for you mba people

1. CURRENCY
FUTURES

2. Foreign Exchange Market
• Largest Financial
market
• 24-hr market
• Average daily trade –
over US $ 3.5 trillion

3. Foreign Exchange Market
• Most widely traded currency – Dollar
– Investment currency in capital markets
– Reserve currency of Central Banks
– Transaction currency in many commodity
markets
– Invoice currency for many contracts

4. Foreign Exchange Market
• Participants
– Central Banks
– Commercial Banks
– Hedge Funds
– Commercial companies
– Investment management firms
– Retail FX brokers
– INDIVIDUALS

5. Foreign Exchange Market
• Main Instruments
– Spot
– Outright forwards
– Swaps
• Interest Rate Swaps
• Currency Swaps
– OTC Currency Options
– Exchange Traded Currency Futures

6. Factors affecting USD/INR Rates
• Supply and Demand Forces
• Dollar against major currencies like Euro, Pound, Yen
• Global Asian Stock markets
• Indian Stock markets
• Economic factors
– Government budget deficits
– Interest rates
– Inflation
– Fiscal and Monetary Policy

7. Market activity
• Hedging
– Banks
– Importers & Exporters
– Corporate
• Trading/ Speculation
– View on appreciation or depreciation of USD/INR
• Arbitrage
– Inter market (OTC forwards and NSE - futures)
– Inter exchange ( NSE and MCX-SX, NSE and DGCX)

8. OTC Market
 Interbank Market - Average daily turnover in Global
FX market- over $3.5 trillion
 Forward Contracts
– Customized Contracts
• High Spreads
– Access restricted to participants with underlying positions
– Physical Settlement
– Low Accessibility
– Counterparty Risk

9. A new and better alternative for
trading FX
USD/ INR cash settled futures market at NSE
• Access to all Indians
• Transparent online trading platform
• No requirement for underlying position
• Low Margins
 Anonymous order matching facility
• Robust settlement systems with counterparty guarantee
• Low Bid – Offer Spreads
• Euro, Yen and Sterling v/s Rupee futures to be added soon to
the Currency Derivatives Segment (RBI has already given
permission)

10. Exchange based trading volumes
• Average Daily Volumes
– Oct'09 $ 1613.40 Million
– Sept'09 $1171.15 Million
– Jun'09 $ 714.75 Million
– Apr'09 $ 490.72 Million

11. Contract Specifications

12. FX Volatility Is The Reality

13. Trading / Speculation
Expectation that dollar will strengthen against the rupee
• Buy 10 November futures @ 46.60
– Cash outflow of margin @ 5 % - Rs 23,300
• Book Potential Profit / Loss
• Sell November futures @ 46.75 to book profit of – Rs 1,500 on an
investment of Rs 23,300
RETURN of 6.43 % INTRA-DAY
• What if my view is completely wrong ?
– Sell futures @ 46.30 and book a loss of – Rs 3000
Stop Loss Trigger at a movement of 10 paise per $ against the view –
to prevent excess losses

14. Protecting Earnings of
Underlying

Hedge the FX exposure
– Exporter : IT, Electronics & Hardware, Jewelery, Auto Ancillaries,
Textiles, Chemicals, Food & Beverages
– Importer : Oil and Gas , Gems and Jewelery
– Investors : Institutions investing abroad
– Borrowers : ECB's and FCCB's
– Individuals : Students studying abroad

15. Hedging Example - Importer
• If an Oil Importer wants to import Crude Oil, worth $1 million on
June 3, 2009 with delivery and payment dates being three months
ahead, in Sept 2009.
Spot Rate on 3rd June 09 INR 46.74 per USD
Amt payable as on 3rd June 09 Rs 4,67,40,000 (46.74 * 1000000)
Buy 3 month futures contract
Futures Price = Spot + Cost of Carry USD 47.05 (46.74+0.31)
Futures Price in INR Rs 4,70,50,000
Spot Rate on 3rd September 09 INR 49.20 per USD
If not hedged payment would Rs 4,92,00,000
Saving due to hedging Rs 21,50,000

16. Hedging Example – Exporter
• Exporter earning USD 1,000,000 for DEC 09, expecting
remittance on 25 DEC 2009
Spot Rate on 30th OCT 09 INR 47.02 per dollar
Sell 1000 USDINR contracts DEC
09
Futures Price = Spot+ Cost of INR 47.20 per USD (47.02+0.18)
Carry Price in INR
Futures Rs 4,72,00,000
Spot Rate on 28 DEC 09 INR 46.50 per USD
If not hedged receipt would be Rs 4,65,00,000
Saving due to hedging Rs 7,00,000

17. Costs
• Deposit
Upfront Margin – 5% of the contract amount
• Charges
Brokerage – 0.04 % of the contract value
• Government Taxes and Duty
Service Tax – 10 % of Brokerage
STT (only on sell) – Nil ( as of now)
Transaction Tax – Nil ( as of now)
Stamp Duty – 0.002 %

18. Margins
Margins / collaterals

To be deposited pre – trade

Released once trade is unwound or the contract matures
•
Forms of collaterals (*)

Cash

Bank guarantees

Fixed deposits,

GOI bonds

Approved equities / mutual fund units
( * )- Check with Head office

19. Margins
Providing collaterals

Cash through CIM (debited from clearing bank account)

FD and BG from approved banks

GOI bonds through National Securities Clearing
Corporation Ltd (NSCCL)

Approved securities
• Releasing collaterals

Cash – next day in the bank a/c, FD and BG same day

Approved securities to custodians on same day

21. Thank you
21