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Currency future

Meaning of currency future

A contract for the future delivery of a commodity, currency or security on a specific date.
In contrast to forward contracts, futures contracts are for standard quantities and for standard
periods of time and are primarily traded on an Exchange. Forward transactions enable importers
and exporters who will have to make, or will receive, payment in a foreign currency at a future
time, to protect themselves against the risk of fluctuations in the spot rate.
Definitions
(i) Currency Futures means a standardized foreign exchange derivative contract traded on a
recognized stock exchange to buy or sell one currency against another on a specified future
date, at a price specified on the date of contract, but does not include a forward contract.
(ii) Currency Futures market means the market in which currency futures are traded.
Permission
(i) Currency futures are permitted in US Dollar - Indian Rupee or any other currency pairs,
as may be approved by the Reserve Bank from time to time.
Only persons resident in India may purchase or sell currency futures to hedge an exposure to
foreign exchange rate risk or otherwise.
Features of Currency Futures
Standardized currency futures shall have the following features:
a. Only USD-INR contracts are allowed to be traded.
b. The size of each contract shall be USD 1000.
c. The contracts shall be quoted and settled in Indian Rupees.
d. The maturity of the contracts shall not exceed 12 months.
e. The settlement price shall be the Reserve Banks Reference Rate on the last trading day.
Participants

No person other than 'a person resident in India' as defined in section 2(v) of the Foreign
Exchange Management Act, 1999 (Act 42 of 1999) shall participate in the currency
futures market.

No scheduled bank or such other agency falling under the regulatory purview of the
Reserve Bank under the Reserve Bank of India Act, 1934, the Banking Regulation Act,
1949 or any other Act or instrument having the force of law shall participate in the
currency futures market without the permission from the respective regulatory
Departments of the Reserve Bank. Similarly, for participation by other regulated entities,
concurrence from their respective regulators should be obtained.

Membership

The membership of the currency futures market of a recognized stock exchange shall be
separate from the membership of the equity derivative segment or the cash segment.

Membership for both trading and clearing, in the currency futures market shall be subject
to the guidelines issued by the SEBI.

Banks authorized by the Reserve Bank of India under section 10 of the Foreign Exchange
Management Act, 1999 as AD Category - I bank are permitted to become trading and
clearing members of the currency futures market of the recognized stock exchanges, on
their own account and on behalf of their clients, subject to fulfilling the following
minimum prudential requirements:
a) Minimum net worth of Rs. 500 crores.
b) Minimum CRAR of 10 per cent.
c) Net NPA should not exceed 3 per cent.
d) Made net profit for last 3 years.
The AD Category - I banks which fulfill the prudential requirements should
lay down detailed guidelines with the approval of their Boards for trading
and clearing of currency futures contracts and management of risks.

AD Category - I banks which do not meet the above minimum prudential requirements
and AD Category - I banks which are Urban Co-operative banks or State Co-operative
banks can participate in the currency futures market only as clients, subject to approval
therefor from the respective regulatory Departments of the Reserve Bank.

Position Limits
i. The position limits for various classes of participants in the currency futures market shall be
subject to the guidelines issued by the SEBI.
ii. The AD Category - I banks, shall operate within prudential limits, such as Net Open Position
(NOP) and Aggregate Gap (AG) limits. The exposure of the banks, on their own account, in the
currency futures market shall form part of their NOP and AG limits.
Risk Management Measures
The trading of currency futures shall be subject to maintaining initial, extreme loss and
calendar spread margins and the Clearing Corporations / Clearing Houses of the exchanges
should ensure maintenance of such margins by the participants on the basis of the guidelines
issued by the SEBI from time to time.
Surveillance and Disclosures
The surveillance and disclosures of transactions in the currency futures market shall be
carried out in accordance with the guidelines issued by the SEBI.
Authorization to Currency Futures Exchanges / Clearing Corporations
Recognized stock exchanges and their respective Clearing Corporations / Clearing houses
shall not deal in or otherwise undertake the business relating to currency futures unless they hold
an authorization issued by the Reserve Bank under section 10 (1) of the Foreign Exchange
Management Act, 1999.
Power of RBI
The Reserve Bank may from time to time modify the eligibility criteria for the participants,
modify participant-wise position limits, prescribe margins and / or impose specific margins for

identified participants, fix or modify any other prudential limits, or take such other actions as
deemed necessary in public interest, in the interest of financial stability and orderly development
and maintenance of foreign exchange market in India.
History of Currency Future
Currency futures were first created in 1970 at the International Commercial Exchange in
New York. But the contracts did not "take off" due to the fact that the Bretton Woods system was
still in effect. They did so a full two years before the Chicago Mercantile Exchange (CME) in
1972, less than one year after the system of fixed exchange rates was abandoned along with the
gold standard. Some commodity traders at the CME did not have access to the inter-bank
exchange markets in the early 1970s, when they believed that significant changes were about to
take place in the currency market. The CME actually now gives credit to the International
Commercial Exchange (not to be confused with the ICE for creating the currency contract, and
state that they came up with the idea independently of the International Commercial Exchange).
The CME established the International Monetary Market (IMM) and launched trading in seven
currency futures on May 16, 1972. Today, the IMM is a division of CME. In the fourth quarter of
2009, CME Group FX volume averaged 754,000 contracts per day, reflecting average daily
notional value of approximately $100 billion. Currently most of these are traded electronically.[1]
Because currency futures contracts are marked-to-market daily, investors can exit their
obligation to buy or sell the currency prior to the contract's delivery date. This is done by closing
out the position. With currency futures, the price is determined when the contract is signed, just
as it is in the forex market, only and the currency pair is exchanged on the delivery date, which is
usually sometime in the distant future. However, most participants in the futures markets are
speculators who usually close out their positions before the date of settlement, so most contracts
do not tend to last until the date of delivery.
Interest future
Interest futures are a financial derivative (a futures contract) with an interest-bearing
instrument as the underlying asset.
Examples include Treasury-bill futures, Treasury-bond futures and Eurodollar futures.
The global market for exchange-traded interest rate futures is notionally valued by the
Bank for International Settlements at $5,794,200 million in 2005.[citation needed]
Uses
Interest rate futures are used to hedge against the risk of that interest rates will move in an
adverse direction, causing a cost to the company.For example, borrowers face the risk of interest
rates rising. Futures use the inverse relationship between interest rates and bond prices to hedge
against the risk of rising interest rates. A borrower will enter to sell a future today. Then if
interest rates rise in the future, the value of the future will fall (as it is linked to the underlying

asset, bond prices), and hence a profit can be made when closing out of the future (i.e buying the
future).
Treasury futures are contracts sold on the Globex market for March, June, September and
December contracts. As pressure to raise interest rates rises, futures contracts will reflect that
speculation as a decline in price. Price and yield will always be in an inversely correlated
relationship.
Open Interest (OI) is the number of contracts outstanding in the marketplace. Open
Interest only applies to futures and option contracts. A change in open interest either confirms
price action or acts as a warning of a potentially weakening trend.
It is often observed that the interest rates charged to borrowers of micro-loans are quite
high. According to the United States Federal Reserve Board, the average interest rate charged by
commercial banks for a 24-month personal credit loan was 12.22% in the third quarter of 2005.
The average annual percentage rate charged on credit card debt was only slightly higher at
12.48% for Q3 05; yet the APR charged for a typical loan by microfinance institutions (MFIs) in
India ranged from 20% to 40% (p.4) in 2003. In lesser developed nations such as Indonesia or
the Philippines rates reached up to 80% (p.4). These rates are quickly and errantly decried as
exorbitant and usurious, when, in fact, they are the product of some of the most fundamental
principles of economics and are advantageous not only for the lender, but the borrower as well.
Interest rates charged for lending are a function of a number of factors, of those,
transaction costs and risk figure prominently into the derivation of microlending interest rates.
Microlenders are subject to significantly higher transaction costs than banks in the developed
world, both in absolute and relative terms. Three types of costs (p.3) are associated with the
lending process: the cost of funds for on-lending, the cost of risk (loan loss), and administrative
costs (identifying and screening clients, processing loan applications, disbursing payments,
collecting repayments, and following up on non-repayment).With regard to loan administration,
Microcredit is an industry that is heavily dependent on personal contact for its execution (p.2).
This is very time-consuming and resource intensive, and allows each loan officer to reach only a
limited audience of potential borrowers. By contrast, much of the administrative process for
commercial banks leverages technology for computerized credit scoring, communication with
clients and payment processing. Not only is the administrative process less efficient for a
microlender for each loan, but the problem is compounded further by the fact that while a
developed commercial institution may lend a large sum of money to one borrower, a microlender will lend very small sums to many borrowers, thereby multiplying the total administrative
costs by X number of borrowers. The factors noted above contribute to a higher absolute
transaction cost per loan, it is also important to note that the transaction costs relative to the loan
size are considerably higher. Interest Rates Are Important
Interest rates control the flow of money in the economy. High interest rates curb inflation, but
also slow down the economy. Low interest rates stimulate the economy, but could lead to
inflation. Therefore, you need to know not only whether rates are increasing or decreasing, but
what other economic indicators are saying.

If interest rates are increasing and the Consumer Price Index (CPI) is decreasing, this
means the economy is not overheating, which is good.
But, if rates are increasing and GDP is decreasing, the economy is slowing too much,
which could lead to recession.

If rates are decreasing and GDP is increasing, the economy is speeding up, and that is
good.

But, if rates are decreasing and the CPI is increasing, the economy is headed towards
inflation.

How Interest Rates Affect You


The most direct impact interest rates have is on your home mortgage. If interest rates are
relatively high, your loan payments will be greater. If you are buying a home, this means you can
afford a less expensive home. Even if you are not in the market, your home value will not rise
and could even decline during times of high interest rates.
On the other hand, high interest rates curb inflation. This means the price of other goods
like food and gasoline will stay low, and your paycheck will go further. If you were smart
enough to lock in a fixed-interest loan at a low rate, your income will stretch even more.
If interest rates stay too high for too long, it causes a recession, which create layoffs as
businesses slow. If you are in a cyclical industry, or a vulnerable position, you could get laid off.
International Banking
Definition
A facility that allows depository institutions in the United States to offer deposit and loan
services to foreign residents and institutions, while being exempted from reserve requirements
imposed by the Federal Reserve and some state and local income taxes. Because of these
exemptions, IBFs enable U.S. banks and U.S.-based financial institutions to compete more
effectively for overseas deposits and loans business in the Eurocurrency markets.
International banking enables people who live or work abroad to manage their finances in
one central location. By keeping your money in one place, it allows you to make transfers and
payments in several currencies from a stable and secure offshore jurisdiction. Providing you with
a link between all of your banking arrangements, you can be in complete control of your money,
wherever you are in the world
Advantages of International Banking
You can bank in different currencies and even multi-currencies which is of advantage to
expats with financial commitments in more than one nation or currency for example.
If the nation in which you live has a less than favourable economic climate, by keeping
your wealth in an offshore bank account you can avoid the risks in your new nation such
as high inflation, currency devaluation or even a coup or war.

For those expats living in a nation where you only pay tax on the money you remit into
that country, there is an obvious tax benefit to keeping your money in an offshore bank
account.

Offshore or international accounts are usually designed to offer customers maximum


flexibility in terms of account usage. Expats can benefit from this no matter where they
are in the world as it can mean they can access their funds from ATMs or online or over
the phone at any time of the day or night, no matter what the time zone.

Any interest earned is usually paid free from the deduction of taxation. For those who
dont pay tax on foreign sourced income this means they can enjoy greater returns
immediately, without having to apply for a rebate.

You can potentially enjoy greater account privacy by going offshore. Some jurisdictions
e.g., Switzerland place great emphasis on maintaining client confidentiality at all
times. For anyone wishing to protect their assets from unfair or speculative litigious
behaviour for example, an offshore bank account can be an added deterrent.

An offshore bank account can be a tool in the armoury of those seeking to protect their
estate from inheritance taxes in the future. Accounts tied to trusts or companies can
sometimes be beneficial for the legitimate avoidance of estate taxes upon death. Note:
specialist estate planning advice needs to be sought by anyone seeking to benefit from
such an advantage.

Some offshore banks charge less and some pay more interest than onshore banks. This is
becoming less and less the case nowadays, but its worth looking closely at whats
available when seeking to establish a new offshore bank account.

Because many of the high street banks have offshore arms, you can potentially remain
with your current banking provider when you expatriate and simply swap to having an
international or offshore account.

Less government intervention in offshore financial centres can mean that offshore banks
are able to offer more interesting investment services and solutions to their clients.

You may benefit from having a relationship manager or private bank account manager if
you choose a premier or private offshore bank account. Such a service is of benefit to
those who desire a more hands on approach to their accounts management from their
bank.

Disadvantages of International Banking


Historically banking offshore is arguably more risky than banking onshore. This is
demonstrated when examining the fallout from the Kaupthing Singer and Friedlander
collapse on the Isle of Man. Those onshore in the UK who was affected locally by the
nationalization of the banks parent company in Iceland received full compensation.
Those who had deposits remotely in offshore accounts in the Isle of Man were lucky if
they were repaid the 50,000 guaranteed by the depositor protection scheme.

The term offshore has become synonymous with illegal and immoral money laundering
and tax evasion activity. Therefore conceivably anyone with an offshore bank account
could be tarred, by some, with the same brush even though their offshore banking
activity is wholly legitimate.

You have to choose your offshore jurisdiction carefully. Whilst you may well be aware
of how the banking industry operates in your own home nation and how it is regulated,
the rules and regulations abroad differ massively. Also, some offshore havens are less
stable than others.

Its also important to look at the terms and conditions of an offshore bank account. Will
you be charged higher fees if you fail to maintain a minimum balance, what are the fees
and charges for the account and the services you may wish to utilise?

It can be more difficult to resolve any issues that may arise with your account if you hold
it offshore. This is because you cannot physically visit your branch and speak to
someone in person.

There are fewer advantages to banking offshore today than there were just 10 years ago
therefore unless youre specifically seeking flexibility for example, an offshore bank
account may be overkill for your financial circumstances.

International Bank Account Number - IBAN


A standard numbering system developed to identify bank accounts from around the
world. It was originally developed by banks in Europe to simplify transactions involving...
International liquidity is the ability of a given country to purchase goods and services from
another country. It is a combination of a country's readily available supply of foreign currency,
and the degree to which its assets may be used as a form of payment or converted to the currency
of the country with which it is trading.
International Liquidity
It used to be that the term international liquidity meant the relative amount of resources
available to a nations monetary authorities that could be used to settle a balance of payments
deficit.
In the days of the gold standard, this would mean access to gold that could be used to
redeem a nations currency held by foreigners.
After Bretton Woods and the advent of the dollar-gold exchange standard, liquidity came
to mean access to dollars, either held as reserves or as credit lines, or the SDR system maintained
by the International Monetary Fund.
After 1971, with the abandonment of the dollar-gold exchange standard, as the world
entered an era of managed exchange rates, some floating, some pegged, international

liquidity came to mean the resources available to national monetary authorities to maintain the
value of their currencies as required by their exchange management programs.
Liquidity in a post-gold-standard world
After the Asian financial crises of 1997, it became clear that with globalization and open
economies, national monetary authorities often no longer had even nominal control over their
exchange rates.The international currency is determined by exporters As countries abandoned the
licensing of imports, exports, and international credit and investment operations, control of
foreign exchange assets passed to the private sector.
For countries operating without exchange licensing, the access to resources needed to
settle a balance of payments deficit, no longer were managed by central banks, but were
controlled by private businesses and individuals.
Under liberal trading systems, central banks often do not even have a way to accurately
measure foreign exchange assets controlled by private citizens, much less the ability to determine
the access of the private sector to international lines of credit.
International Liquidity and Foreign Aid
Before the end of this year, the Special Drawing Rights machinery of the International
Monetary Fund should come into operation, ushering in a new era of multilaterally created
international reserves. This is no small matter. The international community has not heretofore
created anything so deadly serious as money.
Nor will creation begin on a niggling scale. The principal financial countries agreed in
July to support activation of $9.5 billion in this new international money over the next three
years, and the other members of the Fund will surely go along with this decision. This quite
respectable sum adds new interest to an old issue: Is it practical to link a man-made stream of
liquidity to foreign aid? At a time of faltering foreign aid, the issue takes on added importance.
It is an intriguing question. Nevertheless, it should not obscure the fact that the primary
interest of all countries-rich and poor alike-lies in the success of Special Drawing Rights as a
basic reform of the international monetary system, and specifically, as a means of avoiding
growing restrictions on trade, aid and investment. From this standpoint, the new reserves will
come none too soon. Gold and dollars have dried up as sources of new international liquidity.
Gold fell victim to the persistently held speculative dogma that the monetary price would
have to rise. This credo was so stubbornly believed that in recent years new gold production went
largely into private hands-as a bet on a rise in price-rather than to monetary reserves. During the
four months of speculative madness that followed devaluation of sterling in November 1967, the
international monetary system actually lost over $3 billion in gold reserves to the private market.
When the active gold-pool countries decided in March 1968 to insulate monetary gold from these
private pressures, the drain stopped. Under the two-tier arrangement they set up, the world's
stock of monetary gold is kept virtually stable, remaining by far the largest single element in total

reserves, but new gold production is for all practical purposes demonetized. It moves haltingly,
but inexorably, into the market to satisfy the variety of demands for gold as a commodity, at
whatever price these demands will support. It is no longer, however, a serious potential source of
new international liquidity.
Liquidity: Liquidity is a term which can be used to mean the same as cash, as in liquid assets.
Liquidity generally refers to the ease with which assets may be converted into cash or the amount
of cash available to an individual or an entity, such as a company or a government, at any given
time.
Liquid Assets: Liquid asset describes resources of cash as well as securities which can be easily
sold in order to obtain their cash-equivalent value. Cash resources include physical currency,
checking accounts and certain types of savings accounts. Soluble securities include short-term
money market items as well as bonds.
International Liquidity and Trade: The wide effects of globalization have impelled countries
to engage in trade on an unprecedented scale. To this extent, global economic growth and
consequent regional prosperity are heavily affected by countries' supplies of foreign currency and
reserves of liquid assets, such as precious metals.
International Liquidity and Exchange Rates: For a given country participating in international
trade, the relative value of its own currency will heavily impact its purchasing power against
another country's currency. In other words, if a country has a stronger currency than a given
trading partner, it will be able to leverage the liquidity of its own currency into greater buying
power upon conversion. By contrast, if a country's own currency is weaker than that of a given
trading partner, its relative liquidity becomes diminished as conversion requires value of the
home currency be divided rather than multiplied.
International Monetary Fund (IMF)
International Monetary Fund (IMF), United Nations (UN) specialized agency,
founded at the Bretton Woods Conference in 1944 to secure international monetary cooperation,
to stabilize currency exchange rates, and to expand international liquidity (access to hard
currencies)
International financial institutions
International financial institutions (IFIs) are financial institutions that have
been established (or chartered) by more than one country, and hence are subjects
of international law. Their owners or shareholders are generally national
governments, although other international institutions and other organizations
occasionally figure as shareholders. The most prominent IFIs are creations of
multiple nations, although some bilateral financial institutions (created by two
countries) exist and are technically IFIs. Many of these are multilateral development
banks