Currency Derivatives &amp Impact of Different Macro-Economic Indicators On Currency Movement

___________________________________________________IMSCD&R Ahmednagar
B.P.H.E.SOCIETY’S
Institute of Management Studies Career Development &
Research, Ahmednagar
A
PROJECT REPORT
ON
“Currency Derivatives & Impact of Different Macro-Economic
Indicators on Currency Movement”
SUBMITTED TO
THE UNIVERSITY OF PUNE
IN
PARTIAL FULFILMENT OF MASTERS DEGREE IN BUSINESS
ADMINISTRATION
UNDER THE GUIDANCE OF
Mr. D.A KULKARNI, M.Com; C.A.
Internal guide and faculty - M.B.A. Department
PREPARED BY
VINIT PATIL
(MBA-II 2010-11)
PREPARED FOR
ANGEL BROKINGS LTD.
CurrencyDerivatives______________________________________________________1
ACKNOWLEDGEMENT
I take this opportunity to express my deep gratitude to all those who

came out of their way to help me during the course of the project.
I express my deep sense of gratitude and profound thanks to our
Director, Mr. M.B MEHTA, for his kind help and support. Then I thank Mr.
D.A KULKARNI, M.Com; C.A. - faculty guide, IMSCD & R Ahmednagar,
for timely help and guidance
I am grateful to express my sincere thanks to my friends and our seniors,
for their help and suggestions throughout the project.
I would also like to thank the Branch Manager & the staff of Angel
Brokings Limited, Pune for their constant support and guidance during my
project work.
Last but not the least I would like to give my best regards from the
bottom of my heart to my parents who have taken a lot of efforts to bring me
at this stage.
Patil
Vinit
ABBREVIATIONS
INITIALS TERMS
SEBI Securities and Exchange Board of India
F&O Future and Option
NSE National Stock Exchange
BSE Bombay Stock Exchange
MCX Multi Commodity Exchange
NCDEX National Commodity Exchange
NSDL National Securities Depository Limited
MTM Marking-to-market
GDP Gross Domestic Product
ATM At-the-money-option
OTC Over The Counter
OPEC The Organization of the Petroleum Exporting

Counties
INDEX
SERIAL PAGE
TOPICS
NO. NO.
1 ABSTRACT 2
2 COMPANY PROFILE 3-6
3 RESEARCH DESIGN & METHODOLOGY 7
3.1 OBJECTIVES OF THE STUDY 8
3.2 SCOPE 9
3.3 TYPE OF DATA 9
3.4 LIMITATIONS 9
3.5 TOOLS OF ANALYSIS 10
4 INTRODUCTION TO THE TOPIC 11
4.1 DEFINITION OF FINANCIALDERIVATIVES 12
4.2 INTRODUCTION TO CURRENCY DERIVATIVES 12
4.3 INTRODUCTION TO CURRENCY FUTURE 13
4.4 OVERVIEW OF THE FOREIGN EXCHANGE MARKET IN INDIA 14
4.5 CURRENCY DERIVATIVE PRODUCTS 14
4.6 FUTURE TERMINOLOGY 15-18
4.7 USES OF CURRENCY FUTURES 19-20
4.8 TRADING PROCESS AND SETTLEMENT PROCESS 21
4.9 REGULATORY FRAMEWORK FOR CURRENCY FUTURES 21
COMPARISION OF FORWARD AND FUTURES CURRENCY
4.10 CONTRACT 22
4.11 CONTRACT SPECIFICATIONS FOR USD - INR 23
4.12 BENEFITS OF CURRANCY FUTURES 24
4.13 CURRENCY MOVEMENT 26-28
5 DATA ANALYSIS AND INTERPRETATION 29-41
6 RESEARCH FINDINGS 42
7 SUGGESTIONS 43
8 CONCLUSION 44
9 BIBLIOGRAPHY 45
10 WEBLIOGRAPHY 45
ABSTRACT
Each country has its own currency through which both national and international
transactions are performed. All the international business transactions involve an exchange
of one currency for another.
Thus, the currency units of a country involve an exchange of one currency for
another. The price of one currency in terms of other currency is known as exchange rate.
The foreign exchange markets of a country provide the mechanism of exchanging
different currencies with one and another, and thus, facilitating transfer of purchasing
power from one country to another.
With the multiple growths of international trade and finance all over the world,
trading in foreign currencies has grown tremendously over the past several decades. Since
the exchange rates are continuously changing, so the firms are exposed to the risk of
exchange rate movements. As a result the assets or liability or cash flows of a firm which
are denominated in foreign currencies undergo a change in value over a period of time due
to variation in exchange rates.
This variability in the value of assets or liabilities or cash flows is referred to
exchange rate risk.. As a result, these firms are increasingly turning to various risk hedging
products like foreign currency futures, foreign currency forwards, foreign currency
options, and foreign currency swaps.
The purpose of the study is to gain knowledge about currency future market &
analyze the impact of different Macro-economic indicators on currency movement over the
past few years for the use of investors i.e.(Hedgers, Traders & Arbitragers) so as to
enhance their knowledge about volatility and possible direction of currency movement to
take a right decision.
COMPANY PROFILE
Angel Broking's tryst with
excellence in customer relations
began in 1987. Today, Angel has
emerged as one of the most
respected Stock-Broking and
Wealth Management Companies in India. With its unique retail-focused stock trading
business model, Angel is committed to providing ‘Real Value for Money’ to all its clients.
The Angel Group is a member of the Bombay Stock Exchange (BSE), National Stock
Exchange (NSE) and the two leading Commodity Exchanges in the country: NCDEX &
MCX. Angel is also registered as a Depository Participant with CDSL.
Vision
To provide best value for money to investors through innovative products,
trading/investments strategies, state of the art technology and personalized service.
Motto
To have complete harmony between quality-in-process and continuous improvement
to deliver exceptional service that will delight our Customers and Clients.
CRM Policy: Customer is King
“A Customer is the most Important Visitor on our premises. He is not dependent on
us, but we are dependent on him. He is not an interruption in our work. He is the purpose
of it. He is not an outsider in our business. He is part of it. We are not doing him a favour
by serving him. He is doing us a favor by giving us an opportunity to do so.” - Mahatma
Gandhi
Business Philosophy
• Ethical practices & transparency in all our dealings
• Customers interest above our own
• Always deliver what we promise
• Effective cost management
Quality Assurance Policy
We are committed to providing world-class products and services which exceed
the expectations of our customers, achieved by teamwork and a process of
continuous improvement.
SERVICES OFFERED
Equity Trading- Angel provides guidance in the exciting world of stock market with
suitable trading solutions and value-added tools and services to enhance your trading
experience.
Online Trading
• Three different online products tailored for traders & investors
• Customized single screen Market Watch for multiple exchanges
• Real-time rates
• Flash news & intra-day calls
• Intra-day & historical charts with technical tools
• Online research
• E-broking & back-office software training
Quality Research
• Wide range of daily, weekly and special Research reports
• Expert Sector Analysts with professional industry experience
Advisory
• Real-time market information with News updates
• Investment Advisory services
• Dedicated Relationship Managers
• Portfolio Management Services
Support
• 24x7 Web-enabled Back Office
• Centralized Help Desk
• Live Chat support system
Commodities
• Portfolio Management Services
• Mutual Funds
• Life Insurance
• Personal Loans
• IPO
• Depository Services
• Investment Advisory
CURRENCY TRADING –
Low Commissions: Brokerage fees are very low as the market is highly competitive.
No Middlemen : Futures/Options currency trading does away with the middleman and
allows clients to interact directly on the exchange platform.
Standardized Lot Size : In the futures markets, exchanges determine lot or contract sizes
which are fixed in nature. This allows traders to trade in multiple lots.
Low Transaction Cost : The retail transaction cost (the bid/ask spread) is typically less
than 0.1% under normal market conditions. In large deals, the spread could be as low as
0.07%.
High Liquidity : With an average trading volume of over $4 trillion per day, Forex market
has high liquidity. It means that a trader can enter or exit the market at will in almost any
market condition.
Instant Transactions: This is a very advantageous by-product of high liquidity. Low
Margin, High Leverage: These factors increase the potential for higher profits (and losses).
Online Access: The big boom in Forex came with the advent of online trading platforms.
Interbank Market: The backbone of the Forex market consists of a global network of
dealers. They are mainly major commercial banks that communicate and trade with one
another and with their clients through electronic networks and by telephone. There is no
organized exchange to serve as a central location to facilitate transactions the way the New
York Stock Exchange serves the equity markets. The Forex market operates in a manner
similar to that of the NASDAQ market in the United States. Thus, it is also referred to as an
over-the counter (OTC) market.
Self-regulatory: The Forex market is so vast and has so many participants that no single
entity, not even a Central Bank, can control the market price for an extended period. Even
interventions by mighty Central Banks are becoming increasingly ineffectual and short-
lived. Thus, Central Banks are becoming less and less inclined to intervene and manipulate
currency prices.
No Insider trading: because of the Forex market’s size and non-centralized nature, there
is virtually any chance for ill effects caused by insider trading. Fraud possibilities, at least
against the system as a whole, are significantly less than in any other financial instruments.
Limited Regulation: There is limited governmental influence via regulation in the Forex
markets, primarily because there is no centralized location or exchange.
Milestones
• Angel Broking bagged the coveted ‘Major Volume Driver’ Award by BSE for
2008-09, 2007-2008, 2006-2007, 2005-2006, and 2004-2005.
• May, 2009- Angel Broking wins two prestigious awards for 'Broking House
with Largest Distribution Network' and 'Best Retail Broking House' at Dun &
Bradstreet Equity Broking Awards.
• July, 2006- Angel Broking launches Portfolio Management Services (PMS)
• April, 2004- Angel Broking expands its basket of services by establishing the
Commodity Broking division
• December, 1997- Angel Broking Ltd incorporated as a wealth management,

retail and corporate broking firm.
RESEARCH DESIGN
&
METHODOLOGY
OBJECTIVES OF THE STUDY
1. To study the exchange traded currency future.
2. To study & analyze the impact of different Macro-Economic indicators on Indian

Currency.
• Inflation
• Crude Oil Prices
• Gross Domestic product (GDP)
• S&P CNX Nifty
3. To understand the practical considerations and ways of considering currency

Future price.
4 .To analyze different currency derivatives products
SCOPE
1. Study mainly concentrates on USD/INR EXHANGE RATE contracts though NSE has
introduced trading in currency futures based on
• Euro(EUR)-INR
• Pound Sterling(GBP)-INR
• Japanese Yen (JPY)-INR exchange rates
2. The main factor that affects the USD/INR EXHANGE RATE or any other currency is
the Demand/supply dynamics for the individual currencies. However the Demand/supply
dynamics is influenced by many other factors such as interest rates, inflation, money
supply, trade balance, growth in imports, exports, capital flows, and overall economic
growth in the country and global developments.
Due to time constraints only four major economic indicators are selected for analysis
• Inflation
• Crude Oil Prices
• Gross Domestic product (GDP)
• S&P CNX Nifty
TYPE OF DATA
Primary Data:
1. The data collected from the Live Terminal of Angel Broking Ltd.
2. Firsthand information from Angel Broking staff
Secondary data:
1. The secondary data is also collected from the newspapers, magazines, different
websites report submitted by RBI/SEBI committee and NCFM/BCFM modules
periodicals.
2. A major bulk of the data has been obtained from Angel Broking Ltd.
LIMITATIONS
• Only four economic indicators are selected for the study
• The currency future is new concept and topic related book was not available in
library and market
• Some part of analysis was purely based on the secondary data. So any error in the
secondary data might also affect the study undertaken.
TOOLS OF ANALYSIS
Karl Pearson’s correlation coefficient

In statistics, correlation indicates the strength and direction of a linear relationship
between two random variables.
The quantity r, called the linear correlation coefficient, measures the strength and the
direction of a linear relationship between two variables. The linear correlation coefficient
is sometimes referred to as the Pearson product moment correlation coefficient in honor of
its developer Karl Pearson.
The mathematical formula for computing r is:
Where n is the number of pairs of data.
The value of r is such that -1 < r < +1. The + and – signs are used for positive linear
correlations and negative linear correlations, respectively.
Positive correlation: If x and y have a strong positive linear correlation, r is close to +1.
An r value of exactly +1 indicates a perfect positive fit. Positive values indicate a
relationship between x and y variables such that as values for x increases, values for y also
increase.
Negative correlation: If x and y have a strong negative linear correlation, r is close to
-1. An r value of exactly -1 indicates a perfect negative fit. Negative values indicate a
relationship between x and y such that as values for x increase, values for y decrease.
No correlation: If there is no linear correlation or a weak linear correlation, r is close to
0. A value near zero means that there is a random, nonlinear relationship between the two
variables
INTRODUCTION TO THE TOPIC
DEFINITION OF FINANCIAL DERIVATIVES

Derivatives are financial contracts whose value/price is independent on the behaviour
of the price of one or more basic underlying assets. These contracts are legally binding
agreements, made on the trading screen of stock exchanges, to buy or sell an asset in future.
These assets can be a share, index, interest rate, bond, rupee dollar exchange rate, sugar,
crude oil, soybeans, cotton, coffee and what you have.
A very simple example of derivatives is curd, which is derivative of milk. The price
of curd depends upon the price of milk which in turn depends upon the demand and supply
of milk.
The Underlying Securities for Derivatives are :
 Commodities: Castor seed, Grain, Pepper, Potatoes, etc.
 Precious Metal : Gold, Silver
 Short Term Debt Securities : Treasury Bills
 Interest Rates
 Common shares/stock
 Stock Index Value : NSE Nifty
 Currency : Exchange Rate
INTRODUCTION TO CURRENCY DERIVATIVES
Each country has its own currency through which both national and international
transactions are performed. All the international business transactions involve an
exchange of one currency for another.
For Example,
If any Indian firm borrows funds from international financial market in US dollars for
short or long term then at maturity the same would be refunded in particular agreed
currency along with accrued interest on borrowed money. It means that the borrowed
foreign currency brought in the country will be converted into Indian currency, and when
borrowed fund are paid to the lender then the home currency will be converted into foreign
lender’s currency. Thus, the currency units of a country involve an exchange of one
currency for another.
The price of one currency in terms of other currency is known as exchange rate.
The foreign exchange markets of a country provide the mechanism of exchanging
different currencies with one and another, and thus, facilitating transfer of purchasing
power from one country to another.
With the multiple growths of international trade and finance all over the world,
trading in foreign currencies has grown tremendously over the past several decades. Since
the exchange rates are continuously changing, so the firms are exposed to the risk of
exchange rate movements. As a result the assets or liability or cash flows of a firm which
are denominated in foreign currencies undergo a change in value over a period of time due
to variation in exchange rates.
This variability in the value of assets or liabilities or cash flows is referred to
exchange rate risk. Since the fixed exchange rate system has been fallen in the early
1970s, specifically in developed countries, the currency risk has become substantial for
many business firms. As a result, these firms are increasingly turning to various risk
hedging products like foreign currency futures, foreign currency forwards, foreign
currency options, and foreign currency swaps.
INTRODUCTION TO CURRENCY FUTURE
A futures contract 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.
When the underlying asset is a commodity, e.g. Oil or Wheat, the contract is termed a
“Commodity futures contract
. When the underlying is an exchange rate, the contract is termed a “Currency futures
contract”.
Currency futures contract
In other words, it is a contract to exchange one currency for another currency at a
specified date and a specified rate in the future.
Therefore, the buyer and the seller lock themselves into an exchange rate for a
specific value or delivery date. Both parties of the futures contract must fulfil their
obligations on the settlement date.
Currency futures can be cash settled or settled by delivering the respective obligation
of the seller and buyer. All settlements however, unlike in the case of OTC markets, go
through the exchange. Currency futures are a linear product, and calculating profits or
losses on Currency Futures will be similar to calculating profits or losses on Index
futures. In determining profits and losses in futures trading, it is essential to know both the
contract size (the number of currency units being traded) and also what the tick value is. A
tick is the minimum trading increment or price differential at which traders are able to
enter bids and offers. Tick values differ for different currency pairs and different
underlying.
OVERVIEW OF THE FOREIGN EXCHANGE MARKET IN INDIA

During the early 1990s, India embarked on a series of structural reforms in the
foreign exchange market. The exchange rate regime, that was earlier pegged, was partially
floated in March 1992 and fully floated in March 1993. The unification of the exchange
rate was instrumental in developing a market-determined exchange rate of the rupee and
was an important step in the progress towards total current account convertibility, which
was achieved in August 1994.
The following four currency futures are allowed on the Indian exchanges.
Symbol Country Currency Nickname
USD United States Dollar Geenback
EUR Euro members Euro Fiber
JYP Japan Yen Yen
GBP Great Britain Pound Cable
 India is 16th largest forex market in the world. The daily global FX turnover is USD 4
Trillion.
 Market Share in World FX Market has increased from 0.1% (in 1998) to 0.9%
( 2009)
 Daily FX Indian Market volume is $50 bn
 59% of the total market USD – INR
 Daily Currency Futures Turnover – Rs 32000 Crs. (NSE + MCX –SX)
 Main trading centers are London, NY, Tokyo, Singapore &now In MUMBAI
 USD-INR volatility has seen an average increase of over 9% p.a.
 Available FX Derivatives: Futures, Forwards, Options & Swaps
CURRENCY DERIVATIVE PRODUCTS

Derivative contracts have several variants. The most common variants are forwards,
futures, options and swaps. We take a brief look at various derivatives contracts that have
come to be used.
 FORWARD:
A forward contract is customized contract between two entities, where settlement
takes place on a specific date in the future at today’s pre-agreed price. The exchange rate
is the time the contract is entered into. This is known as forward exchange rate or simply
forward rate.
 FUTURE :
A currency futures contract provides a simultaneous right and obligation to buy and
sell a particular currency at a specified future date, a specified price and a standard
quantity. Future contracts are special types of forward contracts in the sense that they are
standardized exchange-traded contracts.
 SWAP
Swap is private agreements between two parties to exchange cash flows in the future
according to a prearranged formula.
 OPTIONS:
In other words, a foreign currency option is a contract for future delivery of a
specified currency in exchange for another in which buyer of the option has to right to buy
(call) or sell (put) a particular currency at an agreed price for or within specified period.
FUTURE TERMINOLOGY
SPOT PRICE:
The price at which an asset trades in the spot market. The transaction in which
securities and foreign exchange get traded for immediate delivery. Since the exchange of
securities and cash is virtually immediate, the term, cash market, has also been used to
refer to spot dealing. In the case of USD/INR, spot value is T + 2.
FUTURE PRICE:
The price at which the future contract traded in the future market.
CONTRACT CYCLE:
The period over which a contract trades. The currency future contracts in Indian
market have one month, two month, and three month up to twelve month expiry cycles. In
NSE/BSE will have 12 contracts outstanding at any given point in time.
VALUE DATE / FINAL SETTELMENT DATE:
The last business day of the month will be termed the value date /final settlement date
of each contract. The last business day would be taken to the same as that for inter bank
settlements in Mumbai. The rules for inter bank settlements, including those for ‘known
holidays’ and would be those as laid down by Foreign Exchange Dealers Association of
India (FEDAI).
EXPIRY DATE:
It is the date specified in the futures contract. This is the last day on which the
contract will be traded, at the end of which it will cease to exist. The last trading day will
be two business days prior to the value date / final settlement date.
CONTRACT SIZE:
The amount of asset that has to be delivered under one contract, also called as lot
size. In case of USD/INR it is USD 1000.
COST OF CARRY :
The relationship between futures prices and spot prices can be summarized in terms
of what is known as the cost of carry. This measures the storage cost plus the interest that
is paid to finance or ‘carry’ the asset till delivery less the income earned on the asset. For
equity derivatives carry cost is the rate of interest.
INITIAL MARGIN:
When the position is opened, the member has to deposit the margin with the clearing
house as per the rate fixed by the exchange which may vary asset to asset. Or in another
words, the amount that must be deposited in the margin account at the time a future
contract is first entered into is known as initial margin.
MARKING TO MARKET:
At the end of trading session, all the outstanding contracts are reprised at the
settlement price of that session. It means that all the futures contracts are daily settled, and
profit and loss is determined on each transaction. This procedure, called marking to
market, requires that funds charge every day. The funds are added or subtracted from a
mandatory margin (initial margin) that traders are required to maintain the balance in the
account. Due to this adjustment, futures contract is also called as daily reconnected
forwards.
MAINTENANCE MARGIN:
Member’s account are debited or credited on a daily basis. In turn customers’
account are also required to be maintained at a certain level, usually about 75 percent of
the initial margin, is called the maintenance margin. This is somewhat lower than the
initial margin.
This is set to ensure that the balance in the margin account never becomes negative.
If the balance in the margin account falls below the maintenance margin, the investor
receives a margin call and is expected to top up the margin account to the initial margin
level before trading commences on the next day.
TICK SIZE/PIP & TICK VALUE
Tick Size is the minimum tradable price movement that an exchange makes in a
currency pair. For example, 1 pip=one hundredth of 1%=0.0001.
Tick value is the change in value of 1 lot of the future contract for every tick
movement.
For example; If a trader takes long position in 1lot of USD/INR currency future
contract at 48.5020 & if future price increased by 1 paisa to 48.5125, then the trader would
make a profit of Rs 10 i.e. 1 pip = 0.0001 100pips = INR0.01 per USD Hence profit is
0.01*1000 = INR 10
BID PRICE & ASK PRICE:
The Bid price is the highest or the best among all prices that the buyers are willing to
pay to the seller at that particular period of time.
The Ask price is the price at which seller at the exchange are ready to sell their
currency to the buyers.
LONG POSITION & SHORT POSITION:

Taking a long position in currency futures means a trader will “buy” a futures
contract with the expectation that the price will rise in the future.
On the other hand taking a short position means that a trader will “sell” a futures
contract with the expectation that the price will decrease in the future.
BASIS:
Basis refers to difference between the spot rate & the future contract price
BASE CURRENCY & QUOTE CURRENCY:
The first currency in the currency pair is referred to as the base currency & the
second currency in a currency pair is called the quote currency. In USD/INR currency pair
USD- Base currency & INR-Quote currency.
FOREIGN EXCHANGE QUOTATIONS
Foreign exchange quotations can be confusing because currencies are quoted in terms
of other currencies. It means exchange rate is relative price.
For Example,
If one US dollar is worth of Rs. 45 in Indian rupees then it implies that 45 Indian
rupees will buy one dollar of USA, or that one rupee is worth of 0.022 US dollar which is
simply reciprocal of the former dollar exchange rate.
Direct- $1 = Rs. 45.7250 Indirect. Re 1 = $ 0.02187
USES OF CURRENCY FUTURES

HEDGING:
Exchange-traded currency futures are used to hedge against the risk of rate volatilities
in the foreign exchange markets. Here, we give two examples to illustrate the concept and
mechanism of hedging
Suppose an edible oil importer wants to import edible oil worth USD 100,000 and
places his import order on July 15, 2008, with the delivery date being 4 months ahead. At
the time when the contract is placed, in the spot market, one USD was worth say INR
44.50. But, suppose the Indian Rupee depreciates to INR 44.75 per USD when the
payment is due in October 2008, the value of the payment for the importer goes up to INR
4,475,000 rather than INR 4,450,000. The hedging strategy for the importer, thus, would
be:
Current Spot Rate (15th July '08) : 44.5000
Buy 100 USD - INR Oct '08 Contracts (1000 * 44.5500) * 100 (Assuming the Oct '08
on 15th July ’08 contract is trading at 44.5500 on 15th July, '08)
Sell 100 USD - INR Oct '08 Contracts : 44.7500

in Oct '08 Profit/Loss (futures market) 1000 * (44.75 – 44.55) * 100 = 20,000
Purchases in spot market @ 44.75 Total : 44.75 * 100,000

cost of hedged transaction 100,000 * 44.75 – 20,000 = INR 4,455,000
SPECULATION:
Take the case of a speculator who has a view on the direction of the market. He
would like to trade based on this view. He expects that the USD/INR rate presently at
Rs.42, is to go up in the next two-three months. How can he trade based on this belief? In
case he can buy dollars and hold it, by investing the necessary capital, he can profit if say
the Rupee depreciates to Rs.42.50. Assuming he buys USD 10000, it would require an
investment of Rs.4,20,000. If the exchange rate moves as he expected in the next three
months, then he shall make a profit of around Rs.5000. This works out to an annual
return of around 4.76%. It may please be noted that the cost of funds invested is not
considered in computing this return.
A speculator can take exactly the same position on the exchange rate by using futures
contracts. Let us see how this works. If the INR/USD is Rs.42 and the three month futures
trade at Rs.42.40. The minimum contract size is USD 1000. Therefore the speculator
may buy 10 contracts. The exposure shall be the same as above USD 10000. Presumably,
the margin may be around Rs.21, 000. Three months later if the Rupee depreciates to Rs.
42.50 against USD, (on the day of expiration of the contract), the futures price shall
converge to the spot price (Rs. 42.50) and he makes a profit of Rs.1000 on an investment
of Rs.21, 000. This works out to an annual return of 19 %. Because of the leverage they
provide, futures form an attractive option for speculators.
ARBITRAGE:
Arbitrage is the strategy of taking advantage of difference in price of the same or
similar product between two or more markets. That is, arbitrage is striking a combination
of matching deals that capitalize upon the imbalance, the profit being the difference
between the market prices..
One of the methods of arbitrage with regard to USD-INR could be a trading strategy
between forwards and futures market. As we discussed earlier, the futures price and
forward prices are arrived at using the principle of cost of carry. Such of those entities who
can trade both forwards and futures shall be able to identify any mis-pricing between
forwards and futures. If one of them is priced higher, the same shall be sold while
simultaneously buying the other which is priced lower. If the tenor of both the contracts is
same, since both forwards and futures shall be settled at the same RBI reference rate, the
transaction shall result in a risk less profit.
TRADING PROCESS AND SETTLEMENT PROCESS
Like other future trading, the future currencies are also traded at organized
exchanges. The following diagram shows how operation take place on currency future
market:
It has been observed that in most futures markets, actual physical delivery of the
underlying assets is very rare and hardly it ranges from 1 percent to 5 percent. Most often
buyers and sellers offset their original position prior to delivery date by taking an opposite
positions. This is because most of futures contracts in different products are predominantly
speculative instruments.
REGULATORY FRAMEWORK FOR CURRENCY FUTURES

With the expected benefits of exchange traded currency futures, it was decided in a
joint meeting of RBI and SEBI on February 28, 2008, that an RBI-SEBI Standing
Technical Committee on Exchange Traded Currency and Interest Rate Derivatives was
constituted.
COMPARISION OF FORWARD AND FUTURES CURRENCY CONTRACT
BASIS FORWARD FUTURES

Structured as per requirement of the
Size Standardized
parties
Delivery Date Tailored on individual needs Standardized
Open auction among buyers

Method of Established by the bank or broker
and seller on the floor of
transaction through electronic media
recognized exchange.
Banks, brokers,
Banks, brokers, forex dealers,
multinational companies,
multinational companies,
Participants institutional investors, small
institutional investors, arbitrageurs,
traders, speculators,
traders, etc.
arbitrageurs, etc.
None as such, but compensating
Margins Margin deposit required
bank balanced may be required
Tailored to needs: from one week to
Maturity Standardized
10 years
Actual delivery or offset with cash Daily settlement to the
Settlement settlement. No separate clearing market and variation margin
house requirements
At recognized exchange
Over the telephone worldwide and
Market place floor with worldwide
computer networks
communications
Open to any one who is in
Limited to large customers banks,
Accessibility need of hedging facilities or
institutions, etc.
has risk capital to speculate
More than 90 percent settled by Actual delivery has very less
Delivery
actual delivery even below one percent
Highly secured through
Secured Risk is high being less secured
margin deposit.
CONTRACT SPECIFICATIONS FOR USD - INR

Symbol USD/INR
Instrument Type FUTCUR
Unit of trading 1 (1 unit denotes 1000 USD)
Underlying USD
Quotation/Price Quote Rs. per USD
Tick size 0.25 paise or INR 0.0025
Monday to Friday
Trading hours
9:00 a.m. to 5:00 p.m.
Contract trading cycle 12 month trading cycle.
Two working days prior to the last business day of the
Last trading day
expiry month at 12 noon.
Last working day (excluding Saturdays) of the expiry
month.
Final settlement day
The last working day will be the same as that for
Interbank Settlements in Mumbai.
Theoretical price on the 1st day of the contract. On all
Base price
other days, DSP of the contract.
Minimum initial margin 1.75% on first day & 1% thereafter.
Extreme loss margin 1% of MTM value of gross open position.

Daily settlement : T + 1
Settlement
Final settlement : T + 2
Mode of settlement Cash settled in Indian Rupees
DSP shall be calculated on the basis of the last half an
Daily settlement price hour weighted average price of such contract or such other
(DSP) price as may be decided by the relevant authority from
time to time.
Final settlement price
RBI reference rate
(FSP)
BENEFITS OF CURRANCY FUTURES
 Greater accessibility to potential participants (Online / Offline platforms).
 Standardized Contracts, small lot size – US$ 1,000. Encourages retail and SME
participation.
 Electronic Settlement of MTM Profits / Losses: Control and track losses.
 No counterparty default risk.
 Large number of market participants.
 High Transparency – Real time dissemination of prices.
 No requirement of underlying document to book the FCY.
 Cost efficient: Low brokerage thus lower transaction cost.
 Intraday volatility (43 Bps): Short term profits for the traders.
 Lower margins: 3- 3.5% of the contract value compared to average of 10- 15%
on index/stock futures.
Indian Currency Futures Market-Present Status
Currency Futures trading was launched in India on 29th Aug, 2008 on NSE.NSE &
MCX’SX are the major two exchanges presently.BSE is almost non-active.
Times of India- Aug 31st, 2009

It has been exactly one year since the trading in Rupee – Dollar futures was
introduced in India. Since then the currency derivative segment has grown by over 1500%
in terms of daily average turnover. From about $ 60 million per day in August – September
2008, the current rate is nearly $1 billion per day in each of the two.
The Financial Express – Feb 6th, 2010

The total turnover in the segment has increased incredibly from $ 3.4 bn in
October2008 to $84 bn in December 2009. The average daily volume reached $4 bn in
December 2009. India had witnessed enhanced FIIs thus Indian currency is becoming an
important currency in world market . According to BIS, the total share of Indian rupee in
total daily average foreign exchange has increased from 0.1% in 1998 to 0.9% in April
2007. Since the exchange rate is volatile during the last few years and hence increased
importance of ETF.
Currency Movement
Major Events in International and Indian Monetary System
1. Free float of currencies - 1973.

2. Oil crisis in 1973 - quadrupling of oil prices
3. European Currencies float against US$ - 1978
4. Post emergency years
5. Majority Govt. formed - 1984-85
6. Liberalization of Indian Economy: devaluation of INR - 1991
7. East and South East Asian Currency crisis - 1997
8. Nuclear tests by India - 1998
9. Robust economic growth in India
10. High crude oil and commodity prices
Currency Movement Impact
Importer Exporter
Imports Goods & Services Exports Goods & Services
Payments in foreign currency Receivables in foreign currency
Buys currency from the bank Sells currency to the bank
Re - STRONG → Gain Re - STRONG → Loss
Re - WEAK → Loss Re - WEAK → Gain
Factors: Appreciation of INR
General trend for

Events likely to impact Impact on Impact on
demand/supply of
USD/INR rate USD INR
USD
Increase in exports of Excess inflow of USD

Depreciates Appreciates
India in the country
RBI is selling USD to Supply of USD

Depreciates Appreciates
meet demand for the dollar increases
NRI Forex remittance is

Increase in USD inflow Depreciates Appreciates
increasing
Positive trade balance Increase in USD inflow Depreciates Appreciates
Factors: Depreciation of INR
Events likely to
General trend for Impact on Impact on
impact USD/INR
demand/supply of USD USD INR
rate
Increase in imports of Demand for USD
Appreciates Depreciates
India increases
Rise in global prices Demand for USD rises
of commodities due to costlier imports
FIIs buying back
Excessive USD outflow Appreciates Depreciates
USD
RBI is buying USD
to absorb excess Absorption of excess
USD due to forex USD liquidity
inflows
DATA ANALYSIS &

INTERPRETATION
TABLE NO. – I
Table of Correlation between Rates of Inflation & USD/INR EXHANGE Rate
Annual GDP
Averages of growth
Year X Y XY X2 Y2
Currency (annual
rate %)
1999 43.11 7.387 - - - -
2000 44.95 4.03 4.268 -45.441 -193.951 18.217 2064.926
29.438 146.700
2001 47.19 5.216 4.983 3 4 24.833 866.6154
2002 48.6 3.766 2.987 -27.795 -83.0508 8.9276 772.5912
122.22
2003 46.55 8.37 -4.21 6 -515.564 17.792 14939.31
2.90305
2004 45.33 8.278 -2.62 -1.1076 7 6.8687 1.226961
12.975
2005 44.11 9.352 -2.69 2 -34.9213 7.2434 168.3581
3.3900 9.37618
2006 45.33 9.669 2.765 2 3 7.6497 11.49229
56.1271
2007 41.29 9.06 -8.91 -6.2976 6 79.431 39.66019
2008 43.41 6.074 5.134 -32.951 -169.188 26.362 1085.827
2009 48.35 5.36 11.37 -11.766 -133.906 129.5 138.462
13.07 326.82
∑= 42.668 -915.48 20088.5
6 7
USD/INRVs InflationRate
Annual Averages of USDINR Rate Inflation Rate (annual %)
47.19 48.6 48.35

44.95 46.55 45.33 45.33
43.11 44.11 43.41
41.29
8.35 10.14
4.67 4.39 5.8 6.37
4 3.68 3.8 3.77 4.24
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
SAMPLE CALCULATIONS:
• USD/INR Growth rate for Year-2000
= {[(44.95-43.11)/43.11]*100}
=4.268151
• Change in Inflation Rate for Year-2000
= {[(4.67-4)/4]*100}
=-14.34
Calculation of Coefficient Of Correlation between Inflation & Exchange Rate:
Where;
x = Annual Growth Rate of USD/INR EXHANGE Rate
y = Annual Growth Rate of Inflation Rate
n = Number of Observations = 11
(11*339.47) – [(13.07)*(94.32)]
r = ____________________________________________________
__________________________ ___________________________
{(11)*(326.82) – 170.82} * {(11)*(3854.72) – 8896.26}
r = 0.2951
INTERPRETATION:
The coefficient correlation (r = 0.2951) shows that there is a positive correlation.
Though there is no strong correlation between two. Positive values indicate a relationship
between x and y variables such that as rate of inflation increases, values of USD/INR
exchange rate also increases.
If domestic inflation rate is higher
• Domestic goods are costlier than foreign goods
• It encourages import of foreign goods
• Foreign goods are cheaper
• More demand for foreign currencies
• Foreign currencies are costlier
• Decline in the value of domestic currencies
More demand for foreign currency results in Depreciation of Domestic currency.
Thus higher Inflation leads to weakening of Domestic Currency.
TABLE NO. – II
Table of Correlation between USD/INR EXHANGE Rate & S&P CNX Nifty
Monthly
Monthly
Averages of
Month Averages X Y XY X2 Y2
USD/INR
of Nifty
Rate
Jun-07 40.77 4222.17
Jul-07 40.41 4474.18 0.883 5.968 5.27 0.779 35.625
Aug-07 40.81 4301.35 0.989 -3.86 -3.82 0.979 14.921
Sep-07 40.34 4659.92 -1.15 8.336 -9.6 1.326 69.492
Oct-07 39.51 5456.61 -2.05 17.09 -35.1 4.233 292.29
Nov-07 39.44 5748.57 -0.17 5.35 -0.94 0.031 28.628
Dec-07 39.44 5963.57 0 3.74 0 0 13.988
Jan-08 39.37 5756.35 -0.17 -3.47 0.616 0.031 12.073
Feb-08 39.72 5201.56 0.889 -9.63 -8.56 0.79 92.888
Mar-08 40.35 4769.49 1.586 -8.3 -13.1 2.515 68.998
Apr-08 40.02 4901.9 -0.81 2.776 -2.27 0.668 7.7072
May-08 42.12 5028.66 5.247 2.585 13.56 27.53 6.687
Jun-08 42.82 4463.78 1.661 -11.2 -18.6 2.761 126.18
Jul-08 42.83 4121.6 0.023 -7.66 -0.17 0 58.762
Aug-08 42.94 4417.11 0.256 7.169 1.841 0.065 51.405
Sep-08 45.56 4206.68 6.101 -4.76 -29 37.22 22.695
Oct-08 48.64 3210.22 6.76 -23.6 -160 45.7 561.1
Nov-08 49 2834.78 0.74 -11.6 -8.65 0.547 136.77
Dec-08 48.64 2895.79 -0.73 2.152 -1.58 0.539 4.6319
Jan-09 48.83 2854.36 0.39 -1.43 -0.55 0.152 2.0468
Feb-09 49.22 2819.2 0.798 -1.23 -0.98 0.637 1.5173
Mar-09 51.23 2802.27 4.083 -0.6 -2.45 16.67 0.3606
Apr-09 50.06 3359.82 -2.28 19.89 -45.4 5.215 395.86
May-09 47.29 3957.96 -5.53 17.8 -98.5 30.61 316.93
Jun-09 47.77 4436.37 1.015 12.08 12.26 1.03 146.1
Jul-09 48.47 4343.09 1.465 -2.1 -3.08 2.147 4.421
Aug-09 48.34 4571.1 -0.26 5.249 -1.4 0.071 27.561
Sep-09 48.43 4859.3 0.186 6.304 1.173 0.034 39.75
Oct-09 46.72 4994.1 -3.53 2.774 -9.79 12.46 7.6954
Nov-09 46.57 4953.53 -0.32 -0.81 0.26 0.103 0.6599
Dec-09 46.63 5099.74 0.128 2.951 0.38 0.016 8.7121
Jan-10 45.96 5156.22 -1.43 1.107 -1.59 2.064 1.2265
Feb-10 46.32 4839.57 0.783 -6.14 -4.81 0.613 37.713
Mar-10 45.5 5178.14 -1.77 6.995 -12.3 3.133 48.942
Apr-10 44.5 5294.75 -2.19 2.251 -4.94 4.83 5.0713
May-10 45.8 5052.97 2.921 -4.56 -13.3 8.534 20.852
Jun-10 46.56 5187.77 1.659 2.667 4.426 2.753 7.1168
16.11 34.05 451.3 216.8
∑= 2677.42
3 3 4 4
USD/INR Vs S&P CNX Nifty X-%change in USDINR

20 over the previoud
month
15
Y- %Change in Nifty over

10
the previous month
5
-5
-10
-15
m
iu %
rtp
g
n
h
o
e
a
v
c
-20
r = -0.625
Interpretation- The coefficient correlation (r = -0.625) shows that there is a negative

correlation. As x and y have a strong negative linear correlation, r is close to -1. .Negative
values indicate a relationship between USD/INR EXHANGE Rate and S&P CNX Nifty
such that as values for x increase, values for y decrease.
One of the reasons for Nifty Index to go up is investment made by Foreign
Institutional Investors (FIIs).Thus FIIs have to sell Dollar to buy Indian rupee.
More demand for Domestic currency and excessive supply of foreign currency results
in Appreciation of Domestic currency.
TABLE NO. – III
Monthly
Averages Monthly Averages
Month of of Crude Oil X Y XY
___________________________________________________IMSCD&R X2
AhmednagarY2
Currency Prices(US$/Barrel)
rate between USD/INR EXHANGE Rate & Crude Oil Prices (US$/Barrel)
Table of Correlation
Jun-07 40.77 66.89
7.47 0.77
Jul-07 40.41 71.89 -0.88 4 -6.6 9 55.875
0.98 0.97
Aug-07 40.81 68.7 9 -4.43 -4.392 9 19.689
7.96 1.32
Sep-07 40.34 74.17 -1.15 2 -9.169 6 63.395
6.94 4.23
Oct-07 39.51 79.32 -2.05 3 -14.28 3 48.212
0.03
Nov-07 39.44 88.84 -0.17 12 -2.126 1 144.04
Dec-07 39.44 87.05 0 -2.01 0 0 4.0596
1.49 0.03
Jan-08 39.37 88.35 -0.17 3 -0.265 1 2.2302
0.88 2.59
Feb-08 39.72 90.64 9 1 2.3042 0.79 6.7182
1.58 2.51
Mar-08 40.35 90.02 6 -0.68 -1.084 5 0.4678
16.8 0.66
Apr-08 40.02 105.16 -0.81 1 -13.75 8 282.86
5.24 13.5 27.5
May-08 42.12 119.38 7 2 70.956 3 182.85
1.66 7.49 2.76
Jun-08 42.82 128.33 1 7 12.459 1 56.206
0.02 2.25
Jul-08 42.83 131.22 3 2 0.0525 0 5.0715
0.25 0.06
Aug-08 42.94 112.4 6 -14.3 -3.683 5 205.7
6.10 37.2
Sep-08 45.56 96.84 1 -13.8 -84.46 2 191.64
Oct-08 48.64 69.16 6.76 -28.5 -193.2 45.7 817
0.54
Nov-08 49 49.75 0.74 -28 -20.77 7 787.66
0.53
Dec-08 48.64 38.6 -0.73 -22.4 16.466 9 502.3
7.61 0.15
Jan-09 48.83 41.54 0.39 6 2.9752 2 58.012
0.79 0.63
Feb-09 49.22 41.41 8 -0.31 -0.249 7 0.0979
4.08 10.5 16.6
Mar-09 51.23 45.78 3 5 43.095 7 111.36
9.65 5.21
Apr-09 50.06 50.2 -2.28 4 -22.04 5 93.216
30.6
May-09 47.29 56.98 -5.53 13.5 -74.73 1 182.41
1.01 19.9
Jun-09 47.77 68.36 5 7 20.271 1.03 398.87
1.46 2.14
Jul-09 48.47 64.58 5 -5.52 -8.102 7 30.575
10.4 0.07
Aug-09 48.34 71.34 -0.26 6 -2.807 1 109.57
0.18 0.03
Sep-09 48.43 67.17 6 -5.84 -1.088 4 34.166
8.17 12.4
Oct-09 46.72 72.66 -3.53 3 -28.85 6 66.802
r = -0.404
Interpretation-
The coefficient correlation (r = -0.404) shows that there is a negative correlation.
Though there is no strong correlation between two. Negative values indicate a relationship
between USD/INR EXHANGE Rate and Crude Oil Prices such that as Crude Oil Price
decreases, values for USD/INR EXHANGE Rate increases & vice-versa.
Thus Indian Rupee has appreciated with rise in crude oil prices.
TABLE NO. – IV
Table of Correlation between USD/INR EXHANGE Rate & GDP growth (annual %)
Annual
Averages GDP
Year of growth X Y XY X2 Y2
Currency (annual %)
rate
1999 43.11 7.387 - - - -
2000 44.95 4.03 4.268 -45.441 -193.951 18.217 2064.926
29.438 146.700
2001 47.19 5.216 4.983 3 4 24.833 866.6154
2002 48.6 3.766 2.987 -27.795 -83.0508 8.9276 772.5912
122.22
2003 46.55 8.37 -4.21 6 -515.564 17.792 14939.31
2.90305
2004 45.33 8.278 -2.62 -1.1076 7 6.8687 1.226961
12.975
2005 44.11 9.352 -2.69 2 -34.9213 7.2434 168.3581
3.3900 9.37618
2006 45.33 9.669 2.765 2 3 7.6497 11.49229
56.1271
2007 41.29 9.06 -8.91 -6.2976 6 79.431 39.66019
2008 43.41 6.074 5.134 -32.951 -169.188 26.362 1085.827
2009 48.35 5.36 11.37 -11.766 -133.906 129.5 138.462
13.07
∑= 42.668 -915.48 326.827 20088.5
6
r = -0.388
Interpretation-
The coefficient correlation (r = -0.388) shows that there is a negative correlation.
Though there is no strong correlation between two .Negative values indicate a relationship
between USD/INR EXHANGE Rate and GDP Growth Rate such that as values for
USD/INR EXHANGE Rate increases, GDP rate shows declining trend.
• The gross domestic product (GDP) is a measure of a country's overall economic
output. It is the market value of all final goods and services made within the borders
of a country in a year.
• Higher GDP means increasing export & decreasing import which results in positive
trade balance. Lower demand for foreign currency
Thus higher GDP leads to appreciation of Domestic Currency
PRICING FUTURES –i) INTEREST RATE PARITY PRINCIPLE

For currencies which are fully convertible, the rate of exchange for any date other
than spot is a function of spot and the relative interest rates in each currency. The
assumption is that, any funds held will be invested in a time deposit of that currency.
Hence, the forward rate is the rate which neutralizes the effect of differences in the interest
rates in both the currencies. The forward rate is a function of the spot rate and the interest
rate differential between the two currencies, adjusted for time. In the case of fully
convertible currencies, having no restrictions on borrowing or lending of either currency
the forward rate can be calculated as follows;
Future Rate = (spot rate) {1 + interest rate on home currency * period}/

{1 + interest rate on foreign currency * period}
For example,
Assume that on January 10, 2002, six month annual interest rate was 7 percent p.a.
on Indian rupee and US dollar six month rate was 6 percent p.a. and spot ( Re/$ ) exchange
rate was 46.3500. Using the above equation the theoretical future price on January 10,
2002, expiring on June 9, 2002 is : the answer will be Rs.46.575 per dollar. Then, this
theoretical price is compared with the quoted futures price on January 10, 2002 and the
relationship is observed.
PRICING FUTURES – ii) COST OF CARRY MODEL
Pricing of futures contract is very simple. Using the cost-of-carry logic, we calculate
the fair value of a futures contract. Every time the observed price deviates from the fair
value, arbitragers would enter into trades to capture the arbitrage profit. This in turn would
push the futures price back to its fair value.
The cost of carry model used for pricing futures is given below:
F=Se^(r-rf)T
Where:
r = Cost of financing (using continuously compounded interest rate)
rf = one year interest rate in foreign
T = Time till expiration in years
E = 2.71828
This relationship is known as interest rate parity relationship and is used in

international finance. To explain this, let us assume that one year interest rates in US and
India are say 7% and 10% respectively and the spot rate of USD in India is Rs. 44.
From the equation above the one year forward exchange rate should be
F = 44 * e^ (0.10-0.07)*1=45.34
It may be noted from the above equation, if foreign interest rate is greater than the
domestic rate i.e. rf > r, then F shall be less than S. The value of F shall decrease further as
time T increase. If the foreign interest is lower than the domestic rate, i.e. rf < r, then value
of F shall be greater th77an S. The value of F shall increase further as time T increases.
HEDGING WITH CURENCY FUTURES

Exchange rates are quite volatile and unpredictable, it is possible that
anticipated profit in foreign investment may be eliminated, rather even may incur loss.
Thus, in order to hedge this foreign currency risk, the traders’ often use the currency
futures. For example, a long hedge (I.e.., buying currency futures contracts) will protect
against a rise in a foreign currency value whereas a short hedge (i.e., selling currency
futures contracts) will protect against a decline in a foreign currency’s value.
It is noted that corporate profits are exposed to exchange rate risk in many situation.
For example, if a trader is exporting or importing any particular product from other
countries then he is exposed to foreign exchange risk. Similarly, if the firm is borrowing or
lending or investing for short or long period from foreign countries, in all these situations,
the firm’s profit will be affected by change in foreign exchange rates. In all these
situations, the firm can take long or short position in futures currency market as per
requirement.
The general rule for determining whether a long or short futures position will hedge a
potential foreign exchange loss is:
Loss from appreciating in Indian rupee= Short hedge
Loss from depreciating in Indian rupee= Long hedge
THE CHOICE OF UNDERLYING CURRENCY

The first important decision in this respect is deciding the currency in which futures
contracts are to be initiated. For example, an Indian manufacturer want to purchase some
raw materials from Germany then he would like future in German mark since his exposure
in straight forward in mark against home currency (Indian rupee). Assume that there is no
such future (between rupee and mark) available in the market then the trader would choose
among other currencies for the hedging in futures. Which contract should he choose?
Probably he has only one option rupee with dollar. This is called cross hedge.
CHOICE OF THE MATURITY OF THE CONTRACT
The second important decision in hedging through currency futures is selecting the
currency which matures nearest to the need of that currency. For example, suppose Indian
importer import raw material of 100000 USD on 1st November 2008. And he will have to
pay 100000 USD on 1st February 2009. And he predicts that the value of USD will
increase against Indian rupees nearest to due date of that payment. Importer predicts that
the value of USD will increase more than 51.0000.
So what he will do to protect against depreciating in Indian rupee? Suppose spots
value of 1 USD is 49.8500. Future Value of the 1USD on NSE as below:
Price Watch
As On 26-Nov-2008 12:00:00 Hours IST

Underlying RBI reference rate USD/INR 49.8500
Solution:
He should buy hundred contract of USD/INR 28012009 at the rate of 49.8850. Value
of the contract is (49.8850*1000*100) =4988500. (Value of currency future per
USD*contract size*No of contract). For that he has to pay 5% margin on 4988500. Means
he will have to pay Rs.299425 at present. And suppose on settlement day the spot price of
USD is 51.0000. On settlement date payoff of importer will be (51.0000-49.8850) =1.115
per USD. And (1.115*100000) =111500.Rs.
CHOICE OF THE NUMBER OF CONTRACTS (HEDGING RATIO)

Another important decision in this respect is to decide hedging ratio HR. The value of
the futures position should be taken to match as closely as possible the value of the cash
market position. As we know that in the futures markets due to their standardization, exact
match will generally not be possible but hedge ratio should be as close to unity as possible.
We may define the hedge ratio HR as follows:
HR= Vf / Vc
Where, Vf is the value of the futures position
Vc is the value of the cash position.
Suppose value of contract dated 28 January 2009 is 49.8850. And spot value is
49.8500.
HR=49.8850/49.8500=1.001.
RESEARCH FINDINGS
• Thus higher Inflation leads to weakening of Domestic Currency.
• INR has appreciated with every upward movement shown by Nifty Index over
a period of time.
• Indian currency has appreciated with rise in crude oil prices.

.
• Higher GDP leads to appreciation of Domestic Currency.
• Cost of carry model and Interest rate parity model are useful tools to find out
standard future price and also useful for comparing standard with actual future
price. And it’s also a very help full in Arbitraging.
• There is a limit of USD 100 million on open interest applicable to trading
member who are banks. And the USD 25 million limit for other trading
members so larger exporter and importer might continue to deal in the OTC
market where there is no limit on hedges.
• In India RBI and SEBI has restricted other currency derivatives except
Currency future, at this time if any person wants to use other instrument of
currency derivatives in this case he has to use OTC.
SUGGESTIONS
• Currency Future need to change some restrictions it imposed such as cut off
limit of 5 million USD, Ban on NRI’s and FII’s and Mutual Funds from
Participating.
• In OTC there is no limit for trader to buy or short Currency futures so there
demand arises that in Exchange traded currency future should have increase
limit for Trading Members and also at client level, in result OTC users will
divert to Exchange traded currency Futures.
• In India the regulatory of Financial and Securities market (SEBI) has Ban on
other Currency Derivatives except Currency Futures, so this restriction seem
unreasonable to exporters and importers. And according to Indian financial
growth now it’s become necessary to introducing other currency derivatives in
Exchange traded currency derivative segment.
CONCLUSION
By far the most significant event in finance during the past decade has been the
extraordinary development and expansion of financial derivatives…These instruments
enhances the ability to differentiate risk and allocate it to those investors most able and
willing to take it- a process that has undoubtedly improved national productivity growth
and standards of livings.
The currency future gives the safe and standardized contract to its investors and
individuals who are aware about the forex market or predict the movement of exchange
rate so they will get the right platform for the trading in currency future. Because of
exchange traded future contract and its standardized nature gives counter party risk
minimized.
Initially only NSE had the permission but now MCX has also started currency future.
It is shows that how currency future covers ground in the compare of other available
derivatives instruments. Not only big businessmen and exporter and importers use this but
individual who are interested and having knowledge about forex market they can also
invest in currency future.
Exchange between USD-INR markets in India is very big and these exchange traded
contract will give more awareness in market and attract the investors.
BIBLIOGRAPHY
• NCFM: Currency future Module.
• BCFM: Currency Future Module.
• Report of the Internal Working Group on Currency Futures .Reserve Bank of India,
• Report of the RBI-SEBI standing technical committee on exchange traded

(Currency futures)
• KNOWLEDGE KIT Published by Angel Brokings.
WEBLIOGRAPHY
www.angelbroking.com
www.angelcommodities.com
www.sebi.gov.in
www.mcx-sx.com
www.nseindia.com
www.investopedia.com
www.opec.org
www.worldbank.org

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___________________________________________________IMSCD&R Ahmednagar

I take this opportunity to express my deep gratitude to all those who

SEBI Securities and Exchange Board of India

F&O Future and Option

NSE National Stock Exchange

BSE Bombay Stock Exchange

MCX Multi Commodity Exchange

NCDEX National Commodity Exchange

NSDL National Securities Depository Limited

GDP Gross Domestic Product

OTC Over The Counter

OPEC The Organization of the Petroleum Exporting

• July, 2006- Angel Broking launches Portfolio Management Services (PMS)

• December, 1997- Angel Broking Ltd incorporated as a wealth management,

OBJECTIVES OF THE STUDY

1. To study the exchange traded currency future.

2. To study & analyze the impact of different Macro-Economic indicators on Indian

3. To understand the practical considerations and ways of considering currency

4 .To analyze different currency derivatives products

Karl Pearson’s correlation coefficient

Where n is the number of pairs of data.

INTRODUCTION TO THE TOPIC

DEFINITION OF FINANCIAL DERIVATIVES

OVERVIEW OF THE FOREIGN EXCHANGE MARKET IN INDIA

CURRENCY DERIVATIVE PRODUCTS

LONG POSITION & SHORT POSITION:

USES OF CURRENCY FUTURES

Sell 100 USD - INR Oct '08 Contracts : 44.7500

Purchases in spot market @ 44.75 Total : 44.75 * 100,000

TRADING PROCESS AND SETTLEMENT PROCESS

REGULATORY FRAMEWORK FOR CURRENCY FUTURES

COMPARISION OF FORWARD AND FUTURES CURRENCY CONTRACT

BASIS FORWARD FUTURES

Delivery Date Tailored on individual needs Standardized

Open auction among buyers

CONTRACT SPECIFICATIONS FOR USD - INR

Minimum initial margin 1.75% on first day & 1% thereafter.

Extreme loss margin 1% of MTM value of gross open position.

BENEFITS OF CURRANCY FUTURES

 Greater accessibility to potential participants (Online / Offline platforms).

 Electronic Settlement of MTM Profits / Losses: Control and track losses.

 No counterparty default risk.

 Large number of market participants.

 High Transparency – Real time dissemination of prices.

 No requirement of underlying document to book the FCY.

 Cost efficient: Low brokerage thus lower transaction cost.

Indian Currency Futures Market-Present Status

Times of India- Aug 31st, 2009

The Financial Express – Feb 6th, 2010

Major Events in International and Indian Monetary System

1. Free float of currencies - 1973.

Currency Movement Impact

Imports Goods & Services Exports Goods & Services

Payments in foreign currency Receivables in foreign currency

Buys currency from the bank Sells currency to the bank

Re - STRONG → Gain Re - STRONG → Loss

Re - WEAK → Loss Re - WEAK → Gain

Factors: Appreciation of INR

General trend for

Increase in exports of Excess inflow of USD

RBI is selling USD to Supply of USD

NRI Forex remittance is

Positive trade balance Increase in USD inflow Depreciates Appreciates