SUMMER TRAINING PROJECT REPORT

STUDY OF EQUITY, COMMODITY AND CURRENCY

MARKET

SUBMITTED BY

ANIL SAHARIA

(PGDM - II SEM)

ACADEMIC YEAR

2009-11

SUBMITTED TO

MANAGEMENT EDUCATION AND RESEARCH INSTITUTE

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 Acknowledgement

A summer training project is very special for a fresher management student in his career. It gives
him his first practical exposure to the job environment. The project was brought to fruition by
some very special people. I am deeply grateful to all of them.

I express special thanks,

To Mr Prashant Sharma, Branch Manager at Religare Securities. His commitment and sense of
mission motivated me. According to him, „differentiating Religare and diversified product
offering is the key to build business‟. He showed us how to connect to the customer and give
them maximum return on investment. He guided and supported us through out the training
period.

To Mr Gurvinder Sital, Relationship Manager-National Distributor, for spending his valuable

time to give us training in Mutual Fund. I am also grateful to various trainers for imparting
training in currency and commodity derivative, structured funds, etc.

To Mr Atul Trivedi, ABM at Religare Securitites, and all relationship manager at Gurgaon
branch and Jandhewala Branch, for giving me an opportunity to work with them. They shared
their market experience with us. This contributed to the quality of the project and better
understanding of the Financial Derivatives Market.

And most of all, to all clients. There cross questioning helped me developing a better
understanding of the job.

ANIL SAHARIA

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 Introduction

There are various financial needs of individuals and corporate. Individual wants to save tax and
earn maximum on their limited financial corpus and corporate wants safe investment of their
large chuck of surplus funds or minimize the risk of foreign exchange exposure. All this financial
needs are satisfied by firms like Religare Enterprise dealing in financial services and products.

An effort has been made in the project to showcase the various investment opportunities
available to a denizen today. They all very in risk, return, liquidity, transparency, amount of
investment, volatility, etc.

The primarily problem found in the market was the investors where cheated at some point and
they were not even ready to participate in our market research. There was also wrong
presumption that equity is a gambling market which is not true. At Religare we had fundamental
analysis for choosing stocks and technical analysis which depicted when to invest and when to
exit.

Commodity market has different attraction. Gold is coined as the safe heaven of investment.
Developing country like India has high inflation rate (around 9.5% during three months of
training). Investment in gold is considered a hedge against inflation. So it served the dual need of
investors.

Currency futures give exporters and importers to setoff their currency risk. Currency options
have also been introduced at NSE. Mock trading of currency options drew quiet a volume.

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Contents: Page no:

Acknowledgement 2

Introduction 3

1. Religare Enterprise 5

2. Research Frame 17

3. Equity 19

4. Commodity 30

5. Currency 41

6. Analysis 65

7. Recommendation 68

8. Limitation 69

9. Questionnaire 72

10.Bibliography 73

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  ABOUT RELIGARE

 MISSION AND VISION

 ORGANISATIOIN STRUCTURE

 SWOT

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Religare Enterprises ltd

Profile Finance - General

Group Religare

ISIN No. INE621H01010

BSE Code 532915

NSE Code RELIGARE

Market Cap. 5,039.56 Cr.

Face Value Rs.10.00

Listings BSE, NSE

Incorporation 30/01/1984

Public Issue Date 29/10/2007

Key Officials Sunil Godhwani, Chairman and M.D.

Ravi Batra, Sr. Vice President and Company Secretary.

Religare Enterprises Limited (REL) is a global financial services group with a presence across
Asia, Africa, Middle East, Europe and the Americas. In India, REL‟s largest market, the group
offers a wide array of products and services ranging from insurance, asset management, broking
and lending solutions to investment banking and wealth management. The group has also
pioneered the concept of investments in alternative asset classes such as arts and films. With
10,000 plus employees across multiple geographies, REL serves over a million clients, including
corporates and institutions, high net worth families and individuals, and retail investors.

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Core Brand Essence-Diligence

Religare is a latin word meaning „to bind together’.

This is reflected by the enterprise symbol- a rare four-leaf clover, harbinger of good fortune. It is
considered good fortune to find a four-leaf clover since there are about estimated 10000 three-
leaf clovers for every one four-leaf clover found.

Each leaf has a special meaning- Hope, Trust, Care and Good Fortune. All elements perfectly
combine in the emblematic and rare, four-leaf clover to visually symbolize the values that bind
together and form the core of the Religare vision.

Core brand essence is Diligence and Religare is driven by ethical and dynamic processes for
wealth creation.

Vision and Mission

Vision: To build Religare as a globally trusted brand in the financial services domain and present
it as the „investment gateway of India‟.

Mission: Providing financial care driven by the core values of diligence and transparency.

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Segmentation and Positioning

Retail Spectrum Institutional Spectrum Wealth Spectrum

Positioning

Leverage reach and offer Leverage relationship with To be a client centric wealth
integrated product and service SME segment spread across management advisiory firm
portfolio India for the high networth
individuals(HNIs)

Product and Services

Equity Trading Institutional Broking Portfolio Management

Commodity Trading Investment Banking services
Online Investment Portal Insurance Advisiory Premier Client group Services
Personal Financial Services, Arts Initiative
like investment solutions, International Advisory Fund
insurance, loans Management Service
Consumer Finance

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Religare Securities Ltd-

• Member: National Stock Exchange & Bombay Stock Exchange

• Depository Participant : NSDL & CDSL

• SEBI Registered Portfolio Manager

• Equity Broking

– Offline Equity Trading

– Online Trading through www.religareonline.com

• Received in-principle approval from SEBI to be sponsor of Asset Management joint

venture with Aegon

• Received P1 Credit Rating from CRISIL for its short term debt issuance program

Religare Commodities Ltd

• Member: MCX, NCDEX & NMCE

• Present in 529 locations all over India, in addition to 50 Mandi (Rural) locations

• Launched Religare Newswire for daily & Live updates on agri-commodities directly
from Mandi locations to clients through our website and other media

• Corporate Desk is taking major steps in getting industry to hedge on Commodity

Exchanges

• Pioneered the concept of Spot –Futures Arbitrage

• Acquired ISO –9001:2000 certification in April 20081.5 The Religare Edge

 Diverse Offerings

 Dynamic Management Team

 State-of-the-art technology

 Vast Distribution and Reach

 Robust Brand Recognition

 Synergistic Partnerships

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 New Initiatives

 An independent financial advisory platform managed by women, for women

 An alternative career path, keeping in mind the needs, wants and desires of today‟s
woman

 An opportunity to strike a balance between work and family life

 Relationships with large private and public sector banks

 Offering online/offline equities and portfolio management services to Bank‟s customers

 Some of the key strategic partnerships with: IndusInd Bank, Tamilnad Mercantile Bank
Ltd, Corporation Bank, Bank of Rajasthan, etc

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Other Group Companies
Fortis Healthcare Limited, established in 1996 was founded on the vision of creating an
integrated healthcare delivery system. With 22 hospitals in India, including multi-specialty &
super specialty centres, the management is aggressively working towards taking this number to a
significant level in the next few years to provide quality healthcare facilities and services across
the nation.
For more information log on to: http://www.fortishealthcare.com

Super Religare Laboratories Limited (formerly SRL Ranbaxy) within 11 years of inception
has become the largest Pathological Laboratory network in South Asia. It started a revolution in
diagnostic services in India by ushering in the most specialized technologies, backed by
innovation and diligence. The current footprint extends well beyond India in the Middle East and
parts of Europe.
For more information log on to: http://www.srl.in

Religare Wellness Limited (formerly Fortis Healthworld) is one of the leading players in the
wellness retail space with a footprint of over 100 stores across India. The group envisages setting
up a pan India world class retail network of wellness stores that would provide comprehensive
solutions under one roof.
For more information log on to: http://www.religarewellness.com.

Religare Technova Limited is the holding company for global IT business of the promoter
group, offering Enterprise IT Solutions, Knowledge Management Solutions and software
products and services. Currently with over 1500 employees and presence in over 10 countries,
Religare Technova is poised to be a leader in the global IT space.
For more information log on to: http://www.religaretechnova.com

Religare Voyages Limited is the holding company for the promoter group‟s integrated aviation
and travel businesses. The Air Charter business is one of the largest in the non-scheduled space
in the country with its own top-of-the-line fleet that comprises jets, helicopters and turbo props.
The travel business is duly accredited for complete management of both in-bound and out-bound
domestic and international travel.
For more information log on to: http://www.religarevoyages.com

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Organisation Structure

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SWOT ANALYSIS

A SWOT analysis focuses on the internal and external environments, examining strengths and
weaknesses in the internal environment and opportunities and threats in the external environment

STRENGTHS

Services

As a product Religare is a extremely innovative product with very less cost. Services like
online trading facility, institutional and domestic broking, customized research reports with
almost 80% efficiency etc give Religare an edge over its competitors. Religare provides other
support services that make retail investors more confident and assured with their trading. SMS
alerts (allowing traders and investors to make the most of the available opportunities), Softer,
intangible features like imagery, equity driving preference.

Relationship managers

The company has a team of relationship managers who are dedicated to the service of clients.
This RMs takes care of clients‟ even smallest problem and makes efforts to solve them through
their expertise. They also help their clients to invest their wealth in the market.

Distribution Network

Religare with almost 150 branches beefed up by comprehensive online research, advice and
transaction services. In near future expect to make 200000+ retail customers being serviced
through centralized call centre / web solution

Marketing

Religare (previously Fortis securities) is a veteran equities solutions company with loads of
experience in the Indian stock markets. Religare does not claim expertise in too many things.
Religare expertise lies in stocks and that's what it talks about with authority. So when he says
that investing in stocks should not be confused with trading in stocks or a portfolio-based

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strategy is better than betting on a single horse, it is something that is spoken with years of
focused learning and experience in the stock markets.

Products

Company‟s product line is a basket of financial services offered to its clients. It‟s a all product
single shop for investors. Here we offer Along with Equity, Mutual funds, personal loans, PMS,
Corporate Finance and Investment banking etc to our customers. Our products are customized
according to individual demand and preference

WEAKNESS

Customer Satisfaction

As far as customer satisfaction goes Religare has to tighten its Boots. The company does not
have enough Relationship managers to cater to huge customer base. The account opening takes 2
working days whereas an India bull takes half the time for this purpose.

Branding

Though the company has a efficient products but large part of investment interested population
does not know the company. The most basic expectation for a trader or investor when one begins
trading is that one must get timely delivery of shares and proceeds from sale of shares. Also ones
cash balances with the broker must be safe and secure. Though this confidence in the broker
comes with time and experience, good and transparent practices also play a major role in
imbibing confidence in traders.

Competition from banks and Niche Players

Most of the banks due to good branding have the faith of the customers of their banking
database. So they enjoy the liberty of huge database and customers find it more reliable to trade
there rather than with a unknown broker. Also banks like HDFC Bank and ICICI Bank have the
advantage of linking the trading accounts of their customers to saving accounts. This makes
trading easier, and at the same time a trader withdraws exactly as much money from his account
as is needed to complete the trade. Similarly sales proceeds are credited directly to saving
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account. Niche players‟ presence as sub brokers or Small broking house like Abhipra, Way to
wealth etc. attracts a good share of market and run parallel to giant companies

OPPORTUNITIES

The external environment analysis may reveal certain new opportunities for profit and growth.

Ever-increasing market

After the NSE brought the screen based trading system stock markets are now more secured
which has attracted lot of retail investors and the demand is increasing day by day. This has
resulted in improved liquidity and heavy volumes on transactions. Religare is one of the early
entrants here. As to how much it will roar and how swift it can swoop on the market, the future
alone can answer such queries. Religare has been a mega player and is known for being a mover
of stocks. It is also known for putting big deals through and enjoys good networking with the
FIIs. It has been dynamic enough to move with the times and capture the opportunities that the
market throws up from time to time.

Improving Technology

In country like India technology is always improving which gives the company a chance to keep
on improving their product with time whereas for the small players like local brokers it will be
difficult to keep the same pace as the changing technology. Also with SEBI lying down some
strict guidelines small brokers are finding it harder to retain the customers with no research
department and small capital. The traditional business model is highly dependent on a large
network of sub-brokers, and many established players may not have systems (technology,
customer service, etc.) capable of directly servicing so many retail customers.

Unfulfilled needs of the customers

With so many competitors offering their products in the market but no one is able to completely
satisfy the customers. Some have the problem of lack of information or some were scared of
volatility of the stock markets. Religare has the opportunity to tap this unsatisfied set of
customers and to make hold in the market. The Internet serves to break all barriers to

15
information, as it offers an extremely hassle-free investing platform. And, Religare hopes to fully
utilize and capitalize on this platform. This original idea by Religare itself was born out of the
consumer's need for a more transparent, easy to understand and convenient option of investing in
stocks.

Education Level

The education level in the country is improving year after year as far as technology goes. With
that the understanding of the stock market is also increasing and a lot of retail investors are
steeping in the markets which is being shown by increasing volumes, transactions and indices

THREATS

New Competitors

A lot of new competitors are trying to enter the market in this bullish run to taste the flavor of
this cherry. This is creating a lot of competition for large players like Religare and it is creating
little confusion in the minds of the customers about the services provided by the broker. Also
many banking firms are entering into the market with huge investment. Competitors like ICICI,
kotak, hdfc, 5-paisa etc. are posing a lot of threats to the company.

Technology based business

Online trading is totally based on the technology which is quite complex. Typically, the
technology solution has to start from the Internet front-end (or the screen that you see when you
begin trading). Then it needs to get into the 'middle tier' of risk management systems that assess
data from banks and depository participants (DP), calculate client risk at that point in time, and
give the 'Go/No go' advice to the trade. So technology is a kind of threat because unless until it is
working properly it is good but internet is not that safe. Though a lot of cyber laws are being
made but not yet executed.

Switch over cost

The cost of switching over from one company to other is minimal therefore the company
can’t even stop for breathing i.e. it has to provide quality service all the time to its clients
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Research Frame

Research Objective: Study of equity, commodity, currency and target market to position
Religare as a window to better, safer and cost effective investment way.

This includes:

 To gain sound knowledge about the Equity market, Commodity market and the Currency
market.

 To make people aware about the investment opportunities in the Securities and the
Derivative market and encourage them to invest in these markets.

 To develop a database for the Company by analyzing the competition in market and
targeting potential clients.

 To capture and document the constraints and limitations faced by investors.

 To Study how to build a relationship marketing in Capital Market.

Research Methodology: Exploratory research methodology was used.

Data Collection method:

Source of Data:-

Primary Data : Questionnaire, visiting organization.

Secondary Data : Information from the Company, Websites, journals and magazines.

Sampling technique : Random sampling.

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SamplingTechnique: Initially, a rough draft was prepared keeping in mind the objective of the
research. A pilot study was done in order to know the accuracy of the Questionnaire. The final
Questionnaire was arrived only after certain important changes were done. The consumers are
selected by the convenience sampling method. The selection of units from the population based
on their easy availability and accessibility to the researcher is known as convenience sampling.
Convenience sampling is at its best in surveys dealing with an exploratory purpose for
generating ideas and hypothesis.

Sampling Unit: The respondants who were asked to fill out questionnaires are the sampling
units. These comprise of employees of MNCs, Govt. Employees, Self Employeds and existing
customers of Religare securities.

Sample size: The sample size was restricted to only 100.

Sampling Area:The area of the research was Gurgaon, and adjacent areas

The project work can only be complete after:

Analyzing the data.

Referring books and gathering more relevant information from the internet.

Drawing detailed and careful inferences from the analysis.

Data Collection : Questioning & observing are the two basic methods of collecting primary
data. Questionnaire studies are more relevant than observation studies

Presentation of the data: The collected data will be analyzed and will be represented through
various charts, graphs, pie charts, and tabulation.

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 EQUITY

 WHY INVEST IN INDIAN EQUITIES.

 STOCK MARKET TRENDS

 DERIVATIVE TERMINOLOGY
 OPTION TERMS
 OPTION SENSITIVITIES

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Exchange traded product line

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EXCHANGE: An exchange is an organization that facilitates trade in equities, commodities
currency, and/ or government securities. Exchanges do not provide facilty for spot trade. Here
settlement takes place after some time. There are 19 stock exchanges in india and all of them
follow a systematic settlement period. It started with weekly settlement system and at present
the system is of rolling settlement of T+2 Days. Here „T‟ stands for traded day.

The two most popular exchanges in India are National Stock Exchange (NSE) and Bombay
Stock Exchange (BSE). They account for nearly 99% of the trade in India in capital market
segment. There are other new exchanges in India like MCX and USX.

Index: It is a barometer , for example SENSEX and NIFTY, that depicts the movement of the
underlying securities.

SENSEX: It is one of the oldest index in the world. It is an index at BSE of top 30 companies
based on their market capitalization. Market capitalization, on any given day, is calculated by
multiplying the market price(mp) and the number of shares outstanding in the market.

NIFTY: The Index at NSE is more diversified then SENSEX as it is based on 50 securities as
compared to 30 securities on SENSEX. As such the volume at Nifty is more than at Sensex. The
advantage is every single stock cannot alone influence index.

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Why invest in Indian Equities

 India‟s GDP growth released for the last quarter of 2009-10 turned out to be robust, it
showed a record growth of 8.6 percent as compared to the growth of 5.8 percent in the
same quarter of previous year. For the fiscal 2009-10 India's economy grew by 7.4
percent which is an upward revision from earlier estimates of 7.2 percent due to higher-
than-anticipated growth in agriculture, mining and manufacturing sectors.

 The IIP numbers in April 2010 continue to rise, it grew by 17.6 percent which was higher
than the rate of 13.5 percent increase recorded a month ago. This is mainly led by the
notable growth seen across all sectors. The industrial growth was just 1.1 percent a year
ago, i.e. in April 2009.

 In the opening month of 2010-11, growth came from the three sectors, mining,
manufacturing and electricity. As per the use-based classification, growth numbers were
also found to be remarkable;especially, the capital goods sector, this achieved a growth of
72.8 percent indicating a rise in investment sentiments in the economy. The consumer
goods sector appeared to have performed well as it posted growth of 14.4 percent in April
2010. This growth is mainly fuelled by high growth in consumer durables, registering an
increase of 37 percent in April 2010. Fifteen (15) out of the seventeen (17) industry
sectors witnessed positive growth in the first month of the present fiscal (2010-11) as
compared to the growth numbers in the same month of previous year.

 Growth in six core infrastructure industries accelerated by 5.1 percent in April 2010 as
compared to 3.7 percent in April 2009. This growth is attributed to high performance in
the sectors such as finished steel, crude petroleum, and petroleum refinery.

 The overall inflation averaged for the month of April 2010 stood at 9.6 percent as
compared to the inflation of 1.3 percent seen in the same month of previous year. This
rise in price index is on account of dearer food articles and fuel products.

 The broad money supply increased by 0.8 percent in April 2010 compared to growth of
2.6 percent in the same month of 2009. The growth in bank credit to commercial sector
was seen to decelerate by (-) 0.8 percent.

 The aggregate deposits expanded by 1.6 percent in April 2010 , calculated over March
2009 numbers . This expansion in aggregate deposits, was however, marginally higher in
the same month of previous year.

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  The rising indices show that strong sentiments among the investors. Investment
sentiments in the Indian stock market BSE Sensex was maintained above 17K in April
2010, whereas NSE index NIFTY rose to stay above 5K points.

 There has been a decline by 0.3 percent in the fiscal deficit in the opening month of the
current financial year 2010-11 as the deficit has stepped down from Rs 54158 crore in
April 2009 to Rs53993 crores in April 2010.

 The growth in gross tax revenue was observed to enter the positive quadrant during the
month of April 2010. This is mainly on account of strong revival in the collection of
indirect taxes and partly on account of collection in direct taxes.

 India‟s merchandise trade growth numbers show improvement since November 2009.
The role of low base in the high growth cannot be denied, but one cannot also ignore the
rise in demand in the international market. Latest figure available for April 2010 showed
growth in exports by 36.2 percent as against the negative 33.2 percent observed in same
month of last year.

 The total foreign investments attracted in 2009-10 amounted to USD 66.5 billion
compared to USD 21.3 billion during 2008-09. However, the numbers were almost same
when foreign direct investment for both the years were being compared.

 Foreign exchange reserves stood at USD 279.6 billion in April 2010 from USD 251.7
billion April 2009. This increase is subject to the recent surge in the foreign investments
inflows.

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Stock market trends: The positive sentiments in Indian stock market continued to remain. The
directional change in the movements of large capital inflows towards India due to Euro zone
turmoil has added much impetus to the Sensex figures in both BSE and NIFTY indices. As a
result BSE Sensex was observed to rise upto the level of 17693 points in April 2010 from 16773
points, traded in the previous month. Whereas NSE index NIFTY rose sharply from 5027 points
in March 2010 to 5291 points in April 2010.

Monthly trends in stock market indices (beginning of month figures)

% S&P CNX %
DATE SENSEX CHANGE NIFTY CHANGE
01.01.08 20300 4.8 6144 6.6
01.02.08 18242 -10.1 5317 -13.5
03.03.08 16677 -8.5 4953 -6.8
01.04.08 15626 -6.3 4739 -4.3
02.05.08 17600 12.6 5228 10.3
02.06.08 16063 -8.7 4739 -9.3
01.07.08 12961 -19.3 3896 -17.8
01.08.08 14656 13.1 4413 13.3
01.09.08 14498 -1.1 4447 0.8
01.10.08 13055 -9.9 3950 -11.1
03.11.08 10337 -20.8 3043 -23
01.12.08 8839 -14.5 2682 -11.9
26.12.08 9328 5.5 2857 6.5
30.01.09 9424 1 2874 0.5
02.03.09 8607 -8.7 2674 -7
31.03.09 9708 12.8 3020 12.9
29.04.09 11403 17.5 3473 15
01.06.09 14840 30.1 4529 30.4
01.07.09 14645 -1.31 4340 -4.1
03.08.09 15924 8.7 4711 8.5
01.09.09 15551 -2.3 4625 -1.8
01.10.09 17134 10.2 5083 9.9
03.11.09 15405 -10.1 4564 -10.2
01.12.09 17198 11.6 5122 12.2
04.01.10 17558 2.1 5232 2.1
01.02.10 16356 -6.8 4900 -6.4
02.03.10 16773 2.5 5017 2.4
01.04.10 17693 5.5 5291 5.5

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25
Derivative Terminology:

Forwards: A forward contract is a customised contract between two entities, where settlement
takes place on a specific date in the future at today‟s preagreed price.

Futures: A futures contract is an agreement between two parties to buy or sell an asset at a
certain time in the future at a certain price. Futures contracts are special types of forward
contracts in the sense that the former are standardised exchange-traded contracts.

Options: Options are of two types – calls and puts. Calls give the buyer the right but not the
obligation to buy a given quantity of the underlying asset, at a given price on or before a given
future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the
underlying asset at a given price on or before a given date.

Warrants: Options generally have lives of upto one year, the majority of options traded on
options exchanges having maximum maturity of nine months. Longer-dated options are called
warrants and are generally traded over-the-counter.

LEAPS: The acronym LEAPS means Long Term Equity anticipation Securities. These are
options having a maturity of upto three years.

Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is
usually a moving average or a basket of assets. Equity index options are a form of basket
options.

Swaps: Swaps are private agreements between two parties to exchange cash flows in the future
according to a prearranged formula. They can be regarded as portfolios of forward contracts. The
two commonly used swaps are:

Interest rate swaps: These entail swapping only the interest related cash flows between the
parties in the same currency

Currency Swaps: These entail 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.

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Swaptions: Swaptions are options to buy or sell a swap that will become operative at the expiry
of the options. Thus, swaptions is an option on a forward swap. Rather than have calls and puts,
the swaptions market has receiver swaptions and payer swaptions A receiver swaption is an
option to receive fixed and pay floating. A payer swaption is an option to pay fixed and
receive floating.

OPTION

In, at and out-of-the-money

A call option is in-the-money when the underlying price is higher than the option‟s exercise
price, and is out-of-the-money when the underlying price is lower than the option‟s exercise
price. A put option is in-the-money when the underlying price is lower than the option‟s exercise
price, and is out-of-the-money when the underlying price is higher than the option‟s exercise
price. An option is at-the-money when the underlying price is equal to the option‟s exercise
price. In practice the option with the exercise price nearest to the prevailing underlying price is
called the at-the-money option.

Intrinsic and time value: The option price, or premium, can be considered as the sum of two
specific elements: intrinsic value and time value.

Intrinsic value: The intrinsic value of an option is the amount an option holder can realise by
exercising the option immediately. Intrinsic value is always positive or zero. An out-of-the-
money option has zero intrinsic value. Intrinsic value of in-the-money call option = underlying
product price - strike price Intrinsic value of in-the-money put option = strike price - underlying
product price

Time value: The time value of an option is the value over and above intrinsic value that the
market places on the option. It can be considered as the value of the continuing exposure to the
movement in the underlying product price that the option provides. The price that the market
puts on this time value Depends on a number of factors: time to expiry, volatility of the
underlying product price, risk free interest rates and expected dividends.

Time to expiry: Time has value, since the longer the option has to go until expiry, the more
opportunity there is for the underlying price to move to a level such that the option becomes in-
themoney. Generally, the longer the time to expiry, the higher the option‟s time value. As expiry
approaches, the value of an option tends to zero, and the rate of time decay accelerates.

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Time value decay curve:

Volatility: The volatility of an option is a measure of the spread of the price Movements of the
underlying instrument. The more volatile the underlying instrument, the greater the time value of
the option will be. This will mean greater uncertainty for the option seller who, will charge a
high premium to compensate. Option prices increase as volatility rises and decrease as volatility
falls.

Effect of volatility increase/decrease on long straddle

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Option sensitivities
The sensitivities are commonly referred to as the „Greeks‟ and these are defined below.

Delta: measures the change in the option price for a given change in the price of the underlying
and thus enables exposure to the underlying to be determined. The delta is between 0 and +1 for
calls and between 0 and -1 for puts (thus a call option with a delta of 0.5 will increase in price by
1 tick for every 2 tick increase in the underlying).

Gamma: measures the change in delta for a given change in the underlying. (e.g. if a call option
has a delta of 0.5 and a gamma of 0.05, this indicates that the new delta will be 0.55 if the
underlying price moves up by one full point and 0.45 if the underlying price moves down by one
full point).

Theta: measures the effect of time decay on an option. As time passes, options will lose time
value and the theta indicates the extent of this decay.
Both call and put options are wasting assets and therefore have a negative theta. Note that the
decay of options is nonlinear in that the rate of decay will accelerate as the option approaches
expiry. As the table below illustrates, the theta will reach its highest value immediately before
expiry.

Vega: measures the effect that a change in implied volatility has on an option‟s price. Both calls
and puts will tend to increase in value as volatility increases, as this raises the probability that the
option will move in-the-money. Both calls and puts will thus possess a positive vega.

29
 COMMODITY
 WHAT IS COMMODITY?

 ECONOMIC SIGNIFICANCE

 INVESTMENT IN GOLD

30
 In general, commodity is anything that can be traded on exchange. However, a commodity is a
product whose value is derived from the value of one or more Underlying Assets or variables in
a contractual manner. Depending upon the fluctuations in the price of the Underlying Asset,
this price lock leads to three possibilities and their subsequent consequences.

The price will fall below the locked price.

The price will rise above the locked price.

The price will remain the same as locked price.

A farmer who sowed his crop in June faced uncertainty over the price he would receive for his
harvest in September. In years of scarcity, he would probably receive attractive prices. However
during times of oversupply, he would have to dispose of his harvest at a very low price. Clearly
this meant that the farmer and his family were exposed to a high risk of price uncertainty.

On the other hand, a merchant with an ongoing requirement of the grains too would face a
price risk - that of having to pay exorbitant prices during dearth, although favourable prices can
be obtained during periods of oversupply. Under such circumstances, it clearly made sense for
the farmer and the merchant to come together and enter into a contract whereby the price of
the grain to be delivered in September could be decided earlier. What they would then
negotiate happened to be a futures-type contract, which would enable both the parties to
enable the price risk.

31
Industrial Significance:

Futures trading plays a key role in the marketing of a number of important agricultural and
nonagricultural commodities as it provides the industrial and farming communities with a
transparent price discovery platform, which also enables them to hedge their price risk and price
volatility. The growth of Indian commodities futures trading towards an efficient, transparent and
well-organised market has thrown open a window of benefits and opportunities to Indian
producers and traders. Besides the primary benefits of its twin economic functions of price
discovery and price risk management, commodity futures trading has also played an instrumental
role in integrating various fragmented components of the commodity ecosystem, thus developing
the overall infrastructure of agricultural commodities marketing in the country.

Economic functions performed by Derivatives market:

Discovery of Prices: Prices in organized Derivatives Markets reflect the perception of the
market participants about the future movement in prices. These prices lead the prices of
Underlying Assets to the perceived future level. The prices of Derivatives converge with the
prices of the Underlying at the expiration of the Derivative Contract. Thus, Derivatives help in
the discovery of Future as well as Current prices. Example: Anil, an ornament manufacturer,
follows the gold price in MCX to have an idea of the price prevailing the market. Whenever he
goes to a bank or a trader to buy gold, he negotiates on the price quoted to him by the bank or the
trader. He can rationalize spot gold price as he monitors MCX futures price, which is transparent
to the market. Here, participants in gold spot market discover the spot price of gold. This
prohibits banks and traders from dominating the market as a single entity.

Transfer of Risks: Derivatives Markets helps to transfer risk from the original bearer to the one
who wants it. A gold trader who speculates the price of gold to fall in future will sell it to another
trader. This will shift his/her risk to another trader who wants it.

Growth of trade volume: Derivatives are linked to the Physical Market of the Underlying asset.
Introduction of Derivatives increases the number of participants in the Physical Market. This
helps in increasing the volume of trade.

Supervision of market: In the absence of an organized Derivatives market, speculators trade in

the Physical Markets. This gives rise to mixed markets which are difficult to be monitored.
Hence, emergence of organized Derivatives Markets also helps in controlling the activities of the
traders.

32
Growth of entrepreneurship: Derivatives Market has a history of attracting many bright,
creative, well educated people with an entrepreneurial attitude. They often energize others to
create businesses, products and employment opportunities. This leads to the growth of
entrepreneurship.

Growth of savings and investments: Derivatives Markets help increase savings and investment
in the long run. The transfer of risk enables market participants to expand their volume of
activity. This expands their capacity to save and invest.

Growth of savings and investments: Derivatives Markets help increase savings and investment
in the long run. The transfer of risk enables market participants to expand their volume of
activity. This expands their capacity to save and invest.

33
Commodity Exchanges in India:

In India, there are two major exchanges for trading in Commodities:

Multi Commodity Exchange (MCX) is an independent commodity exchange based in India. It was
established in 2003 and is based in Mumbai. The turnover of the exchange for the period Apr-
Dec 2008 was INR 32 Trillion.Popular commodities traded in MCX :

Agri Produts

Plantation Products Pulses Cereals

Rubber Chana Wheat
Yellow Peas Barley
Maize (Yellow/Red)

Spices Fibres Oil and Oilseeds

Pepper Indian 28.5 mm Cotton Castor Seed
Turmeric V -797 Kapas Cotton Seed Oilcake
Jeera Soy Bean
Chilli Mustard Seed
Coriander Crude Palm Oil

Non Agri Products

Polymers Metals Energy

Polypropylene Steel Crude Oil
Linear Low density Polyethylene Copper Thermal Coal
Polyvinyl Chloride Zinc Brent Crude Oil
Aluminium Natural Gas
Nickel Gasoline
Lead Heating Oil

Precious Metals
Gold
Silver
Platinum

34
 2) National Commodity & Derivatives Exchange Limited (NCDEX) is an online commodity
exchange based in India. It was incorporated as a private limited company incorporated on
April 23, 2003 under the Companies Act, 1956. It obtained its Certificate for Commencement of
Business on May 9, 2003. It has commenced its operations on December 15, 2003. NCDEX is
a closely held private company which is promoted by national level institutions and has an
independent Board of Directors and professionals not having vested interest in commodity
markets.

Bullions Metals Energy Oil & oil seeds Others

Gold Aluminiun ATF Crude Palm Oil Almond
Silver Copper Crude Oil Kapasia Khalli Gaur Seed
Electricity weekly Refined Soya Melted Menthol
Platinum Lead & monthly Oil Flakes
Mild Steel
Ingot,Billets Gasoline Soya Bean Mentha Oil
Nickle Heating Oil Potato(Agra)
Tin Imported Thermal Coal Plantations
Zinc Natural Gas Rubber

Pulses Cereals Weather Fiber Spices

Chana Barley Carbon(CER) Kapas Cardamom
Wheat Carbon(CFI) Coriander
Maize Turmeric

Recently, a new exchange for commodities has come to existence. It is known as Indian
Commodity Exchange (ICX).

35
INVESTMENT IN GOLD: Gold is the oldest precious metal known to man and for thousands
of years it has been valued as a global currency, a commodity, an investment and simply an
object of beauty.

Market Dynamics - Factors affecting Gold Prices:

Supply Side Other Factors Demand Side

New Gold Discoveries Financial & Economic Crisis Religious Festivals
Central Bank Reserves Inflation Industrial Demand
Political Risks Golden China
Indian Wedding Season

Gold Market Dynamics – Demand by Sector

Total global demand for Gold in 2008 Approx was 3800 tonnes of which the strongest demand
for jewellery accounted for 2185 tonnes. Total industrial demand, including from dental
industry was 435 tonnes. ETF’S & other similar products accounted for 320 tonnes. 862 tonnes
were converted into bars, gold coins and other retail investment products.

Demand by Sectors

36
 Gold Reserves – Holdings of Central Bank and IMF

Gold Market Dynamics – Supply:

Total supply of Gold, including

scrap gold sales was over 3500
tonnes in 2008.

Mine production in 2008 was

around 2064 tonnes.

Gold mine production has been

on decline. The peak production
was in the year 2001 with 2600
tonnes.

There is a dearth of new mine

discoveries.

Hence the demand and supply

gap is widening constantly.
Some of this gap is filled by old gold scrap sales.

Moreover, at the time of an economic crisis (such as the recent US recession), Central
Banks around the world tend to replace their dollar reserves with gold.

37
 Further, there is a strong demand for gold in emerging markets, particularly India and
China.

All these factors contribute in creating a very strong investment demand in Gold.

Declining Gold Production from 1990 to 2008

38
Why Invest in Gold:

1. Gold as an Inflation hedge: Gold is renowned as an Inflation hedge – as the inflation goes
up, the price of Gold also tends to go up. Gold preserves the purchasing power and in fact
even increases it gradually. Inflation adjusted Gold prices have generated a positive rate of
return in the past few years.

2. For the past few years, gold has outperformed various other asset classes, which included
cash market, short and long term debt and CNX S&P NIFTY.

3. Gold is the most liquid asset in the world. One can buy/ sell a gold bar or a gold coin of
99.9% purity or 99.5% purity anywhere in the world at its due worth, without the risk
attached to other investments like exchange rate risk.

4. Gold as a Dollar hedge: Gold has historically exhibited inverse relationship to the US
dollar, which has grown stronger in the recent years. This is because Gold is bought and sold
in US dollars, so any decline in the value of dollar causes the price of Gold to rise.

39
 Gold vs Dollar

5. Gold has a low correlation with other asset classes and thus acts as an effective portfolio
diversifier. A portfolio comprising of un-correlated assets generally has low volatility.
Hence, Gold helps in containing the portfolio risk.

6. Gold acts as a safe haven during the financial crisis.

7. Gold exposure is warranted based on macroeconomic conditions.

8. In the recent past, Central Banks have changed their attitude towards Gold by increasing
their Gold reserves.

40
 CURRENCY

 CURRENCY FUTURE

 OPERATIONS TERMINOLOGY

 HEDGING OPTIONS

 VALUE PROPOSTION

 STRATEGY

 CONTRACT SPECIFICATION

41
What is currency futures?
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”. 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 and delivery date. Both parties of the
futures contract must fulfill their obligations on the settlement date.

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 underlyings. For e.g. in the case of
the USD-INR currency futures contract the tick size shall be 0.25 paise or 0.0025 Rupee. To
demonstrate how a move of one tick affects the price, imagine a trader buys a contract (USD
1000 being the value of each contract) at Rs. 42.2500. One tick move on this contract will
translate to Rs.42.2475 or Rs.42.2525 depending on the direction of market movement.

Purchase price: Rs.42.2500

Price increases by one tick: +Rs.00.0025
New price: Rs.42.2525
Purchase price: Rs.42.2500
Price decreases by one tick: –Rs.00.0025
New price: Rs.42.2475

The value of one tick on each contract is Rupees 2.50 (1000X 0.0025). So if a trader buys 5
contracts and the price moves up by 4 ticks, he makes Rupees 50.00

Step 1: 42.2600 – 42.2500

Step 2: 4 ticks * 5 contracts = 20 points
Step 3: 20 points * Rupees 2.5 per tick = Rupees 50.00
(Note: The above examples do not include transaction fees and any other fees, which are
essential for calculating final profit and loss)

42
Why currency risk emerged?

a) The last few years have seen extreme volatility in USDINR and G3 currencies. Starting with
recession in US to Euro zone crisis have had seen extreme volatility.

b) Correlation to equities and oil has been high. Particularly in India as its major chunk of export
consist of oil.

c) Corporate selling of USD contributed significantly to volatility. We have seen recently Infosys
quoting very low profit reasoning that currency volatility impacted the profit figures.

d)Not only spot, forwards have also been very volatile. In the month of june many banks have
cancelled their position made in the market because of volatility and uncertainity

e)Initiatives towards stricter Accounting principles.

Translates to …………

a)Need for a sound “Risk Management Policy”

b)Analyzing the profit and loss profile and balance sheet exposures

c)Strict definition of treasury role

d) Dynamic review of applicability and execution of the risk management policy

43
Foreign Exchange Market

Products:

a) Spot
b) Forwards
c) Spot + forward points

Market participants:

Market makers vs price takers

Hedgers, arbitrageurs, speculators
Banks, institutions, corporate entities, individuals

Regulators: RBI

Annulised volatility:

Date UNDERLYING FUTURES ANNUALISED

ANNUALISED ANNUALISED VOLATILITY
VOLATILITY VOLATILITY (NIFTY)
(USD/INR) (USD/INR)

01-Feb-10 7.65 7.64 22.47

44
Concept of base currency and quoted currency

USD / INR = 47.00

Base Currency / Quoted Currency

Base currency is the currency the value of which is given in terms of quoted currency. Here
USD is the base currency and INR is the quoted currency.

First two letters of the code are the two letters of the Country‟s code and the third letter
represents initial of the Currency name of respective Country

For example:

USD - US represents United States and D represents Dollar

INR – IN represents India and R represents rupee.

Except EURO as it is the official currency of Euro Zone

Operation:

Understanding quotes

Forex markets works on two way quotes

Bid rate - rate at which the bank is ready to buy dollars

Ask rate - rate at which the bank is ready to sell dollars
The difference between the Bid and the Ask is called the Spread

Quotation methods

Direct method (European Method)

Indirect method (American method)

45
BID v/s ASK

Bid : Bank is ready to buy dollars, i.e. exporter‟s will have at this rate,

ASK: Bank is ready to sell dollars at this rate i.e. importers will have to buy at this rate.

Note : In case of indirect quote, one must take care of Bid Ask rate.
Also the difference between the Bid/Ask is Banks profit.

European Method (Direct method):

Exchange rate expressed in local currency in terms of per unit foreign currency

BID ASK

Bank's buying rate Bank's selling Rate

USD/INR 46.41 46.43

USD/JPY 89.32 89.34

American Method (Indirect Method):

Exchange rate expressed in foreign currency in terms of per unit local currency

BID ASK

Bank's buying rate Bank's selling rate

EUR/USD 1.4000 1.4009

GBP/USD 1.6193 1.6195
AUD/USD 0.8989 0.8991
NZD/USD 0.7066 0.7067

46
Movement Of forex

a)European method

E.g. - USD/INR current rate – 46.50

If it increases to 47.50, this would mean-

US dollar has appreciated against Indian rupee or

Indian Rupee has depreciated against US dollar

b) American Method

E.g. – EURO/USD current rate – 1.4045

If the rate increases to 1.4050, this would mean-

Euro has appreciated against dollar and

US dollar has depreciated against EURO

Reading cross currency quotes

Pips / Big Figures

EUR/USD – 1.4000 / 04
Here last two digits are considered as pips.

For example: If Euro moves from 1.4000 to 1.4009, it is considered as euro has appreciated by 9
pips against USD

Big Figure Pips

The third digit is considered as big figure

For example: If Euro moves from 1.4000 to 1.4500, then it is said that euro has appreciated by 5
big figure against USD

47
Calculating cross rate currencies: Currency rates available from sources like Bloomberg.com
helps in getting rates of different currency pairs. This helps in getting cross currency rates. Cross
currency rates when adjusted to risk free rate of respective economies help in trading at domestic
market. As it will tell us whether the foreign currency is at discount or at premium in domestic
market and we can define our strategy accordingly.

For eg:-

1) Euro/USD = €1/$1.4000
USD/INR = $1/Rs.46.5

Multiplying both we get

Euro/INR = €1/Rs65.10

2) USD/INR = $1/Rs.46.50
USD/JPYN= $1/YEN 89.60

Dividing both we get:

JPYN/INR = 0.5189

Implication of change in currency rates

1) Cost of Imports: Import, in general, means buying goods/services from foreign nations.
An importing firm has to make payment in the currency of the country from which it is
importing. For this it has to buy the foreign currency by selling domestic currency. Such
a trade is done on an exchange rate which keeps on changing depending on certain
market factors. In case of imports, bills are made on one date and payments are made on
another date. As such a firm may gain or loss due to volatility in exchange rate. There is
always the element of uncertainity and creates a risk to the importer.

For example: On 1st August an importer may be billed $50000 (INR 2300000)when the
USD/INR=46.0000 with due date on 1st September. On 1st September Indian rupee
depreciates against US Dollar by 75 paise. The new cost to the importer will be INR
2337500. Here there is loss of Rs37500 to the importer. This shows the effect of currency
rate changes on cost of import.

48
 2) Realisation on exports: Export means selling of goods/services to another country.
Depending upon the contract the seller may receive advance payment which is less risky.
But if the payment is to be made at a latter date on completion of certain events or
anything else, it carries the risk of currency rate fluctuations. In the globalised market
exporters make deals on competitive rates. And the change in currency rate may change
the look of balance sheet altogether.

For example: When Infosys announced its 1st quarter result of the current year it
displayed a dismayed performance. Major part of its revenue comes from foreign market.
Weakening of euro was said to be one of the prime reason for the decrease in revenue.

3) Capital goods imports: Capital goods import like machinery etc involve heavy
expenditure. This is done in foreign exchange. So the changes the currency value affects
there purchase decisions.

4) Engineering contracts offshore: It involves transfer of resources like man and material
between countries which involve cost. The revenue from such a contract may decrease
due tp change in currency value.

5) Profitability: Export or import oriented firms many times show increase in topline but
bottom line does not reflect it. This reflects in market sentiments by decrease in the
market value of the company.

49
OTC v/s Currency futures

OTC Market Currency Future

Price transparency Low, bilateral contract with High, Online real time screen
banks

Liquidity Subject to credit limit Margins equate all participants

Settlement Full notional, unless cancelled Net settled in INR

Credit Exposure Exposure to your counter Clearing corporation

party(bank) guarantees all trades

Execution Only by authorized dealer 500+ Trading members,

including banks

Margins/MTM Nil Margins and MTM are

mandatory

50
Comparative study of hedging options available at different plateforms:

Corporate need to hedge because: More and more companies are faced with the problem of how
best to deal with currency exposure. This is no longer an issue faced only by large multinational
corporations. Increasingly, small firms and even individuals are faced with the same problem:
signed contracts or purchases in a different currency that take place in the future may result in
unplanned cost if the currencies fluctuate unfavorably. Smaller companies and individuals are
more than likely to ignore the issue and concentrate on the business at hand. But it can become
costly.

It is important to use a hedging strategy to eliminate currency exposure and the attendant risk
associated with currency movement. Luckily, a number of vehicles for hedging forex risk exist.
They all either involve finding a way to buy foreign currency now at today's exchange rate (so
we can know our costs are and have a sound basis on which to set the price of our
product/service), or finding a way to gain the right to buy foreign currency at a later date at
today's fixed exchange rate.

Hedging allows us to manage the risk and reduce potential risk. If we don't hedge, it's tantamount
to speculating that the foreign currency rate will stay the same. If the rate ends up moving
unfavorably, our speculation can be costly.

Different hedging vehicles have been evaluated using the following scenario

Scenario: As a Indian based company, you sign a contract where you have to pay USD
500,000 in six months. Suppose the current USD/INR rate is 46.00.
How much is this USD 500,000 really going to cost you in INR? It will depend on the exchange
rate fluctuations over the next 6 months. Using this scenario as an example, we will briefly
review four hedging solutions available today:

A: Bank Account
B: Currency Forward Contract
C: Futures Contract
D: Currency Options

51
Solution A: Bank Account
At a major bank:
Open a USD account;
buy USD500,000 and deposit it into the Euro account

By buying the USDs up front, today's exchange rate is locked in, and future Euro fluctuations do
not affect the cost of the contract.
There are several problems with this approach:

1. It is unlikely you will get a good exchange rate or competitive interest rate at the bank;

2. You need to pay roughly Rs. 2,300,000 or more to buy the Euros up front, using scarce
cash resources. You may not have these INR funds or an available credit line.

3. If you are using a credit line to fund the USD bank account, the USD credit line will
likely have a higher rate of interest.

Solution B: Currency Forward Contract

At a major bank, ask for a currency forward contract. A currency forward contract is a
negotiated agreement between two parties to exchange specific amounts of currency at a set
rate on a particular day. The forward rate is priced based on the current exchange rate, the
interest differential for the contract time, a cost to cover potential negative changes to the
interest risk differential, and a flexible built-in commission for the forward contract provider.

Currency forward contracts tend not to be very flexible, so there are several disadvantages:

1. Often, the forward rate includes an uncompetitive exchange rate or high built-in
commission, making this solution quite costly;

2. You would require many forward contracts for more complicated scenarios (such as
monthly payments)

3. Since a forward contract is between two parties, there is no secondary market for the
purchase and sale of these contracts, making them rather inflexible or expensive to
extend or terminate early.

52
Solution C: Futures Contract
Buy a futures contract on a formal exchange from an authorized dealer. Futures are similar to
forward transactions, in that the cost is based on the current exchange rate, the interest
differential for the contract time, an amount to cover potential negative changes to the interest
risk differential, and a formal commission.

The major advantage of futures contracts over forward contracts is the existence of a liquid
secondary market on the formal exchange so they can be sold at any time on the open market and
do not have to be held until their maturity date. Futures contracts can be traded on organized
exchanges such as the Chicago Mercantile Exchange (CME) or London International Financial
Futures Exchange (LIFFE) or National Stock Exchange(NSE). These exchanges dictate contract
specifications, such as expiration times, face amount, and margin requirements.

Disadvantages of futures contracts for the purpose of hedging include:

1. Futures contracts involve not just a spread, but also a commission;

2. Face value of futures contract are fixed. For example, USD are generally sold in lots of
USD 1000, making it difficult to make up the exact value of the deal;
3. A margin deposit must be posted and maintained daily;
4. Limited expiration times;
5. It is unlikely you will get a good exchange rate or competitive interest rate on your
margin account;
6. Futures contracts are typically speculative, so taking delivery of the money at the end of
the term is not expected and may cost commission.

Solution D: Currency Options (coming up in near future in India)

Buy a currency option at a bank. A currency option gives the holder the right, but not the
obligation, to sell or buy a face amount of currency at a set price, on or before a given date. A
currency option has a strike price, being the amount for which the currency can be bought or
sold for, and an expiration date. US options can be exercised any time up to and including the
expiration date, whereas European options can only be exercised on the expiration date. There
are two types of options. Call options give the holder the right to buy a given amount of a
currency at the strike price. Put options, on the other hand, give the holder the right to sell a
given amount of currency at the strike price.

Options are one-sided contracts (options, but not obligations) that are priced based on a
number of variables (exchange rates, interest differentials, duration of contract, historical
exchange rate volatility, and a built-in commission for the provider). They are a method of
speculating on future currency movements, and you pay a price for that right to speculate.

53
 Like futures, the major advantage of options over forward contracts is the existence of a liquid
secondary market. As a result, options can be sold at any time on the open market and do not
have held until their expiration date.

The disadvantages are also similar:

1. Options traded on formal exchanges must be purchased in fixed face values and lot sizes.
Some banks offer their own options with any notional amount, but these options may
cost you more as you will not be purchasing the option in an open market.
2. The options have to be purchased. There is a cost involved, and premiums to pay.
3. You will bear the risk and potential cost associated with the difference between the
amount to hedge and the fixed option amounts.
4. They have expiry dates.

Comparision Summary

a) Cost

Bank Account Forward Account Future Contract Currency Option

Large Spreads x
Interest rate x
differentials
Interest risk x x x
premium
Commission x x x
Volatility x

Spreads: Bank accounts typically charge spreads 2% or 3% above interbank spreads. Forward
contracts, future contracts and currency options charge close to interbank spreads, but do have
the following built-in or explicit commissions and other special charges

Interest differential: All hedging methods charge an interest differential on the currencies,
either built into the rate offered or as a separate amount charged. Bank accounts typically charge
interest 2% to 3% above interbank rates for funds borrowed to purchase the foreign currency
(and pay much lower rates for funds deposited).

Interest risk premium: Interest risk premium is a variable amount charged by the issuing party
for potential changes in interest rates.

54
Commissions: Forward contract and option contract suppliers build commissions into their
products based upon how much they can charge the buyer. The commission is built into the
forward rate or included in the amount paid upfront for an option (it is also called the premium).

Volatility charge: Options are one-sided contracts which cost an upfront premium to purchase.
Options offer the right, but not the obligation, to engage in a future transaction. An estimate of
the future volatility of the foreign currency over the life of the option is built into the option
pricing. While an individual option may incur a large payout, other options will expire without
being exercised.

b) Features:
Bank Account Forward Future Contract Currency Option
Contract
Price No No Yes Yes
Transparency
Early Exit No No Yes Yes
Extend beyond Yes No No No
expiry date
Hedge exact Yes Yes No No
amount
Change hedge Yes Yes No No
amount

Price transparency: There is little price transparency in case of a bank account or forward
contract where the quotes are taken from agents(may be bank who charge there commission)
and they inturn get quotes from treasury ( who also add there commission). While rates are
available online incase of future contract and currency options.

Early exit: Forward contracts require break costs if you exit early. You risk market uncertainty
by selling a future contract, or selling/exercising a currency option.

Extensions beyond expiry date: Bank accounts and currency spot have no expiry dates. The
other products will require you to enter into new hedging contracts or risk currency fluctuations
between the expiry date and when the foreign exposure is settled.

55
Hedge exact amount: Contracts and options only offer fixed lot sizes. Currency spot and bank
accounts allow you to hedge to the nearest unit. Forward contracts in theory may be structured
to exact amounts, although often the amounts are not precise.

Change Amount: You can change the hedging amount by any amount for bank accounts or
currency spot. For contracts and options, you can only add or sell/exercise a fixed lot size.

d) Credit Requirement: All hedging options require either upfront cash, or require necessary
credit arrangements with the counterparty. A bank account requires the largest amount of
upfront cash (the full hedge amount). Currency options must be purchased upfront with cash.
Forwards will only be offered as part of your overall credit arrangement with the supplier,
and any resulting forward contracts will reduce your available credit lines. Future contracts
and currency spot hedging will require adequate margin amounts to cover the necessary
credit requirements.

Value Proposition of currency future:

Diversified: Currency futures are available on four currency pairs, viz: USD/INR,
GBP/INR, Eur/INR, and JPYN/INR.

The corporate can hedge their exposure(US Dollar, Great Britain Pond, Euro and YEN)
directly. Whereas in a setup with bank, hedging on any currency other then dollar requires
two transactions. First it will be done on dollar and then transferred to the respective
currency. Here the banks use dollar as a bus currency. And we have to pay commission
on both transactions, i.e, cutting both legs.

Price transparency: It is one important factor that attract corporate. Price discrimination
leads into built in profits for agents and extra cost to corporate. Prices of any available
currency pair can be checked by the corporate on the terminal provided by its broker or
even it can check it on NSE, BSE, MCX, and USX(from 1st September this year)
currency related sites.

Examples have been given in the following pages:

56
In the above figure we can see the quotes for near three months are available for the four
currency pairs. It also shows the best buying and selling price and other technical and important
information like volume traded, open interest.

The site shows the real time quote for currency pairs. It refreshes almost every second. Thus
giving a real time look at prices to the trader.

Trading at religare is done on odin terminals which show real time prices. This helps trader to
enter a hedge position in a more informed manner. He/she can also book profits if so desired.

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The NSE Fx market tracker also provides additional information. We can check the top five
buying and selling price and there respective lot offers at any particular point of time. It helps in
determining directional view of currency price. This information helps a speculater in taking a
position in the market.

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In the above figure we can check the quote of Eur/INR for the near 12months. Similarly we can
check for USD/INR, GBP/INR and JPY/INR. Although the quotes are available for 12 months
but liquidity goes on decreasing. In the figure we can see that quotes for EURINR are available
for upto 5 months. US Dollar is considered to be most liquid and YEN the least.

RELIGARE EDGE: But a company wants to enter into position suppose for 12months but
there is no liquidity in the exchange, then Religare offers the hedging position to the company
only if the company gives in writing that it wants only hedge its position and is not going to
involve in speculative trading. If the company agrees to it, Religare finds a similar party who
wants to make opposite position in the market to hedge exposer.

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 Cost: The cost of taking a position in the market through the exchange is same for all-
whether a big or small corporate or individual or any other investor. But in other plate
form the cost varies. It depends on the volume you want to hedge, your setup with the
bank, credit limits etc. In a research it was found that this charge can vary from 2% to
40%.

KYC: It stands for know your customer. In currency derivative we need to do KYC with
a broker only once to take any time position. Whereas we need to do KYC every time we
enter into a contract in other plate form.

Currency Strategy - 1

Trade date: 29th Jan‟2010

USDINR 28th Feb contract: 46.9000

Current OTC rate: 46.7500

Sell 10 Feb contracts: Value Rs. 4,69,000.00 (USD 1000 *10* 46.9000)

Hold contract to expiry: RBI fixing rate on 24th Feb 2010 – 46.0000

Futures return: Profit, Rs.9,000.00 (4,69,000.00 – 4,60,000.00)

Margins:

Approx. 4.00%: Rs 18,760.00

Funding @ 12%: Rs 2251.200 (if margins paid in cash).

Net return: Rs. 6,749.00

Margins (collateral) can be paid in FDs, Bank Guarantees, Approved Securities.

Daily Mark to Market will be in Cash only.

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Currency Strategy 2

Other currency pairs are an opportunity for Traders. How? Is explained below.

Directional Views

A 3rd currency to INR currency future gives a trader a powerful tool to take a directional views
on the 3rd currency versus INR. Incase, the trader wishes to take a position only against the
USD, he can do so by synthetically creating a cross currency position. Here is an example to
demonstrate the same.

Assume: EUR/INR Jan contract is EUR/INR Jan contract is trading at 65.5000 and USD/INR
Jan contract is trading at 46.23.

View: EUR to strengthen against the USD

Execution: You buy X contracts of EURINR @ 65.50 AND

You sell 1.4X contracts of USDINR @ 46.23 .

Effectively, you have synthetically created a buy Euro against USD position by doing this. There
remains some basis risk arising from mismatch in EURINR and USDINR amounts.

ECONOMIC VARIABLES IMPACTING EXCHANGE RATE MOVEMENTS

Various economic variables impact the movement in exchange rates. Interest rates, inflation
figures, GDP are the main variables; however other economic indicators that provide direction

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regarding the state of the economy also have a significant impact on the movement of a currency.
These would include employment reports, balance of payment figures, manufacturing indices,
consumer prices and retail sales amongst others.Indicators which suggest that the economy is
strengthening are positively correlated with a strong currency and would result in the currency
strengthening and vice versa.

Currency trader should be aware of government policies and the central bank stance as indicated
by them from time to time, either by policy action or market intervention. Government structures
its policies in a manner such that its long term objectives on employment and growth are met. In
trying to achieve these objectives, it sometimes has to work around the economic variables and
hence policy directives and the economic variables are entwined and have an impact on
exchange rate movements.

For instance, if the government wants to stimulate growth, one of the measures it could take
would be cutting interest rates and if such a measure is seen to bear expected results then the
market would react positively and its impact would also be seen in the strengthening of the home
currency. Inflation and interest rates are opposites. In order to reduce inflation, which reduces the
purchasing power of money, often the policy of high interest rate is followed but such a policy
hinders growth therefore a policy to balance inflation and interest rates is considered ideal and
the perception of the success of such a policy by the participants in the foreign exchange market
will impact the movement and direction of the currency.

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Contract Specification
Category
Trading hours
Contract months
Last trading day
Final settlement day
Settlement
Holiday calender
Description
9a.m to 5p.m (Monday to Friday)
12 near calendar month
Two business days prior to last business day of the month (spot
convention)
Last working day of the month
INR cash settled at RBI reference rate
Mumbai Inter-bank

Features of currency pairs:

USD/INR EURO/INR GBP/INR JPYN/INR

Quotation Rate of Rate of Rate of Rate of
exchange exchange exchange exchange
between 1 between 1 between 1 GBP between 100
USD and INR EURO and INR and INR JPY and INR
(USDINR) (EURO-INR) (GBPINR) (JPY-INR)
Contract size USD 1000 EURO 1000 GBP1000 JPYN100000
Minimum Initial 1.75 % on First 2.80 % on First 3.20 % on First 4.50 % on First
Margine Day & 1% Day & 2% Day & 2% Day & 2.30%
thereafter thereafter Thereafter thereafter
Extreme loss 1% 0.3% 0.5% 0.7%
margine
Calender spread Different Different Different Different
margine Margins for Margins for Margins for Margins for
Different Different Different Different
Spread Spread Spread Spread
Client level 6% of the 6% of the Open 6% of the Open 6% of the Open
Open Interest Interest or Interest or Interest or
or EUR 5 Million GBP 5 Million JPY 200 Million
USD 10 Million whichever is whichever is whichever is
whichever is higher higher higher
higher
Non-bank 15% of the 15% of the 15% of the 15% of the
trading member Open Interest Open Interest or Open Interest or Open Interest or
or USD 50 EUR 25 Million GBP 25 Million JPY1000 Million
Million whichever is whichever is whichever is
whichever is higher higher higher
higher
Bank 15% of the 15% of the 15% of the 15% of the
Open Interest Open Interest or Open Interest or Open Interest or
or USD 100 EUR 50 Million GBP 50 Million JPY2000 Million
Million whichever is whichever is whichever is
whichever is higher higher higher
higher

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Product specifications:

Collaterals/ Margins: This are based on previous day volatility. Released once trade is
unwound or the contracr matures. They are in the form of cash, bank guarantee, fixed deposists,
Government of India bonds, approved equities/mutual fund units. Collaterals like cash is
releashed next day in the bank a/c, Fixed deposit and Bank guarantee on the same day and
approved securities to custodians on same day.

Settlement: Daily settlement: Closing price of each contract is based on last 30 minutes
weighted average. Revolving settlement cycle is od T+1 day. It is setteled through the clearing
member. Final settlement is in cash ,i.e, paid or received in cash.

Final settlement: RBI is the regulator and fixes the price at 12 noon on last trading day. Net
settled in cash.

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Analysis

We divided our target market into three segments-

a) Individual consumers: We approached individual customers both personally and

telephonically. Interview method was adopted to collect maximum information. We came
to know about their current investments and awareness of other investment products.
After ascertaining their risk profile we pitched our products.

b) Commodity traders: We divided this group into two further segments- metal dealers
and jewelers. Both metal dealers and jewelers were visited personally. We did a market
mapping and primarily visited Gold Souk in Gurgaon and Karol Bagh Jewelers market.
It was ascertained that few of them have invested in gold at exchange. But the maximum
of them where unaware about making a hedge position and some of them where
uninterested. We shared our knowledge and pitched our product to them. They where
also later backed by information through email for any query.

c) Exporters: We targeted the export houses in Gurgaon. We visited over 100 export
houses. The purpose was to know whether they hedge their foreign exchange exposer and
their other investments like in shares etc. Some of them where also invited to a awareness
campaign by MCX. We showed them the benefits of hedging currency risk with us as
against with bank. We also informed how their surplus funds can be better used by
participating in institutional broking. The advantage of funding were also conveyed.

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 1. Respondent ready to invest in different investment options or have already
invested in them:

Analysis: According to the figure people are less aware about the investments in commodity and
currency. Around 60% people have invested or are willing to invest in equities but many of them
have faced losses and where unwilling to enter the market again.

Use: This information was used to inform them about investment in commodities and currency.
We also had counseling session with investors who have faced losses in equity market.

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 2. Investment purpose

Analysis: 90% of respondents where looking for short term profit ,i.e, this group will
accepting our products.

Use: this information was used to pitch particular products to the respondent. The
information here gives an idea about an individual risk appetite and liquidity needs of
fund. So the products ranging from equity to insurance where offered.

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Follow up:

A database was made out of data collected. Three methods were used to follow target customers:

1. Personnal visits
2. Phone calls
3. E-mail.

Recommendation:

1. Ethical practice: Relationship managers who are trusted by investors for proper
management of their funds indulge in brokerage generation overlooking the interest of
the later. As a result, the margin money becomes negligible and also the investor fears to
enter the market again. The money which could have multiplied for years generating both
income to the investor and brokerage to the firm is lost. Moreover it is loss to Indian
economy. Religare should tell its employees to follow strict ethical rules from day one of
joining the platform.

2. Training: There should be a proper induction and training procedure. The industry lacks
in this regard. Senior executives generally take the role of trainers. Though it cuts the cost
for the company but it also means sharing of their time which could be more costly. So
the company should hire dedicated trainers which can train the new employees as well.

3. Documentation: Know your customer or kYC involves documentations and around more
then forty signatures of the clients. Though they are for the benefit of the investor but in
realty it acts the opposite way. Many of them don‟t read the documents and some others
are willing to sign so many papers. When explained properly they do comply with the
formalities but executives are interested in explaining things. So further relaxtion should
be introduced in documentation process.

4. Fund withdrawal: If a customer wants to withdraw funds from his account, he has to
contact a concerned person at his service provider. Though the process is fast but there is
better facility. ICICI direct customer can withdarw or deposit money by themselves
without contacting any other person at ICICI. Religare needs to close this gap of service.

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Limitations:

The limitations that came to light during the implementation of the project are being highlighted
below:

The lack of knowledge and lack of initiative among the people towards the investments in
the Commodities Market and the Equity Market.

There is widespread skepticism in the market regarding the investments in the

Commodity and Equity market because of the prevalent speculative activities.

Spreading of the wrong information by speculators which hurt the market sentiment.

The foremost regulatory constraints with respect to participation of investors (particularly

small and marginal investors) are the procedural hurdles (PAN Card requirement/
burdensome paperwork etc) for opening a demat/ trading/ bank account.

Policy interventions by the Government have a momentous impact on the direction and
magnitude of price movements. Uncertainty of government interventions acts as a
dissuading influence on genuine market participants and weakens the free market
behaviour of commodity markets.

Most of the time people are busy in their schedule and so they don‟t want to listen to
anything on the telephone calls.

Sometimes because of negative sentiments in the market, people are not ready to invest.
For e.g.: Prevailing European crisis and Goldman Sachs fraud case.

Due to the risk element attached with the Stock Market, people prefer to invest in low
risk options such as Savings A/c or Fixed Deposits

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The format of e-mail is given below:

We from Religare, leading player in securities/equities business, offer basket of services for
your employees and your organisation. As you must be aware that equities/commodities and
products associated with equities/commodities are preffered choice of investment and wealth
creation we offer you following products for your perusal:

1.Euity investment

2.Demat and Trading Accounts

3.Currency and Commodity accounts.

4.IPOs

5.Mutual funds of various companies

6.Life Insurance of various companies

7.General Insurance of various companies

8.Loan against shares

9.Special funding for your organisation against shares

10. Corporate demat account.

We offer best rates/returns on your investments, an example vis-a-vis our competitors is

mentioned below:

1 YEAR RETURN IN
FUND NAME PERCENTAGE

Birla Sun Life Mid Cap Fund-Plan A-Growth 94.42

Canara Robeco Emerging Equities-Growth 93.8
L&T Small Cap Fund-Growth 72.55
Fortis Future Leaders fund-Regular-Growth 86.8
Franklin India Prima Fund-Growth 86.15
HDFC Mid Cap Opportunities Fund-Growth 91.33
HSBC Small Cap Fund-Growth 95.74
ICICI Prudential Fushion Fund 72.24
IDFC Small and Mid Cap Fund-Growth 92.76
ING C.U.B. Fund-Growth 85.75
JM Emerging Leaders Fund-Growth 81.44
JPMorgan India Smaller Companies Fund-Growth 91.47
Kotak Mid Cap Fund-Growth 80.99

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L&T Mid Cap Fund-Growth 89.56
Principal PNB Long Term Equity Fund-3 years-SeriesI-Growth 86.73
Reliance Growth-Growth 72.43
Religare Mid Cap Fund-Growth 104.61
Religare Mid N Small Cap Fund -Growth 109.97
Sahara Midcap Fund-Growth 89.24
Sundaram BNP Paribas India Leadwership Fund-Growth 52.55
Sundaram BNP Paribas Select MidCap-Growth 89.79
TATA MidCap Fund-Growth 82.11
UTI Thematic MidCap Fund-Growth 99.06

We request you to kindly give us an appointment for discussing the same.

For further details you can contact undersigned or Anil Saharia

Thanks and Regards

Prashant Sharma | Branch Manager

Reliagare Securities Limited,

T:+91 011 43690121, 122|M: +91 9873094458

http://www.religare.in

Values that steer us ahead: Passion | Innovation | Ambition | Diligence | Teamwork

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 Questionnaire

Name: …………………………………………………………

Address: ……………………………………...…………………

Contact No:……………………………………………………….

E-mail id: …………………………………………………………

Family Details:
Nuclear Joint

Occupation:

Business Employment

Nature of Business:
Company Name:
Designation:

Investment/ Saving Purpose:

Long term Short Term

Buy/Sell Property Regular Income

Wealth Creation Short Term Profit
Purchase Car Variable Asset
Child Future Plan

Rate your knowledge about various investment options:

(Scale of 1-4, 1 being the highest)
Equity Derivative
Commodity FOREX

Investment/Savings Options:
1) Insurance 2) Mutual Fund 3) F.D.

4) Equity 5) Commodity 6)Currency

Shares Precious metal U.S Dollar

Base metal Others

Energy
Agro-products

72
Bibliography:

 Capital market dealers module , NCFM, NSE.

 Commodity year book, 2009, MCX

 Currency market dealers module, NISM, NSE

 Economic times

 Business India

 Religare monthly research journal

 Current Status of Indian Economy, May 2010, FICCI

 www.rbi.org

 www.imf.org

 www.nseindia.com

 www.bseindia.com

 www.mcxindia.com

 www.ncdexindia.com

 www.icexindia.com

 www.bloomberg.com

 www.kitco.com

 www.livecharts.co.uk

 www.moneycontrol.com

 www.wikipedia.org

 www.religare.in

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