The document discusses financial derivatives such as forwards, futures, options, and swaps used to hedge currency risk, noting that currency futures traded on an exchange provide benefits like price transparency, elimination of counterparty credit risk, and access for retail traders compared to over-the-counter currency forwards. Hedgers use derivatives to offset currency risk from imports/exports while speculators take views on market direction hoping to profit, and arbitrageurs look for mispricing opportunities; exchanges require initial and maintenance margin as well as mark positions to market daily to reduce default risk.

1. 11EX-013 Bishnu Kumar
11EX-015 Davinder Singh
11EX-040 Prateek Wadhwa
11EX-041 Priyanka Tyagi

2. • 24 Hour Market because of business overlap
• Trade is done by buying one currency while selling the
other
• 2 Segments of OTC Market
o Interbank
o Merchant

3. • Securities under the Securities Contracts Act, 1956
and hence the trading of derivatives is governed by
the regulatory framework under the SC(R)A.
• A product whose value is derived from the value of
one or more basic variables called bases
• The underlying asset can be equity, foreign
exchange, commodity, interest rate or any other asset
• Has a future settlement date

4. The factors driving the growth of financial derivatives are:
• Increased volatility in asset prices in financial markets
• Increased integration of national financial markets with the
international financial markets
• Marked improvement in communication facilities and sharp
decline in their costs,
• Development of more sophisticated risk management tools
• Innovations in the derivatives markets, which optimally
combine the risks and returns over a large number of
financial assets, leading to higher returns, reduced risk and
lower transactions costs as compared to individual financial
assets.

5. Unpredicted movements in exchange rates requires investors to
hedge these risks.
• Forwards: A customized OTC contract between two parties.
• Futures: Exchange-trade forwards.
• Options: Option does not buy or sell the underlying directly but
buys or sells the right without obligation on the underlying.
• Swaps: Swaps are agreements between two parties to exchange
cash flows in the future according to a prearranged formula.
• Interest rate swaps: Swapping of interest related cash flows
between the parties in the same currency.
• Currency swaps: Swapping both principal and interest
between the parties, with the cash flows in one direction
being in a different currency than those in the opposite
direction.

6. A currency future, also known as FX future, is a
standardized contract , traded on an exchange, to buy or
sell one currency for another at a specified date in the
future at a price that is fixed on the purchase date. Both
parties of the futures contract must fulfill their obligations on
the settlement date.

7. Futures have some distinct advantages over forward contracts:
• Price transparency
• Elimination of Counterparty credit risk.
• Access to all types of market participants. The OTC market is
restricted to Authorized Dealers (banks which are licensed by
RBI to deal in FX), individuals and entities with FOREX
exposures. Retail speculators with no exposure to FX cannot
trade in OTC market.
• Futures offer low cost of trading as compared to OTC market.

8. Hedger
• Have real exposure to FX risk on account of their business
• Exposure could be because of Imports/Exports
• Objective is to remove FX volatility risk using currency future
Has to pay $ 1 mio after What happens if
IMPORTER 3 months for imports in USD strengthens?
march He loses money.
Has to receive $ 1 mio What happens if
EXPORTER after 3 months for USD weakens?
exports in march He loses money.
Overall portfolio in HEDGING
Participant Risk Underlying Position Hedging Position
Importer INR will weaken Short in Fx Long in CF
Long Hedger
Exporter INR will strengthen Long in Fx Short in CF
Short Hedger

9. Speculator
• Also called as Traders
• Does not have real exposure to FX risk
• Takes a view on the market direction hoping to make returns
by taking the price risk
• Assumes the price risk that hedgers attempt to lay off in the
markets

10. Arbitrageurs
• Look for mispricing and execute simultaneous buy and sell to
capture the mispricing and make profit
• Do not take any view on the market direction
• Neither have exposure to risk and nor they take any risk

11. Initial Margin
The Initial Margin requirement is based on a worst case loss of a
portfolio of an individual client across various scenarios of price
changes. Initial margin for each contract is set by the Exchange.
USD/INR EUR/INR GBP/INR JPY/INR
Minimum margin
requirement on first 1.75% 2.8% 3.2% 4.5%
day
Minimum margin
requirement after first 1% 2% 2% 2.3%
day

12. Calendar Spread
When a CF position at one maturity is hedged by an offsetting
position at a different maturity, Rs. 250/‐ Calendar Spread Margin
per Calendar Spread contract is charged.
Extreme Margin Loss
Computed as % on the MTM value of the gross open position.
USD/INR EUR/INR GBP/INR JPY/INR
Extreme loss
1% 0.3% 0.5% 0.7%
margin
Marked-to-Market
Default risk is reduced by marking to market. MTM value would
be calculated on the basis of the last half an hour weighted
average traded price of the futures contract.

13. National Securities Clearing Corporation Limited (NSCCL)
undertakes clearing and settlement of all trades executed on the
currency derivatives segment of the exchange. It also acts as
legal counterparty to all trades on the currency derivatives
segment and guarantees their financial settlement.
• Mark-to-Market Settlement
• Final Settlement of Futures