CURRENCY DERIVATIVE

A PROJECT REPORT

Submitted by

ANUP PATIDAR

In partial fulfillment for the award of the degree

Of

MASTER OF BUSINESS ADMINISTRATION

IN

FINANCE

APEX INSTITUTE OF MANAGEMENT AND SCIENCE

JAIPUR

AUGEST 2010

[1]
 APEX INSTITUTE OF MANAGEMENT AND SCIENCE

JAIPUR

BONAFIDE CERTIFICATE

Certified that this project report “……….CURRENCY DERIVATIVE ………..”

Is the bonafide work of “ANUP PATIDAR.” who carried out the project work

under my supervision.

SIGNATURE

MR. VIKAS RANKA

BRANCH HEAD

ARIHANT CAPITAL MARKETS

JAIPUR

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 DECLARATION

I, ANUP PATIDAR, a student of APEX

INSTITUTE OF MANAGEMENT AND SCIENCE
,JAIPUR. hereby declare that this project is the
record of authentic work carried out by me
during the academic year 2010-2011 and has
not been submitted to any other university or
Institute towards the award of any degree
.

Date:
Place: Anup patidar

TABLE OF CONTENTS

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TITLE PAGE NO.
Acknowlegment 6
Organization overview 7
Company introduction 8
Philosphy 9
Arihant culture and people 9
Business principal 11
Overview 13
Broking 14
Distribution 15
Depository 16
Wealth management 16
Arihant displine investment process 17
Research 17
Merchant banking 18
Research methodology 21
Currency derivative introdution 22
Diff between future and currency derivative 23
History of currency derivative 24
Foreign exchange market 25
Product 27
Foreign exchange spot market 29
Uses of currency future 30
Foreign exchange quotation 33
Trading process of currency derivative 34
Utility of currency derivative 35
Product defination of currency future on nse/bse 36
Regulatory framework 38
Finding 39
Suggestion 40
Conclusion 41
Biblography 42
ACKNOWLEGEMENT

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Sometimes words fall short to show gratitude, the same
happened with me during this project. The immense
help and support received from Arihant capital markets
overwhelmed me during this project.

My sincere gratitude to MR VIKAS RANKA SIR (Head Jaipur

Branch) for providing me with an opportunity to work with
Arihant capital markets.

I am highly indebted to vikas and company project guide who

has provided me with the necessary information and his valuable
suggestion and comments on bringing out this report in the best
possible way.

I am grateful to the entire member of jaipur branch who helped

me in the successful completion of this project.

Last but not least, my heartfelt love for my parents, whose

constant support and blessings helped me throughout this
project.

ORGANIZATION OVERVIEW

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 COMAPANY

CULTURE
AND
PEOPLE

BUSINESSES

QUALITY

POLICY

COMPANY
COMPANYHISTORY
INTRODUCTION

[6]
Arihant Capital Markets Limited, an ISO 9001:2008 Certified
Company, is one of the leading financial services companies
in India. We provide a gamut of products and services
including securities and commodities broking, investment
planning, financial planning, wealth management and
merchant banking to a substantial and diversified clientele
that includes individuals, corporations and financial
institutions.
We are committed to giving our customers the best services and
holding to our core values which always place our client's
interests first. These values are reflected in our business
principal, which emphasize integrity, commitment to
excellence, innovation and teamwork.
We have presence in 110 cities with over 620 offices across the
nation. Clients turn to Arihant for its complete platform of
financial services combined with excellent execution.
We have a dedicated institutional team, which caters to mutual
fund houses, insurance companies and almost all the banks
active in the capital market segment.
Our goal is to create wealth for our retail and corporate
customers through sound financial advice and appropriate
investment strategies.

PHILOSPHY
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 • Integrity and transparency in all transactions.
• Providing investment solutions based on quality and
unbiased Research.
• Providing personalized services to all investors,
institutions, business associates.
• Achieving success through client's growth.
• Making financial services more affordable, understandable
and available to all.

WHAT ARIHANT ASPIRE

To be the pre-eminent and most trusted provider of financial
services.
The values to which we aspire can be summarized in 5
principles:
• Integrity
• Client commitment
• Strive for profitability
• Excellence
• Innovation

ARIHANT’S CULTURE AND PEOPLE

[8]
Arihant's culture is characterized by five key qualities:
commitment to clients, integrity, excellence, strive for
profitability and innovation. Integral to our corporate culture is
our total dedication to superior client service, reliability and
transparency in all our transactions. At Arihant we believe our
client's success is our success.
Independence and ownership of work is blended in our culture
which helps in creating entrepreneurs within the organization
and gives a feeling of ownership to our employees. Our people
feel a close relationship to Arihant. They associate their success
with the company's growth and this strong sense of belonging
has helped us grow over the years.
We believe that our commitment to the interests of our clients
proves our value to them. We have a strong corporate culture
that is based on firmly held beliefs.
We offer equal opportunity and tremendous growth potential to
individuals who have the right talent and a commitment to
excellence. Along with our reputation and clients, our people are
our most valuable asset.
To maintain our competitive edge and meet the high
expectations of our clients, our culture continues to evolve.
We aspire to be the best financial services company in India. To
achieve this goal, we focus relentlessly on carrying out
our business principles, which are fundamental to everything we
do.

BUSINESS PRINCIPAL

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• Our clients' growth is our primary objective. We believe
that our client’s growth is strongly correlated to our growth.

• We believe that our clients deserve the best. Our idea is not
simply offering a product or service, but it is building a
relationship with clients based on trust, reliability,
understanding and respect.

• We believe that righteousness is very important in every

sphere of life, including business. We therefore strive to be
open and honest with ourselves, our colleagues and our
shareholders.

• The core assets of our business are our people, customers,

capital and reputation. We are dedicated to complying fully
with the bye- laws, rules and ethical principles that govern
us. Our continued success depends upon constant
adherence to this standard.

• Our goal is to provide greater returns to our shareholders.

We believe our potential to earn profits, re-invest our
capital, invest in growth avenues and keep ourselves
abreast with the latest technology and systems would lead
to prosperity in this highly competitive market. Profitability

[10]
 is critical to achieving superior returns, building our capital,
and attracting and retaining our best people.

• We offer our people the opportunity to move ahead. We

foster an environment of respect and inclusiveness amongst
our people.

• We work as a family which is responsible for the growth of

our client. Our people put in their best to their jobs and the
dedication they put in to their work is greater than one finds
in most other organizations.

• We realize the need to constantly change and update

ourselves to meet our clients' upcoming needs in this
burgeoning world of finance. We constantly Endeavour to
anticipate the rapidly changing needs of our customers and
develop services to meet those needs.

• Integrity and honesty are at the heart of our business. We

seek to achieve the highest standards of professional
conduct and ethics, to prevent and detect wrongdoing, and
to govern ourselves in accordance with relevant rules,
regulations, and bye-laws. While we try to be perfect, we
might make mistakes occasionally, and when it comes

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 under our observation, we take immediate steps to rectify
those errors and set things right.

OVERVIEW
“Our success is defined by the success of our clients”
Arihant has developed a diverse and robust portfolio of financial
services to help our customers manage their money in the way
that benefits those most.

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With more than 500 professionals and staff working in 90 plus
cities, Arihant has the resources and nationwide reach to ensure
the highest level of personalized service.
Our fundamental mission is to provide our clients everything
they need to do better — as realizing their strategic visions is
our shared objective. Our service achieves these goals by putting
clients at the center of everything we do. Our client-centric
approach, ethical and transparent business practices, research-
based advice, implementation of cutting-edge technology and
keeping up-to-date to the ever changing world of finance has
helped our clients grow with the surging Indian economy over
the years.

BROKING
Arihant is one of the leading providers of broking services to
individuals and institutions in the equity, derivatives and
commodities segment in India.
We proactively deliver the full depth and breadth of our broking
services to clients through a network of more than 300 branches
and franchises across India.
Excellent research support, state-of-the-art tools, smart risk
management, capital requirements, excellent order routing and
efficient operational practices are key components of our
offerings. We provide superior pre- and post-trading services to
clients through robust technical architecture
.

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DISTRIBUTION
With the objective of meeting all the investment needs of our
clients, we provide distribution services of mutual funds and
IPOs. We are an AMFI registered mutual fund distributor and
are also registered with all the AMCs in India to sell the
schemes offered by them. Our distribution network is backed by
in-depth & comprehensive research and a strong team for
marketing and sales support.
We have a dedicated team exclusively for research on mutual
funds and IPO. We provide monthly publications on mutual
fund activity and fund recommendations and also furnish reports
on New Fund Offers (NFO) and forthcoming IPOs’
recommendations. Our recommendations are objective and
unbiased. For us, the client’s growth is the top priority.
Consistent delivery of high quality advice on mutual funds and
IPO investment has established us as a competent and reliable
distributor across the country. We are also amongst the few
investment firms that offer the facility to invest in mutual funds
and IPO online, giving our clients freedom from paperwork and
making investing convenient for them.

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DEPOSITORY
Our Depository business helps us in providing integrated
financial solutions to our clients. It is led by a team of
professionals and the latest technological expertise, dedicated
exclusively for the depository services.
This creates a seamless transaction platform for clients – to
execute trades through Arihant Broking Business and settle them
through Arihant Depository Services.

WEALTH MANAGEMENT
Our wealth management business provides tailored, impartial
and regulated financial planning advice on life, retirement and
investment products.
Our services to high net worth individuals and corporate
clients include:
• Asset management

• Stock broking

• Wealth structuring

• Financial planning

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ARIHANT DISPLINED INVESTMENT
PROCESS

Arihant has a philosophy of investing in quality businesses with

a strong management at reasonable prices. We follow both a
bottom-up approach and top-down approach to investing with an
intensive research process for screening potential investments.

RESEARCH
Our research team supplements our broking, wealth
management and distribution business. Our research team
comprises expert investment professionals for fundamental and
technical research covering equity, derivatives, mutual funds and
IPOs. We draw upon our experience and depth of resources, to
provide the financial and strategic advice necessary for
successful asset management.

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From day one, our focus has been to offer investors a platform to
make informed investment decisions based on thorough research
and discipline. We have therefore established a research team to
offer complete support and the right guidance to our clients. Our
research is used only for our personal and institutional clients.
Our research extends into every corner of our equities business,
supplying invaluable analysis, information, and advice to our
clients. We employ a disciplined and rigorous research process.
Starting with a top down analysis, we look closely at the
megatrends and industry drivers that create opportunities for
innovative companies. We identify and affiliate ourselves with
the fastest growing and fundamentally strong companies and
provide our investors with the best investment opportunities.

MERCHANT BANKING AND INVESTMENT

BANKING
We deliver high-quality strategic advice and creative financing
solutions to corporates with the help of qualified professionals
who have a combined experience of over 50 years in investment
banking, corporate advisory and corporate finance.
The primary activities of Merchant Banking Business are:

• Corporate Finance

• Strategic Services
The comprehensive experience and knowledge of our team
enables us to offer a host of financial services covering capital
raising, mergers and acquisitions, advisory, debt syndication,
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qualified institutional placements, private placements, financial
restructuring among others.

Arihant’s Quality Policy Statement

ISO 9001:2008
At Arihant Capital Markets Ltd. our aim is to continue to
achieve high levels of satisfaction for our clients and help them
achieve their financial goals through right investment advice and
excellent service.

We aim to make financial products easily accessible and

understandable to all. We are committed to delivering the
highest quality solutions to meet our clients’ investment needs.

To realize this, it is the policy of the Company to continually

review and update our processes, improve the competence of
human resources and effectiveness of quality management
systems, ensure compliance with all regulatory requirements,
optimize technology and infrastructure, thereby enhancing
customer satisfaction.

The Quality Policy has full support of the Senior Management,

and as such it is their responsibility to maintain and implement
our Quality Policy and ensure that the staff adheres to the
procedures.

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COMPANY HISTORY

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 RESEARCH METHODOLOGY
 TYPE OF RESEARCH
In this project Descriptive research methodologies were
use.
The research methodology adopted for carrying out the
study at the first stage theoretical study is attempted and at
the second stage observed online trading on NSE/BSE.

 SOURCE OF DATA COLLECTION

Secondary data were used such as various books, report
submitted by RBI/SEBI committee and NCFM/BCFM
modules.

 OBJECTIVES OF THE STUDY

The basic idea behind undertaking Currency Derivatives
project to gain Knowledge about currency future market.

To study the basic concept of Currency future

To study the exchange traded currency future

To understand the practical considerations and ways of

considering currency future price.

To analyze different currency derivatives products.

 LIMITATION OF THE STUDY

The limitations of the study that analysis was purely based
on the secondary data. So, any error in the Secondary data might
also affect the study undertaken.
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 What is Currency Derivatives?
Currency derivatives are a contract between the seller and the
buyer, whose value is to be derived from the underlying asset,
the currency amount. A derivative based on currency exchange
rates is a future contract which stipulates the rate at which a
given currency can be exchanged for another currency as at a
future date.

INTRODUCTION
OF
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

[21]
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 option, foreign currency swaps.

What is the difference between forex

derivatives and currency derivatives?
There is a thin line dividing the two. Derivatives based on
currency exchange rates are forward contracts (or forward rate
agreements); options and swaps and are popularly known as
forex derivatives. Those are meant to hedge interest rate risks
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and cash mismatches in different currencies such as currency
swaps and options are known as currency derivatives. There are
interest rate forward rate agreements and swaps for managing
the interest rate movements risk within same currency. On the
lines of commodity futures, there are currency and interest rate
futures, which are nothing but standardized forward contracts. A
committee appointed by the RBI (Reserve Bank of India) has
recommended making available the currency futures at
authorized dealers.

History of currency derivative:-

Currency derivative are created in the Chicago Mercantile
Exchange (CME) in the year of1972. The contracts are created
under the guidance & leadership of Leo me lamed,
CMEchairman Emeritus. The FX contract capitalized on the
U.S. abandonment of the brettonwoods agreement, which had
fixed world exchange rates to a gold standard after World War
II. The abandonment of the Bretton woods agreement resulted in
currency values being allowed to float increases the risk of
doing a business, by creating another market in which futures
could be treaded, CME currency futures extended the reach of
risk management beyond commodities which were main
derivative contracts traded at CMEunit then. The concept of
currency futures at CME was revolutionary, & gained credibility
through endorsement of Nobel-prize-winning economist Milton
Friedman.
Today, CME offers 41 individual FX futures & 31, options
contracts on 19 currencies, allof which trade electronically on
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the exchanges CME Globex platform. It is a largest regulated
marketplace for FX trading. Traders of CME FX futures are a
diverse group that includes multinational corporations, hedge
funds, commercial banks, investment banks, financial managers,
commodity trading advisors, proprietary trading firms. Currency
overlay managers & individual investors. They trade in order to
transact business hedge against unfavorable changes in currency
rates or to speculate on rate fluctuations.

Brief history or overview of foreign

exchangemarket
During early 1990’s.india embarked on a series of structural
reforms in the foreign market. The exchange rate regime, that
was earlier pegged, was partially floated inMarch, 1992 and
fully floated in March, 1993. The unification of the exchange
rate was instrumental developing a market determined exchange
rate of the rupee and was important steps in the progress towards
total current account convertibility, which was achieved in 1994.
Although liberalization helped the Indian forex market in
various ways, it led to extensive fluctuations of exchange rate
.this issue has attracted a great deal of concen from policy
makers and investors. While some flexibility in foreign
exchange markets and exchange rate determination is desirable,
excessive volatility can have an adverse effect on price
discovery, export performance, sustainability of current account
balance &balance sheet.

In the content of upgrading Indian foreign market exchange to

international standards a well developed foreign exchange

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market (both PTC as well as exchange traded) is imperative.
With a view to entities to manage volatilities in the currency
market, RBI on April 207, issued comprehensive guidelines on
the wage of foreign currency forwards, swaps, & options in the
OTCmarket. At the same time, RBIalso setup an internal
working group to explore the advantage of introducing currency
futures.The report of the internal working group of RBI
submitted in April 2008 recommended the introduction of
exchange traded currency derivative.
Subsequently, RBI & SEBI jointly constituted the
standing technical committee to analyze the currency forward
and future market around the world and lay down the guide lines
to introduce traded currency futures in the Indian market. The
committee submitted its report on May 29, 2008, further RBI&
SEBI also issued circular on this regard, on August 06, 2008.
Currently, India is a US D 34 billion OTC market, where althea
major currencies like USD, EURO, YEN, Pound, Swiss and
France are trade. With the help of electronic trading and efficient
risk management systems .exchange traded currency futures will
bring in more transparency and efficiency in price discovery,
eliminate counter party credit risk, provide access to all types of
market participants, offer standard products and provide
transparent trading platform, marks are allowed to become of
this segment on the exchange, thereby providing them with a
new opportunity

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 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 :
The basic objective of a forward market in any
underlying asset is to fix a price for a contract
to be carried through on the future agreed date
and is intended to free bot.
The purchaser and the seller from any risk of
loss which might incur due to fluctuations in
the price of underlying asset.
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 fixed at
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.
In another word, a future contract is an
agreement between two parties to buy or sell

[26]
 an asset at a certain time in the future at a
certain price. 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. They can
be regarded as portfolio of forward contracts.
The currency swap entails 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. There are a various types of currency
swaps like as fixed-to-fixed currency swap,
floating to floating swap, fixed to floating
currency swap.

In a swap normally three basic steps are

involve___
(1)Initial exchange of principal amount.
(2) Ongoing exchange of interest
(3) Re - exchange of principal amount on
maturity.

 OPTIONS :
Currency option is a financial instrument that
give the option holder a right and not the

[27]
 obligation, to buy or sell a given amount of
foreign exchange at a fixed price per unit for a
specified time period ( until the expiration date
).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. The seller of
the option gets the premium from the buyer of
the option for the obligation undertaken in the
contract. Options generally have lives of up to
one year, the majority of options traded on
options exchanges having a maximum maturity
of nine months. Longer dated options are
called warrants and are generally traded OTC.

FOREIGN EXCHANGE SPOT (CASH)

MARKET
The foreign exchange spot market trades in
different currencies for both spot and forward
delivery. Generally they do not have specific
location, and mostly take place primarily by means
of telecommunications both within and between
countries.
It consists of a network of foreign dealers which are
often banks, financial institutions, large concerns,

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etc. The large banks usually make markets in
different currencies.

In the spot exchange market, the business is

transacted through out the world on a continual
basis. So it is possible to transaction in foreign
exchange markets 24 hours a day. The standard
settlement period in this market is 48 hours, i.e., 2
days after the execution of the transaction.
The spot foreign exchange market is similar to the
OTC market for securities. There is no centralized
meeting place and no fixed opening and closing
time. Since most of the business in this market is
done by banks, hence, transaction usually do not
involve a physical transfer of currency, rather
simply book keeping transfer entry among banks.
Exchange rates are generally determined
by demand and supply force in this market. The
purchase and sale of currencies stem partly from
the need to finance trade in goods and services.
Another important source of demand and supply
arises from the participation of the central banks
which would emanate from a desire to influence
the direction speed.

USES OF CURRENCY FUTURES

 Hedging:

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 Presume Entity A is expecting a remittance for USD 1000
on 27 August 08. Wants to lock in the foreign exchange
rate today so that the value of inflow in Indian rupee
terms is safe guarded. The entity can do so by selling one
contract of USDINR futures since one contract is for
USD 1000.
Presume that the current spot rate is Rs.43 and‘USD INR
27 Aug 08’ contract is trading at Rs.44.2500. Entity A
shall do the following: Sell one August contract today.
The value of the contract is Rs.44, 250.
Let us assume the RBI reference rate on August 27, 2008
is Rs.44.0000. The entity shall sell on August 27, 2008,
USD 1000 in the spot market and get Rs. 44,000. The
futures contract will settle at Rs.44.0000 (final
settlement price = RBI reference rate).
The return from the futures transaction would be Rs. 250,
i.e. (Rs. 44,250 – Rs.44, 000). As may be observed, the
effective rate for the remittance received by the entity A
is Rs.44. 2500 (Rs.44, 000 + Rs.250)/1000, while spot
rate on that date wasRs.44.0000. The entity was able to
hedge its exposure.

 Speculation: Bullish, buy futures

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
atRs.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
[30]
 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.10000.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 USD10000.
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 ofRs.1000 on an investment of Rs.21, 000.
This works out to an annual return of 19percent. Because of
the leverage they provide, futures form an attractive option
for speculators.

 Speculation: Bearish, sell futures

Futures can be used by a speculator who believes that an
underlying is over-valued and is likely to see a fall in price.
How can he trade based on his opinion? In the absence of a
deferral product, there wasn't much he could do to profit
from his opinion. Today all he needs to do is sell the
futures.

[31]
 Let us understand how this works. Typically futures move
correspondingly with the underlying, as long as there is
sufficient liquidity in the market. If the underlying price
rises, so will the futures price. If the underlying price falls,
so will the futures price. Now take the case of the trader
who expects to see a fall in the price of USD-Inarched sells
one two-month contract of futures on USD say at Rs. 42.20
(each contactor USD 1000). He pays a small margin on the
same. Two months later, when the futures contract expires,
USD-INR rate let us say is Rs.42. On the day of expiration
the spot and the futures price converges. He has made a
clean profit of 20 paisa per dollar. For the one contract that
he sold, this works out to be Rs.2000.

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. If
the same or similar product is traded in say two different
markets, any entity which has access to both the markets
will be able to identify price differentials, if any. If in one
of the markets the product is trading at higher price, then
the entity shall buy the product in the cheaper market and
sell in the costlier market and thus benefit from the price
differential without any additional risk.

FOREIGN EXCHANGE QUOTATION

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Foreign exchange quotations may be confusing because
currencies are quoted in terms of another currency.
Mainly there are two methods of quoting:
1. Direct method and
2. Indirect method
Direct method is followed by most of the countries in which the
numbers of domestic currency is stated against one unit of
foreign currency. For example: in we have to spend Rs.45 to
purchase one unit dollar than quotation can be written as:
Rs. /$ = 45 or $1 = Rs. 45

In case of indirect method of quoting value of one unit of

domestic currency is stated against foreign currency. If we
continue with the previous example then it can be quoted as:
Rs. 1 = 1/45 or 0.02222

In the global foreign exchange market two rates are quoted by

dealers – one rate is buying rate which is also called the BID
RATE and another is selling rate which is also known as ASK
RATE. To separate the buying and selling rate a small desh or
oblique line is drawn.
For example:
Rs. = 45.6600/6650
Here the bid price is Rs.45.6600 and ask price is Rs. 45.6650
and the difference between these two rates is known as
SPREAD.
SPREAD = 45.6650 – 45. 6600 = .0050

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 TRADING PROCESS OF CURRENCY
DERIVATIVE

Like other future trading the future currency is also traded in

organized exchange. Above flow diagram of trading is shown.
When the market opens transaction takes place at the floor of the
exchange when the trader wants to sell or purchase he/she has to
place the sale or purchase order to the broker who are issued an
unique identification number by the exchange. Traders directly
cannot make any transaction directly in the exchange, they have
to trade through brokers after placing the sales or purchase order
all the transactions are done by broker in exchange and
exchange informs it to the clearing house. In any transaction
seller and buyer does not know each other.
Also beyond the trading hours transactions may take place
through an electronic system, called GLOBEX. It connects the
market of Chicago, Paris, London and others from 2.30 pm to

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7.05 am the following morning. GLOBEX system also matches
the purchase and selling order for each type of currency future
contracts.

Utility of Currency Derivative

Exporter: - CDs are used by exporters invoicing the receivables
in foreign currency, willing to protect the earnings foreign
currency depreciation by locating the currency Conversion rate
at a high level.

Importers: - Importers use CDs for hedging the payables in

foreign currency when the foreign currency is expected to
appreciate and they would always like to guarantee a low
Conversion rate.

Investors: - Investors in foreign currency denominated

securities would like to secure strong foreign earnings by
obtaining the right to sell the foreign currency at a high
conversion rate, thus defending their revenue from foreign
currency derivatives.

MNCs: - MNCs use CDs being engaged in direct investment

overseas. They want to guarantee the rate of purchasing foreign
currency for various payments related to installation of a foreign
branch or subsidiary, or to joint venture payment with foreign
partners.
A high degree of volatility creates a fertile ground for foreign
exchange speculators. Their objective is to guarantee a high
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selling rate of foreign currency by obtaining a derivative
contract while hoping to buy the currency at a low rate in the
future.
The most commonly used instrument among the CDs is
currency forward contracts.

Product definition of currency futures on

NSE / BSE
UDERLYING:
Initially, currency futures contracts on USD- INDIAN
RUPEE (US$-INR) would be permitted.

TRADING HOURS:
The trading on currency futures would be available from
9a.m to 5p.m

SIZE OF THE CONTRACT:

The minimum contract size of the currency futures
contract at the time of introduction would be US$100.The
contract size would be predictably aligned to ensure that the
size of the contract remains close to minimum size.

QUATATION:
The currency futures contract would be quoted in rupee
terms. However the outstanding position would be in dollar
terms.

TENOR OF CONTRACT:

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 The currency contract shall have maximum maturity of 12
months.

AVAILABLE CONTRACT:
All monthly maturities from 1to 12months would be made
available.

SETTLEMENT MECHANISM:
The currency futures contract shall be settled in cash in
Indian rupee.

SETTLEMENT PRICE:
The settlement price would the reserve bank reference rate
on the date of expiry. The methodology of computation and
dissemination of reference rate may be publicly disclosed
by RBI.

FINAL SETTLEMENT DAY:

The currency futures date would expire on the last working
day (excluding Saturdays) of the month. The last working
day would be taken to be the same as that of interbank
settlement in Mumbai. The rules for interbank settlement,
including those for known holidays and subsequently
declared holiday would be those as laid down by FEDAI.

REGULATORY FRAMEWORK FOR

EXCHANGE TRADED CURRENCY FUTURES

With a view to enable entities to manage volatility in the

currency market, RBI on Feb. 20 2007 Issued comprehensive
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guidelines on the usage of currency forward, swaps, and option
in the OTC market. At the same time RBI also set up an Internal
Working Group to explore the advantage of introducing the
currency futures. The report of the Internal Working Group of
RBI submitted in April 2008, recommended the introduction of
exchange traded currency futures. With the expected benefit of
exchange traded currency futures it was decided in a joint
meeting of RBI and SEBI on Feb. 2008 that the RBI-SEBI
standing technical committee on exchange traded currency and
interest rate derivative would be constituted. To begin with the
committee would evolve norms and oversee the implementation
of exchange traded currency future. The terms of reference to
the committee were as under.

To co-ordinate the regulatory roles of RBI and SEBI in regard to

currency and interest rate futures on the exchanges.

To suggests the eligibility norms for existing and new exchanges

for currency and interest rate futures trading.

To suggest the eligibility criteria for member of such exchanges.

To review the product design, margin requirement and other risk

mitigation measures on an ongoing basis

To suggest surveillance mechanism and dissemination of market

information

To consider microstructure issues in the overall interest of the

financial stability

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 FINDINGS:
Exchange traded currency future trading is regulated by higher
authority and regulator .The whole function of Exchange traded
currency future is regulated by SEBI/RBI,they establishes rules
and regulations so that trading is done safely and counter party
risk is minimized.

Larger exporter and importer has continued to deal in the OTC.

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 restriction it imposed
such as cut off limit of 5 million USD, Ban on NRI’s and FII’s
and Mutual Funds from Participating.

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 Now in exchange traded currency future segment only one
pair USD-INR
is available to trade so there is also one more demand by the
exporters and importers to introduce another pair in currency
trading. Like POUND-INR, CAD-INR etc.

 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.

CONCLUSIONS
By far the most significant event in finance during the past
decade has been the extra ordinary 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.
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 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 BSE and 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.

BIBLOGRAPHY

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Financial Derivatives (theory, concepts and problems) By: S.L.
Gupta.

NCFM: Currency future Module.

BCFM: Currency Future Module.

Report of the RBI-SEBI standing technical committee on

exchange traded currency futures 2008

Report of the Internal Working Group on Currency Futures

(Reserve Bank of India, April 2008)

Websites:
www.sebi.gov.in

www.rbi.org.in

www.frost.com

www.wikipedia.com

www.economywatch.com

www.bseindia.com

www.nseindia.com

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