is base and quoted currency?
Base
currency
Quoted
currency
The BC is the currency that is priced and its
amount is fixed at one unit.
The other currency is the QC,
which prices the BC, and its amount varies as
the price of BC varies in the market.

In interbank market, currency prices are always quoted with two way price. In a
two way quote, the prices quoted for buying is called bid price and the price
quoted for selling is called as offer or ask price. Please note that these prices
are always from the perspective of the market maker and not from the
perspective of the price taker.
What is two way quotes ?
Example two way quotes
Suppose a bank quotes USDINR spot
price as 45.05/ 45.06 to a merchant.
In this quote, 45.05 is the BID PRICE
and 45.06 is the offer price or ASK
PRICE. This quotes means that the
bank is willing to buy one unit of USD
for a price of INR 45.05 and is willing
to sell one unit of USD for INR 45.06.
Let us look at market norm for quoting two
way prices for popular currency pairs

THE CURRENCY EXCHANGE RATES ARE CONSTANTLY
CHANGING. CHANGES IN RATES ARE EXPRESSED AS
APPRECIATION OR DEPRECIATION OF ONE
CURRENCY IN TERMS OF THE OTHER CURRENCY.
EG. IF USD-INR MOVED FROM 445.00 TO 445.25, THE
US DOLLAR HAS APPRECIATED AND THE RUPEE HAS
DEPRECIATED.
Appreciation / DepreciationAppreciation / Depreciation

RBI Reference rate
As on 08 Jun 2012 release By RBI.
RBI reference rate is the rate published
daily by RBI for spot rate for various
currency pairs. The rates are arrived at
by averaging the mean of the bid / offer
rates polled from a few select banks
during a random five minute window
between 11:45 AM and 12:15 PM.
Underlying Rate
USDINR 65.3650
EURINR 72.2125
GBPINR 92.6375
JPYINR 63.8800
Currency Market Timing
In India, OTC market is open from 9:00 AM to 5:00 PM. However, for merchants
the market is open from 9:00 AM to 4:30 PM and the last half hour is meant only
for interbank dealings for banks to square off excess positions.
Central bank has prescribed certain net overnight open position limit for various
banks. Banks cannot exceed their overnight open position beyond the prescribed
limits and therefore the last half hour of trading window is used to offload excess
position to adhere to the guidelines.

THE CURRENCY MARKET TRACKS THE CENTRAL BANK MEETINGSTHE CURRENCY MARKET TRACKS THE CENTRAL BANK MEETINGS
AND POLICY DECISIONS.AND POLICY DECISIONS.
THE IMPORTANT ANNOUNCEMENTS FROM CENTRAL BANK ARETHE IMPORTANT ANNOUNCEMENTS FROM CENTRAL BANK ARE
INTEREST RATES AND CRR.INTEREST RATES AND CRR.
IN US, THE FEDERAL OPEN MARKET COMMITTEE IS RESPONSIBLEIN US, THE FEDERAL OPEN MARKET COMMITTEE IS RESPONSIBLE
FOR KEY DECISIONS I.E. INTEREST RATES AND THE GROWTH OFFOR KEY DECISIONS I.E. INTEREST RATES AND THE GROWTH OF
THE MONEY SUPPLY. THESE DECISIONS AFFECTED THETHE MONEY SUPPLY. THESE DECISIONS AFFECTED THE
CURRENCY MARKET.CURRENCY MARKET.
SOMETIMES MARKET WILL GIVE LOT OF IMPORTANCE TO IT ANDSOMETIMES MARKET WILL GIVE LOT OF IMPORTANCE TO IT AND
FOCUS ON EMPLOYMENT NUMBERS AND INTEREST RATEFOCUS ON EMPLOYMENT NUMBERS AND INTEREST RATE
SITUATION.SITUATION.
Central Bank Meetings and Key DecisionsCentral Bank Meetings and Key Decisions

What Currency futures ?
Currency futures is a standardized
contract, traded on an exchange, to buy
or sell a certain underlying asset or an
instrument at a certain date in the future,
at a specified price. Here the underlying
asses is Currency.
History of currency future in India.
Currency futures trading was started in Mumbai on August 29,2008.
With over 300 trading members including 11 banks registered in this segment, the first day
saw a very lively counter, with nearly 70,000 contracts being traded.
The first trade on the NSE was by East India Securities Ltd
Amongst the banks, HDFC Bank carried out the first trade. The largest trade was by Standard
Chartered Bank constituting 15,000 contracts. Banks contributed 40 percent of the total gross
volume.
Traded in NSE and MCX exchanges

CURRENCY FUTURES ARE LINEAR CONTRACTS, SO PROFITS ORCURRENCY FUTURES ARE LINEAR CONTRACTS, SO PROFITS OR
LOSSES ARE UNLIMITED, DEPEND ON THE CONTRACT SIZE ANDLOSSES ARE UNLIMITED, DEPEND ON THE CONTRACT SIZE AND
THE TICK VALUE.THE TICK VALUE.
TICK IS THE MINIMUM SIZE OF PRICE CHANGE. THE MARKETTICK IS THE MINIMUM SIZE OF PRICE CHANGE. THE MARKET
PRICE WILL CHANGE IN MULTIPLE OF THE TICK. THE TICKPRICE WILL CHANGE IN MULTIPLE OF THE TICK. THE TICK
VALUES FOR DIFFERENT CURRENCY PAIRS.VALUES FOR DIFFERENT CURRENCY PAIRS.
USDUSD--INR CURRENCY PAIR TICK SIZE IS 0.25 PAISA OR 0.0025 INR.INR CURRENCY PAIR TICK SIZE IS 0.25 PAISA OR 0.0025 INR.
1 TICK = TICK * CONTRACT SIZE.1 TICK = TICK * CONTRACT SIZE.
1 TICK OF USD1 TICK OF USD--INR = 1000 * 0.0025= 2.50 INRINR = 1000 * 0.0025= 2.50 INR
IF 5 CONTRACT OF USDIF 5 CONTRACT OF USD--INR BY 4 TICK = 5 * 4 * 2.5 = 50 INRINR BY 4 TICK = 5 * 4 * 2.5 = 50 INR

Spot price security
can be bought or sold at a specified time and place.
Futures price
trades in future market
Contract cycle
trades, the index future contract have 3 months trading
cycle
Expiry date
usably last Thursday of the month consider as expiry day)
Contract size
In the case of USDINR it is USD 1000; EURINR it is EUR
1000; GBPINR it is GBP 1000 and in case of JPYINR it is JPY
100,000.
Initial margin
the margin account at the time a futures contract is first
entered into is known as initial margin
Marking
of each trading day, the margin account is adjusted to reflect
the investor's gain or loss depending upon the futures closing
price. This is called marking
Spot price -The current price at which a particular security
can be bought or sold at a specified time and place.
Futures price – The price at which the future contract
trades in future market.
Contract cycle – The period over which a contract
trades, the index future contract have 3 months trading
cycle.
Expiry date –The last trading day of a future contract (
usably last Thursday of the month consider as expiry day)
Contract size –The quantity of assets that has to deliver .
In the case of USDINR it is USD 1000; EURINR it is EUR
1000; GBPINR it is GBP 1000 and in case of JPYINR it is JPY
100,000.
Initial margin - The amount that must be deposited in
the margin account at the time a futures contract is first
entered into is known as initial margin
Marking-to-market - In the futures market, at the end
of each trading day, the margin account is adjusted to reflect
the investor's gain or loss depending upon the futures closing
price. This is called marking-to-market.
Spot price
Future price
Contract cycle
Expiry date
Contract size
Initial Margin
MTM margin
Futures Terminology
Exchange Traded Currency
Futures

THE PURPOSE FOR INTRODUCING CURRENCY FUTURESTHE PURPOSE FOR INTRODUCING CURRENCY FUTURES
MARKET IS DIVERSIFIED. BOTH RESIDENTS & NONEMARKET IS DIVERSIFIED. BOTH RESIDENTS & NONE
RESIDENT PURCHASE DOMESTIC CURRENCY ASSETS. IF THERESIDENT PURCHASE DOMESTIC CURRENCY ASSETS. IF THE
EXCHANGE RATE REMAINS UNCHANGED FROM THE TIME OFEXCHANGE RATE REMAINS UNCHANGED FROM THE TIME OF
PURCHASE OF THE CURRENCY, NO GAIN OR LOSSES AREPURCHASE OF THE CURRENCY, NO GAIN OR LOSSES ARE
MADE OUT OF FOREIGN CURRENCY. IF DOMESTIC CURRENCYMADE OUT OF FOREIGN CURRENCY. IF DOMESTIC CURRENCY
DEPRECIATE OR APPRECIATE AGAINST FOREIGN CURRENCY,DEPRECIATE OR APPRECIATE AGAINST FOREIGN CURRENCY,
THE EXPOSURE WOULD RESULT IN GAIN OR LOSS.THE EXPOSURE WOULD RESULT IN GAIN OR LOSS.
UNPREDICTED MOVEMENTS IN EXCHANGE RATES EXPOSEUNPREDICTED MOVEMENTS IN EXCHANGE RATES EXPOSE
INVESTORS TO CURRENCY RISKS. CURRENCY FUTUREINVESTORS TO CURRENCY RISKS. CURRENCY FUTURE
ENABLE THEM TO HEDGE THESE RISKS. CURRENCY RISKSENABLE THEM TO HEDGE THESE RISKS. CURRENCY RISKS
COULD BE HEDGED MAINLY THROUGH FORWARDS, FUTURES,COULD BE HEDGED MAINLY THROUGH FORWARDS, FUTURES,
SWAPS AND OPTIONS.SWAPS AND OPTIONS.
Rationale behind currency futuresRationale behind currency futures

Settlement : Cash in INR
Final Settlement Price : The reference rate fixed by
RBI on last trading day or expiry day.
Final Settlement Day : Last working day ( excluding
Saturday) of the expiry month, will be same as for
Interbank Settlements in Mumbai. Holidays declared
by Foreign Exchange Dealer’s Association ( FEDAI)

Base Price : Base price of the futures contracts on
the first day of its life shall be the theoretical
futures price. The base price for subsequent trading
day will be previous days settlement price.
Settlement Price ( Closing Price ) : Closing price for
a future contract will be last half an hour average
trading price of the future contracts or Theoretical
Settlement Price if there is no trading in the last
half an hour.

THE TENOR OF A CONTRACT MEANS TRADINGTHE TENOR OF A CONTRACT MEANS TRADING
CYCLES OF THE CONTRACT.CYCLES OF THE CONTRACT.
THE CURRENCY FUTURES CONTRACTS ARETHE CURRENCY FUTURES CONTRACTS ARE
AVAILABLE FROM 1 TO 12 MONTHS.AVAILABLE FROM 1 TO 12 MONTHS.
Tenor of Future ContractsTenor of Future Contracts

End Of Session-5B

CAREER IN FINANCIAL MARKETS
Certification in Financial Markets
NSE Certified NCFM Modules-
https://www.nseindia.com/
SEBI Certified NISM Modules-
http://www.nism.ac.in/
 NIFM- http://www.nifm.in/

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Smart Disha Workshop-07 April-Risk Management in Stock Market with Career Options

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