INTRODUCTION TO FINANCIAL DERIVATIVES

By far the most significant event in finance during the past decade has been the extraordinary development and expansion of financial derivativesThese 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. Alan Greenspan, Former Chairman. US Federal Reserve Bank

The financial environment today has more risks than earlier. Successful business firms are those that are able to manage these risks effectively. Due to changes in the macroeconomic structures and increasing internationalization of businesses, there has been a dramatic increase in the volatility of economic variables such as interest rates, exchange rates, commodity prices etc. Firms that monitor their risks carefully and manage their risks with judicious policies enjoy a more stable business than those who are unable to identify and manage their risks. There are many risks which are influenced by factors external to the business and therefore suitable mechanisms to manage and reduce such risks need to be adopted. One of the modern day solutions to manage financial risks is hedging which can be done through derivatives.

In finance, a derivative is a financial instrument whose value depends on other, more basic, underlying variables. Such a variable is called an "underlying" and can be a traded asset, for example, a stock or commodity, but can also be something which is impossible to trade, such as the temperature (in the case of weather derivatives), unemployment rate, or any kind of (economical) index. A derivative is essentially a contract whose payoff depends on the behavior of some benchmark. The most common derivatives are futures, options, and swaps.

Derivatives are financial contracts whose value/price is independent on the behavior of the price of one or more basic underlying assets. These contracts are legally binding agreements, made on the trading screen of stock exchanges, to buy or sell an asset in future. These assets can be a share,

index, interest rate, bond, rupee dollar exchange rate, sugar, crude oil, soybeans, cotton, coffee and what you have. A very simple example of derivatives is curd, which is derivative of milk. The price of curd depends upon the price of milk which in turn depends upon the demand and supply of milk.

The Underlying Securities for Derivatives are : y y y y y y y Commodities: Castor seed, Grain, Pepper, Potatoes, etc. Precious Metal : Gold, Silver Short Term Debt Securities : Treasury Bills Interest Rates Common shares/stock Stock Index Value : NSE Nifty Currency : Exchange Rate

DERIVATIVES INTRODUCTION IN INDIA

The first step towards introduction of derivatives trading in India was the promulgation of the Securities Laws (Amendment) Ordinance, 1995, which withdrew the prohibition on options in securities. SEBI set up a 24 member committee under the chairmanship of Dr. L.C. Gupta on November 18, 1996 to develop appropriate regulatory framework for derivatives trading in India, submitted its report on March 17, 1998. The committee recommended that the derivatives should be declared as securities so that regulatory framework applicable to trading of securities could also govern trading of derivatives. To begin with, SEBI approved trading in index futures contracts based on S&P CNX Nifty and BSE-30 (Sensex) index. The trading in index options commenced in June 2001 and the trading in options on individual securities commenced in July 2001. Futures contracts on individual stocks were launched in November 2001.

CURRENCY DERIVATIVES
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 lenders currency. Thus, the currency units of a country involve an exchange of one currency for another. The price of one currency in terms of other currency is known as exchange rate. The foreign exchange markets of a country provide the mechanism of exchanging different currencies with one and another, and thus, facilitating transfer of purchasing power from one country to another. With the multiple growths of international trade and finance all over the world, trading in foreign currencies has grown tremendously over the past several decades. Since the exchange rates are continuously changing, so the firms are exposed to the risk of exchange rate movements. As a result the assets or liability or cash flows of a firm which are denominated in foreign currencies undergo a change in value over a period of time due to variation in exchange rates. This variability in the value of assets or liabilities or cash flows is referred to exchange rate risk. Since the fixed exchange rate system has been fallen in the early 1970s, specifically in developed countries, the currency risk has become substantial for many business firms. As a result, these firms are increasingly turning to various risk hedging products like foreign currency futures, foreign currency forwards, foreign currency options, and foreign currency swaps.

HISTORY OF CURRENCY DERIVATIVES

Currency futures were first created at the Chicago Mercantile Exchange (CME) in 1972.The contracts were created under the guidance and leadership of Leo Melamed, CME Chairman Emeritus. The FX contract capitalized on the U.S. abandonment of the Bretton Woods 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, increasing the risk of doing business. By creating another type of market in which futures could be traded, CME currency futures extended the reach of risk management beyond commodities, which were the main derivative contracts traded at CME until then. The concept of currency futures at CME was revolutionary, and gained credibility through endorsement of Nobel-prize-winning economist Milton Friedman. Today, CME offers 41 individual FX futures and 31 options contracts on 19 currencies, all of which trade electronically on the exchanges CME Globex platform. It is the 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 (CTAs), proprietary trading firms; currency overlay managers and individual investors. They trade in order to transact business, hedge against unfavorable changes in currency rates, or to speculate on rate fluctuations.

Currency future derivatives in India

A RBI-SEBI Standing Technical Committee was set up to evolve norms and oversee implementation of Exchange Traded Currency and Interest Rate derivatives. To begin with, the Committee as looked at Exchange Traded Currency Derivatives and submitted a report on Exchange Traded Currency Futures ( Report ). This report was submitted on May 29, 2008.

The report laid down the framework for the launch of Exchange Traded Currency Future in terms of the eligibility norms for existing and new Exchanges and their Clearing Corporations/Houses, eligibility criteria for members of such Exchanges/Clearing Corporations/Houses, product design, risk management measures, surveillance mechanism and other related issues. The Currency Future in India was first time traded at NSE on August 29, 2008. Thereafter BSE and MCX were subsequently allowed to deal in currency future from October 1, 2008 and October 31, 2008.

OVERVIEW OF THE FOREIGN EXCHANGE MARKET IN INDIA

During the early 1990s, India embarked on a series of structural reforms in the foreign exchange market. The exchange rate regime, that was earlier pegged, was partially floated in March 1992 and fully floated in March 1993. The unification of the exchange rate was instrumental in developing a market-determined exchange rate of the rupee and was an important step in the progress towards total current account convertibility, which was achieved in August 1994. 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 concern from policymakers and investors. While some flexibility in foreign exchange markets and exchange rate determination is desirable, excessive volatility can have an adverse impact on price discovery, export performance, sustainability of current account balance, and balance sheets. In the context of upgrading Indian foreign exchange market to international standards, a welldeveloped foreign exchange derivative market (both OTC as well as Exchange-traded) is imperative. With a view to enable entities to manage volatility in the currency market, RBI on April 20, 2007 issued comprehensive guidelines on the usage of foreign currency forwards, swaps and options in the OTC market. At the same time, RBI also set up an Internal Working Group to explore the advantages of introducing currency futures. The Report of the Internal Working Group of RBI submitted in April 2008, recommended the introduction of Exchange Traded Currency Futures. Subsequently, RBI and SEBI jointly constituted a Standing Technical Committee to analyze the Currency Forward and Future market around the world and lay down the guidelines to introduce Exchange Traded Currency Futures in the Indian market. The Committee submitted its report on May 29, 2008. Further RBI and SEBI also issued circulars in this regard on August 06, 2008. Currently, India is a USD 34 billion OTC market, where all the major currencies like USD, EURO, YEN, Pound, Swiss Franc etc. are traded. 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 counterparty credit risk, provide access to all types of market participants, offer standardized products and provide transparent trading platform. Banks are also allowed to become members of this segment on the Exchange, thereby providing them with a new opportunity. Source :-( Report of the RBI-SEBI standing technical committee on exchange traded currency futures) 2008.e

INDIAN FOREIGN EXCHANGE MARKETS PARTICIPANTS

NCY futures market Introduction to Currency Markets

How and why does the demand and supply of a currency increase and decrease? There are several reasons. A rise in export earnings of a country increases foreign exchange supply. A rise in imports increases demand. These are the objective reasons, but there are many subjective reasons too. Some of the subjective reasons are: directional viewpoints of market participants, expectations of national economic performance, confidence in a countrys economy and so on.

EXCHANGE RATE Foreign exchange rate is the value of a foreign currency relative to domestic currency. T he exchange of currencies is done in the foreign exchange market, which is one of the biggest financial markets. The participants of the market are banks, corporations, exporters, importers etc. A foreign

exchange contract typically states the currency pair, the amount of the contract, the agreed rate of exchange etc.

Direct The number of units of domestic Currency stated against one unit of foreign currency. Re/$ = 45.7250 ( or ) $1 = Rs. 45.7250

Indirect The number of unit of foreign currency per unit of domestic currency. Re 1 = $ 0.02187

There are two ways of quoting exchange rates: the direct and indirect. Most countries use the direct method. In global foreign exchange market, two rates are quoted by the dealer: one rate for buying (bid rate), and another for selling (ask or offered rate) for a currency. This is a unique feature of this market. It should be noted that where the bank sells dollars against rupees, one can say that rupees against dollar. In order to separate buying and selling rate, a small dash or oblique line is drawn after the dash. For example, If US dollar is quoted in the market as Rs 46.3500/3550, it means that the forex dealer is ready to purchase the dollar at Rs 46.3500 and ready to sell at Rs 46.3550. The difference between the buying and selling rates is called spread. It is important to note that selling rate is always higher than the buying rate. Traders, usually large banks, deal in two way prices, both buying and selling, are called market makers. A foreign exchange deal is always done in currency pairs, for example, US Dollar Indian Rupee contract (USD INR); British Pound INR (GBP - INR), Japanese Yen U.S. Dollar (JPYUSD), U.S. Dollar Swiss Franc (USD-CHF) etc. Some of the liquid currencies in the world are USD, JPY, EURO, GBP, and CHF and some of the liquid currency contracts are on USD-JPY, USDEURO, EURO-JPY, USD-GBP, and USD-CHF. The prevailing exchange rates are usually depicted in a currency table like the one given below:

Base Currency/ Terms Currency: In foreign exchange markets, the base currency is the first currency in a currency pair. The second currency is referred to as the counter/terms/quote currency. The exchange rate tells the worth of the base currency in terms of the terms currency, i.e. for a buyer, how much of the terms currency must be paid to obtain one unit of the base currency. Exchange rates are quoted in per unit of the base currency. That is the expression Dollar-Rupee, tells you that the Dollar is being quoted in terms of the Rupee. The Dollar is the base currency and the Rupee is the terms currency.

Exchange rates are constantly changing, which means that the value of one currency in terms of the other is constantly in flux. Changes in rates are expressed as strengthening or weakening of one currency vis--vis the second currency. Changes are also expressed as appreciation or depreciation of one currency in terms of the second currency. Whenever the base currency buys more of the terms currency, the base currency has strengthened / appreciated and the terms currency has weakened / depreciated. For example, a USD-INR rate of Rs. 48.0530 implies that Rs. 48.0530 must be paid to obtain one US Dollar. Foreign exchange prices are highly volatile and fluctuate on a real time basis. In foreign exchange contracts, the price fluctuation is expressed as appreciation/depreciation or the strengthening/weakening of a currency relative to the other. A change of USD-INR rate from Rs. 48 to Rs. 48.50 implies that USD has strengthened/ appreciated and the INR has weakened/depreciated, since a buyer of USD will now have to pay more INR to buy 1 USD than before. Fixed Exchange Rate Regime and Floating Exchange Rate Regime There are mainly two methods employed by governments to determine the value of domestic currency vis--vis other currencies : fixed and floating exchange rate.

Fixed exchange rate regime: Fixed exchange rate, also known as a pegged exchange rate, is when a currency's value is maintained at a fixed ratio to the value of another currency or to a basket of currencies or to any other measure of value e.g. gold. In order to maintain a fixed exchange rate, a government participates in the open currency market. When the value of currency rises beyond the permissible limits, the government sells the currency in the open market, thereby increasing its supply and reducing value. Similarly, when the currency value falls beyond certain limit, the government buys it from the open market, resulting in an increase in its demand and value. Another method of maintaining a fixed exchange rate is by making it illegal to trade currency at any other rate. However, this is difficult to enforce and often leads to a black market in foreign currency. Floating exchange rate regime: Unlike the fixed rate, a floating exchange rate is determined by a market mechanism through supply and demand for the currency. A floating rate is often termed "self-correcting", as any fluctuation in the value caused by differences in supply and demand will automatically be corrected by the market. For example, if demand for a currency is low, its value will decrease, thus making imported goods more expensive and exports relatively cheaper. The countries buying these export goods will demand the domestic currency in order to make payments, and the demand for domestic currency will increase. This will again lead to appreciation in the value of the currency. Therefore, floating exchange rate is self correcting, requiring no government intervention. However, usually in cases of extreme appreciation or depreciation of the currency, the countrys Central Bank intervenes to stabilize the currency. Thus, the exchange rate regimes of floating currencies are more technically called a managed float.

Factors Affecting Exchange Rates There are various factors affecting the exchange rate of a currency. They can be classified as fundamental factors, technical factors, political factors and speculative factors. A countrys currency exchange rate is typically affected by the supply and demand for the countrys currency in the international foreign exchange market. The demand and supply dynamics is principally influenced by factors like interest rates, inflation, and trade balance and economic & political scenarios in the country. The level of confidence in the economy of a particular country also influences the currency of that country

Fundamental factors: The fundamental factors are basic economic policies followed by the government in relation to inflation, balance of payment position, unemployment, capacity utilization, trends in import and export, etc. Normally, other things remaining constant the currencies of the countries that follow sound economic policies will always be stronger. Similarly, countries having balance of payment surplus will enjoy a favorable exchange rate. Conversely, for countries facing balance of payment deficit, the exchange rate will be adverse.

Technical factors: y Interest rates: Rising interest rates in a country may lead to inflow of hot money in the

country, thereby raising demand for the domestic currency. This in turn causes appreciation in the value of the domestic currency. y Inflation rate: High inflation rate in a country reduces the relative competitiveness of the

export sector of that country. Lower exports result in a reduction in demand of the domestic currency and therefore the currency depreciates. Exchange rate policy and Central Bank interventions: Exchange rate policy of the country is the most important factor influencing determination of exchange rates. For example, a country may decide to follow a fixed or flexible exchange rate regime, and based on this, exchange rate movements may be less/more frequent. Further, governments sometimes participate in foreign exchange market through its Central bank in order to control the demand or supply of domestic currency.

Political factors: Political stability also influences the exchange rates. Exchange rates are susceptible to political instability and can be very volatile during times of political crises.

Speculation: Speculative activities by traders worldwide also affect exchange rate movements. For example, if speculators think that the currency of a country is over valued and will devalue in near future, they

will pull out their money from that country resulting in reduced demand for that currency and depreciating its value.

APPRECIATION AND DEPRECIATION OF INDIAN RUPPEES

The Rupee depreciated against the Dollar, with the close price of USDINR for May 2011 moving from `44.5450 to `45.2425 during the period, experiencing an intraday high of `45.4875 and a low of `44.4750.

The Rupee appreciated against the EURO, with the close price of EURINR for May 2011 moving from `66.0825 to `65.0725 during the period, experiencing an intraday high of `66.7075 and a low of `63.3625.

QUOTES In currency markets, the rates are generally quoted in terms of USD. The price of a currency in terms of another currency is called quote. A quote where USD is the base currency is referred to as a direct quote (e.g. 1 USD INR 48.5000) while a quote where USD is referred to as the terms currency is an indirect quote (e.g. 1 INR = 0.021 USD).

USD is the most widely traded currency and is often used as the vehicle currency. Use of vehicle currency helps the market in reduction in number of quotes at any point of time, since exchange rate

between any two currencies can be determined through the USD quote for those currencies. This is possible since a quote for any currency against the USD is readily available. Any quote not against the USD is referred to as cross since the rate is calculated via the USD.

For example, the cross quote for EUR-GBP can be arrived through EUR-USD quote * USD-GBP quote (i.e. 1.406 * 0.606 = 0.852). Therefore, availability of USD quote for all currencies can help in determining the exchange rate for any pair of currency by using the cross-rate.

TICK-SIZE Tick size refers to the minimum price differential at which traders can enter bids and offers. For example, the Currency Futures contracts traded at the NSE have a tick size of Rs. 0.0025. So, if the prevailing futures price is Rs. 48.5000, the minimum permissible price movement can cause the new price to be either Rs. 48.4975 or Rs. 48.5025. Tick value refers to the amount of money that is made or lost in a contract with each price movement. 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. 52.2500. One tick move on this contract will translate to Rs. 52.2475 or Rs. 52.2525 depending on the direction of market movement.

Purchase price: Rs. 52.2500 Price increases by one tick: + Rs. 00.0025 New price: Rs. 52.2525 Purchase price: Rs. 52.2500 Price decreases by one tick: Rs. 00.0025 New price: Rs. 52.2475 The value of one tick on each contract is Rupees 2.50. So if a trader buys 5 contracts and the price moves up by 4 ticks, she makes Rupees 50. Step 1: 52.2600 52.2500 Step 2: 4 ticks * 5 contracts = 20 points Step 3: 20 points * Rs. 2.5 per tick = Rs. 50

(Note: please note the above examples do not include transaction fees and any other fees, which are essential for calculating final profit and loss)

SPREADS Spreads or the dealers margin is the difference between bid price (the price at which a dealer is willing to buy a foreign currency) and ask price (the price at which a dealer is willing to sell a foreign currency). the quote for bid will be lower than ask, which means the amount to be paid in counter currency to acquire a base currency will be higher than the amount of counter currency that one can receive by selling a base currency. For example, a bid-ask quote for USDINR of Rs. 47.5000 Rs. 47.8000 means that the dealer is willing to buy USD by paying Rs. 47.5000 and sell USD at a price of Rs. 47.8000. The spread or the profit of the dealer in this case is Rs. 0.30.

SPOT TRANSACTION AND FORWARD TRANSACTION The spot market transaction does not imply immediate exchange of currency, rather the settlement (exchange of currency) takes place on a value date, which is usually two business days after the trade date. The price at which the deal takes place is known as the spot rate (also known as benchmark price). The two-day settlement period allows the parties to confirm the transaction and arrange payment to each other. A forward transaction is a currency transaction wherein the actual settlement date is at a specified future date, which is more than two working days after the deal date. The date of settlement and the rate of exchange (called forward rate) is specified in the contract. The difference between spot rate and forward rate is called forward margin.

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 Contracts Forward contracts are agreements to exchange currencies at an agreed rate on a specified future date. The actual settlement date is more than two working days after the deal date. The agreed rate is called forward rate and the difference between the spot rate and the forward rate is called as forward margin. Forward contracts are bilateral contracts (privately negotiated), traded outside a

regulated stock exchange and suffer from counter -party risks and liquidity risks. Counter Party risk means that one party in the contract may default on fulfilling its obligations thereby causing loss to the other party.

Futures Contracts Futures contracts are also agreements to buy or sell an asset for a certain price at a future time. Unlike forward contracts, which are traded in the over -the-counter market with no standard contract size or standard delivery arrangements, futures contracts are exchange traded and are more standardized. They are standardized in terms of contract sizes, trading parameters, settlement procedures and are traded on a regulated exchange. The contract size is fixed and is referred to as lot size. Since futures contracts are traded through exchanges, the settlement of the contract is guaranteed by the exchange or a clearing corporation and hence there is no counter party risk. Exchanges guarantee the execution by holding an amount as security from both the parties. This amount is called as Margin money. Futures contracts provide the flexibility of closing out the contract prior to the maturity by squaring off the transaction in the market. Table 3.1 draws a comparison between a forward contract and a futures contract.

COMPARISION OF FORWARD AND FUTURES CURRENCY CONTRACT

BASIS Size FORWARD FUTURES Structured as per requirement Standardized of the parties Delivery date Method of transaction Tailored on individual needs Standardized

Established by the bank or Open auction among buyers broker through electronic media and seller on the floor of recognized exchange.

Participants

Banks, brokers, forex dealers, multinational companies, institutional investors, arbitrageurs, traders, etc.

Banks, brokers, multinational companies, institutional investors, small traders, speculators, arbitrageurs, etc. Margin deposit required

Margins

None as such, but

compensating bank balanced may be required Maturity Tailored to needs: from one week to 10 years Settlement Actual delivery or offset with cash settlement. No separate clearing house Daily settlement to the market and variation margin requirements Standardized

Market place

Over the telephone worldwide and computer networks

At recognized exchange floor with worldwide communications

Accessibility

Limited to large customers banks, institutions, etc.

Open to any one who is in need of hedging facilities or has risk capital to speculate

Delivery

More than 90 percent settled by actual delivery

Actual delivery has very less even below one percent Exchange provides the guarantee of settlement and hence no counter party risk.

Risk

Counter-Party risk is present since no guarantee is provided

Trading

Informal Over-the-Counter market; Private contract between parties

Traded on an exchange

Secured

Risk is high being less Secured

Highly secured through margin deposit.

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.

Option: Currency option is a financial instrument that give the option holder a right and not the 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, etc. The large banks usually make markets in different currencies. In the spot exchange market, the business is transacted throughout 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, extent or speed of exchange rate movements.

UTILITY OF CURRENCY DERIVATIVES

Currency-based derivatives are used by exporters invoicing receivables in foreign currency, willing to protect their earnings from the foreign currency depreciation by locking the currency conversion rate at a high level. Their use by importers hedging foreign currency payables is effective when the payment currency is expected to appreciate and the importers would like to guarantee a lower conversion rate. Investors in foreign currency denominated securities would like to secure strong foreign earnings by obtaining the right to sell foreign currency at a high conversion rate, thus defending their revenue from the foreign currency depreciation. Multinational companies use currency derivatives being engaged in direct investment overseas. They want to guarantee the rate of purchasing foreign currency for various payments related to the installation of a foreign branch or subsidiary, or to a joint venture with a foreign partner. A high degree of volatility of exchange rates creates a fertile ground for foreign exchange speculators. Their objective is to guarantee a high selling rate of a foreign currency by obtaining a derivative contract while hoping to buy the currency at a low rate in the future. Alternatively, they may wish to obtain a foreign currency forward buying contract, expecting to sell the appreciating currency at a high future rate. In either case, they are exposed to the risk of currency fluctuations in the future betting on the pattern of the spot exchange rate adjustment consistent with their initial expectations. The most commonly used instrument among the currency derivatives are currency forward contracts. These are large notional value selling or buying contracts obtained by exporters, importers, investors and speculators from banks with denomination normally exceeding million USD. The contracts guarantee the future conversion rate between two currencies

and can be obtained for any customized amount and any date in the 0future. They normally do not require a security deposit since their purchasers are mostly large business firms and investment institutions, although the banks may require compensating deposit balances or lines of credit. Their transaction costs are set by spread between bank's buy and sell prices. Exporters invoicing receivables in foreign currency are the most frequent users of these contracts. They are willing to protect themselves from the currency depreciation by locking in the future currency conversion rate at a high level. A similar foreign currency forward selling contract is obtained by investors in foreign currency denominated bonds (or other securities) who want to take advantage of higher foreign that domestic interest rates on government or corporate bonds and the foreign currency forward premium. They hedge against the foreign currency depreciation below the forward selling rate which would ruin their return from foreign financial investment. Investment in foreign securities induced by higher foreign interest rates and accompanied by the forward selling of the foreign currency income is called a covered interest arbitrage.

INTRODUCTION TO CURRENCY FUTURE

A futures contract is a standardized contract, traded on an exchange, to buy or sell a certain underlying asset or an instrument at a certain date in the future, at a specified price. When the underlying asset is a commodity, e.g. Oil or Wheat, the contract is termed a commodity futures contract. When the underlying is an exchange rate, the contract is termed a currency futures contract. In other words, it is a contract to exchange one currency for another currency at a specified date and a specified rate in the future. Therefore, the buyer and the seller lock themselves into an exchange rate for a specific value or delivery date. Both parties of the futures contract must fulfill their obligations on the settlement date. Currency futures can be cash settled or settled by delivering the respective obligation of the seller and buyer. All settlements however, unlike in the case of OTC markets, go through the exchange. Currency futures are a linear product, and calculating profits or losses on Currency Futures will be similar to calculating profits or losses on Index futures. In determining profits and losses in futures trading, it is essential to know both the contract size (the number of currency units being traded) and also what the tick value is. A tick is the minimum trading increment or price differential at which traders are able to enter bids and offers. Tick values differ for different currency pairs and different

underlying. For e.g. in the case of the USD-INR currency futures contract the tick size shall be 0.25 paise or 0.0025 Rupees. 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.

The value of one tick on each contract is Rupees 2.50. So if a trader buys 5 contracts and the price moves up by 4 tick, she makes Rupees 50. 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

RATIONALE FOR INTRODUCING CURRENCY FUTURE

With the help of electronic trading and efficient risk management systems, Exchange traded currency future has helped to get transparency and efficiency in price discovery, elimination of counterparty credit risk, access to all types of market participants, standardized products and transparent trading platform. Banks are also allowed to become members of this segment on the Exchange and this provides them new opportunity in this market segment.

PRICING FUTURES
INTEREST RATE PARITY PRINCIPLE
For currencies which are fully convertible, the rate of exchange for any date other than spot is a function of spot and the relative interest rates in each currency. The assumption is that, any funds held will be invested in a time deposit of that currency. Hence, the forward rate is the rate which neutralizes the effect of differences in the interest rates in both the currencies. The forward rate is a function of the spot rate and the interest rate differential between the two currencies, adjusted for time. In the case of fully convertible currencies, having no restrictions on borrowing or lending of either currency the forward rate can be calculated as follows;

Future Rate = (spot rate) {1 + interest rate on home currency * period} / {1 + interest rate on foreign currency * period} For example, Assume that on January 10, 2011, six month annual interest rate was 7 percent p.a. on Indian rupee and US dollar six month rate was 6 percent p.a. and spot ( Re/$ ) exchange rate was 46.3500. Using the above equation the theoretical future price on January 10, 2011, expiring on June 9, 2011 is : the answer will be Rs.46.7908 per dollar. Then, this theoretical price is compared with the quoted futures price on January 10, 2011 and the relationship is observed.

COST OF CARRY MODEL

Pricing of futures contract is very simple. Using the cost-of-carry logic, we calculate the fair value of a futures contract. Every time the observed price deviates from the fair value, arbitragers would enter into trades to capture the arbitrage profit. This in turn would push the futures price back to its fair value. The cost of carry model used for pricing futures is given below: F=Se^(r-rf)T where: r=Cost of financing (using continuously compounded interest rate)

rf= one year interest rate in foreign T=Time till expiration in years E=2.71828 The relationship between F and S then could be given as F Se^(r rf )T - = This relationship is known as interest rate parity relationship and is used in international finance. To explain this, let us assume that one year interest rates in US and India are say 7% and 10% respectively and the spot rate of USD in India is Rs. 44. From the equation above the one year forward exchange rate should be F = 44 * e^(0.10-0.07 )*1=45.34 It may be noted from the above equation, if foreign interest rate is greater than the domestic rate i.e. rf > r, then F shall be less than S. The value of F shall decrease further as time T increase. If the foreign interest is lower than the domestic rate, i.e. rf < r, then value of F shall be greater than S. The value of F shall increase further as time T increases.

STRATEGIES USING CURRENCY FUTURES

Futures contracts act as hedging tools and help in protecting the risks associated with uncertainties in exchange rates. Anyone who is anticipating a future cash outflow (payment of money) in a foreign currency, can lock-in the exchange rate for the future date by entering into a futures contract. For example, let us take the example of an oil-importing firm - ABC Co. The company is expected to make future payments of USD 100000 after 3 months in USD for payment against oil imports. Suppose the current 3 -month futures rate is Rs. 45, then ABC Co. has two alternatives: OPTION A: ABC Co. does nothing and decides to pay the money by converting the INR to USD. If the spot rate after three months is Rs. 47, the ABC Co. will have to pay INR 47, 00,000 to buy USD 100000. Alternatively, if the spot price is Rs. 43.0000, ABC Co. will have to pay only INR 43, 00,000 to buy USD 100000. The point is that ABC Co. is not sure of its future liability and is subject to risk of exchange rate fluctuations. OPTION B: ABC Co. can alternatively enter into a futures contract to buy 1,00,000 USD at Rs. 45 and lock in the future cash outflow in terms of INR. In this case, whatever may be the prevailing

spot market price after three months the companys liability is locked in at INR 45,00,000. In other words, the company is protected against adverse movement in the exchange rates. This is known as hedging and currency futures contracts are generally used by hedgers to reduce any known risks relating to the exchange rate. In a currency futures contract, the party taking a long (buy) position agrees to buy the base currency at the future rate by paying the terms currency. The party with a short (sell) position agrees to sell the base currency and receive the terms currency at the pre-specified exchange rate. When the base currency appreciates and the spot rate at maturity date (S) becomes more than the strike rate in the futures contract (K), the long party who is going to buy the base currency at the strike rate makes a profit. The party with the long position can buy the USD at a lower rate and sell in the market where the exchange rate is higher thereby making a profit. The party with a short position loses since it has to sell the base currency at a price lower than the prevailing spot rate. When the base currency depreciates and falls below the strike rate (K), the long party loses and a short position gains. This is depicted in Figure 4-1 as a pay-off diagram. In the pay-off diagram the profits are illustrative above the horizontal line and the losses below. The movement in the exchange rate is given on the horizontal line. The straight line (diagonal) indicates the pay-off for a buyer of USDINR contract. This pay-off is also called as a linear pay-off. An exposure in the currency futures market without any exposure (actual or expected) in the spot market becomes a speculative transaction. However, the role of speculators cannot be undermined in the futures market. They play an active role in the derivatives market and help in providing liquidity to the market. In this chapter, we will discuss the various positions that can be taken in a futures market. We will also discuss the relevance of each position to different market players.

Figure4.1: Payoff from an USD-INR Futures Contract (Base Currency USD)

CURRENCY FUTURES PAYOFFS

A payoff is the likely profit/loss that would accrue to a market participant with change in the price of the underlying asset. This is generally depicted in the form of payoff diagrams which show the price of the underlying asset on the X-axis and the profits/losses on the Y-axis. Futures contracts have linear payoffs. In simple words, it means that the losses as well as profits for the buyer and the seller of a futures contract are unlimited. Options do not have linear payoffs. Their pay offs are nonlinear. These linear payoffs are fascinating as they can be combined with options and the underlying to generate various complex payoffs. However, currently only payoffs of futures are discussed as exchange traded foreign currency options are not permitted in India.

Payoff for buyer of futures: Long futures

The payoff for a person who buys a futures contract is similar to the payoff for a person who holds an asset. He has a potentially unlimited upside as well as a potentially unlimited downside. Take the case of a speculator who buys a two-month currency futures contract when the USD stands at say Rs.43.19. The underlying asset in this case is the currency, USD. When the value of dollar moves up, i.e. when Rupee depreciates, the long futures position starts making profits, and when the dollar depreciates, i.e. when rupee appreciates, it starts making losses. Figure 4.1 shows the payoff diagram for the buyer of a futures contract.

Payoff for buyer of future:

The figure shows the profits/losses for a long futures position. The investor bought futures when the USD was at Rs.43.19. If the price goes up, his futures position starts making profit. If the price falls, his futures position starts showing losses.

Payoff for seller of futures: Short futures

The payoff for a person who sells a futures contract is similar to the payoff for a person who shorts an asset. He has a potentially unlimited upside as well as a potentially unlimited downside. Take the case of a speculator who sells a two month currency futures contract when the USD stands at say Rs.43.19. The underlying asset in this case is the currency, USD. When the value of dollar moves down, i.e. when rupee appreciates, the short futures position starts 25 making profits, and when the dollar appreciates, i.e. when rupee depreciates, it starts making losses. The Figure below shows the payoff diagram for the seller of a futures contract.

Payoff for seller of future:

The figure shows the profits/losses for a short futures position. The investor sold futures when the USD was at 43.19. If the price goes down, his futures position starts making profit. If the price rises, his futures position starts showing losses.

HEDGING WITH CURENCY FUTURES

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

Hedging in currency market can be done through two positions, viz. Short Hedge and Long

Hedge. They are explained as under: Short-Hedge A short hedge involves taking a short position in the futures market. In a currency market, short hedge is taken by someone who already owns the base currency or is expecting a future receipt of the base currency. An example where this strategy can be used: An exporter, who is expecting a receipt of USD in the future, will try to fix the conversion rate by holding a short position in the USD-INR contract. Box 4.1 explains the pay-off from a short hedge strategy through an example.

Long Hedge A long hedge involves holding a long position in the futures market. A Long position holder agrees to buy the base currency at the expiry date by paying the agreed exchange rate. This strategy is used by those who will need to acquire base currency in the future to pay any liability in the future. An example where this strategy can be used: An importer who has to make payment for his imports in USD will take a long position in USDINR contracts and fix the rate at which he can buy USD in future by paying INR. Box 4.2 explains the pay-off from a long hedge strategy in currency market.

y The choice of underlying currency

The first important decision in this respect is deciding the currency in which futures contracts are to be initiated. For example, an Indian manufacturer wants to purchase some raw materials from Germany then he would like future in German mark since his exposure in straight forward in mark against home currency (Indian rupee). ` Assume that there is no such future (between rupee and mark) available in the market then

the trader would choose among other currencies for the hedging in futures. Which contract should he choose? Probably he has only one option rupee with dollar. This is called cross hedge.

y Choice of the maturity of the contract

The second important decision in hedging through currency futures is selecting the currency which matures nearest to the need of that currency. For example, suppose Indian importer import raw material of 100000 USD on 1st November 2010. And he will have to pay 100000 USD on 1st February 2011. And he predicts that the value of USD will increase against Indian rupees nearest to due date of that payment. Importer predicts that the value of USD will increase more than 51.0000. So what he will do to protect against depreciating in Indian rupee? Suppose spots value of 1 USD is 49.8500. Future Value of the 1USD on NSE as below:

PRICE WATCH FROM NSE SITE (REFER CURRENCY PROJECT 1)

y Choice of the number of contracts (hedging ratio)
Another important decision in this respect is to decide hedging ratio HR. The value of the futures position should be taken to match as closely as possible the value of the cash market position. As we know that in the futures markets due to their standardization, exact match will generally not be possible but hedge ratio should be as close to unity as possible. We may define the hedge ratio HR as follows: HR= VF / Vc Where, VF is the value of the futures position and Vc is the value of the cash position. Suppose value of contract dated 28th January 2011 is 49.8850. And spot value is 49.8500. HR=49.8850/49.8500=1.001.

SPECULATION IN CURRENCY FUTURES

Futures contracts can also be used by speculators who anticipate that the spot price in the future will be different from the prevailing futures price. For speculators, who anticipate a strengthening of the base currency will hold a long position in the currency contracts, in order to profit when the exchange rates move up as per the expectation. A speculator who anticipates a weakening of the base currency in terms of the terms currency, will hold a short position in the futures contract so that he can make a profit when the exchange rate moves down. Speculators prefer taking positions in the futures market to the spot market because of the low investment required in case of futures market. In futures market, the parties are required to pay just the margin money upfront, but in case of spot market, the parties have to invest the full amount, as they have to purchase the foreign currency.

USES OF CURRENCY FUTURES

Hedging:
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 safeguarded. 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 USDINR 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 was Rs.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 at Rs.42, is to go up in the next two-three months. How can he trade based on this belief? In case he can buy dollars and hold it, by investing the necessary capital, he can profit if say the Rupee depreciates to Rs.42.50. Assuming he buys USD 10000, it would require an investment of Rs.4,20,000. If the exchange rate moves as he expected in the next three months, then he shall make a profit of around Rs.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 USD 10000. Presumably, the margin may be around Rs.21, 000. Three months later if the Rupee depreciates to Rs. 42.50 against USD, (on the day of expiration of the contract), the futures price shall converge to the spot price (Rs. 42.50) and he makes a profit of Rs.1000 on an investment of Rs.21, 000. This works out to an annual return of 19 percent. Because of the leverage they provide, futures form an attractive option for speculators. y 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. 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-INR. He sells one two-month contract of futures on USD say at Rs. 42.20 (each contact for 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 paise 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. One of the methods of arbitrage with regard to USD-INR could be a trading strategy between forwards and futures market. As we discussed earlier, the futures price and forward prices are arrived at using the principle of cost of carry. Such of those entities who can trade both forwards and futures shall be able to identify any mispricing between forwards and futures. If one of them is priced higher, the same shall be sold while simultaneously buying the other which is priced lower. If the tenor of both the contracts is same, since both forwards and futures shall be settled at the same RBI reference rate, the transaction shall result in a risk less profit.

NEED FOR EXCHANGE TRADED CURRENCY FUTURES

Currency futures are needed if your business is influenced by fluctuations in currency exchange rates. If you are in India and are importing something, you have done the costing of your imports on the basis of a certain exchange rate between the Indian Rupee and the relevant foreign currency. By the time you actually import, the value of the Indian Rupee may have gone down and you may lose out on your income in terms of Indian Rupees by paying higher. On the contrary, if you are exporting something and the value of the Indian Rupee has gone up, you earn less in terms of Rupees than you had anticipated. Currency futures help you hedge against these exchange rate risks.
Currency futures benefits to investors as : y Importers/Exporters may have some obligations in Forex market, trading in Currency Futures will help them hedge their positions. Similarly, any investor can trade in Currency Futures with or with no obligations.

y y

The counter-party risk is eliminated as the clearing corporation guarantees the trades. By ensuring that the best price is available to all categories of market participants, transactions are executed on a price time priority.

In Currency Futures, mark to market obligations are settled on a daily basis, unlike a forward contract, which is an agreement to transact at a forward price on a future date and no money changes hands except on the maturity date.

EXCHANGES ENGAGED IN CURRENCY FUTURE IN INDIA

y y y y NSE- Started in Aug,2008 MCX-SX-Started in October,2008 BSE- Started in October,2008 USE-Will start on 31st Aug,2010

AVAILABLE CURRENCY FUTURES IN INDIA

y y y y US Dollar - Rupee Currency Futures Contract Euro - Rupee Currency Futures Contract-It was introduced on 29th Jan, 2010 British Pound - Rupee Currency Futures Contract-It was introduced on 29th Jan, 2010 Yen - Rupee Currency Futures Contract-It was introduced on 29th Jan, 2010

FUTURE TERMINOLOGY
y SPOT PRICE : The price at which an asset trades in the spot market. The transaction in which securities and foreign exchange get traded for immediate delivery. Since the exchange of securities and cash is virtually immediate, the term, cash market, has also been used to refer to spot dealing. In the case of USDINR, spot value is T + 2.

FUTURE PRICE : The price at which the future contract traded in the future market.

CONTRACT CYCLE : The period over which a contract trades. The currency future contracts in Indian market have

one month, two month, and three month up to twelve month expiry cycles. In NSE/BSE will have 12 contracts outstanding at any given point in time.

VALUE DATE / FINAL SETTELMENT DATE : The last business day of the month will be termed the value date /final settlement date of

each contract. The last business day would be taken to the same as that for inter bank settlements in Mumbai. The rules for inter bank settlements, including those for known holidays and would be those as laid down by Foreign Exchange Dealers Association of India (FEDAI).

EXPIRY DATE :

It is the date specified in the futures contract. This is the last day on which the contract will be traded, at the end of which it will cease to exist. The last trading day will be two business days prior to the value date / final settlement date.

CONTRACT SIZE :

The amount of asset that has to be delivered under one contract. Also called as lot size. In case of USDINR it is USD 1000.

BASIS : In the context of financial futures, basis can be defined as the futures price minus the spot

price. There will be a different basis for each delivery month for each contract. In a normal market, basis will be positive. This reflects that futures prices normally exceed spot prices.

COST OF CARRY : The relationship between futures prices and spot prices can be summarized in terms of what is known as the cost of carry. This measures the storage cost plus the interest that is paid to finance or carry the asset till delivery less the income earned on the asset. For equity derivatives carry cost is the rate of interest.

INITIAL MARGIN : When the position is opened, the member has to deposit the margin with the clearing house

as per the rate fixed by the exchange which may vary asset to asset. Or in another words, the amount that must be deposited in the margin account at the time a future contract is first entered into is known as initial margin.

MARKING TO MARKET : At the end of trading session, all the outstanding contracts are reprised at the settlement price

of that session. It means that all the futures contracts are daily settled, and profit and loss is determined on each transaction. This procedure, called marking to market, requires that funds charge every day. The funds are added or subtracted from a mandatory margin (initial margin) that traders are required to maintain the balance in the account. Due to this adjustment, futures contract is also called as daily reconnected forwards.

MAINTENANCE MARGIN : Members account are debited or credited on a daily basis. In turn customers account are

also required to be maintained at a certain level, usually about 75 percent of the initial margin, is called the maintenance margin. This is somewhat lower than the initial margin. This is set to ensure that the balance in the margin account never becomes negative. If the balance in the margin account falls below the maintenance margin, the investor receives a margin call and is expected to top up the margin account to the initial margin level before trading commences on the next day.

TRADING PROCESS AND SETTLEMENT PROCESS

What is currency trading? While trade is international, currencies are national. As international transactions are settled in global currencies, usually they are brought/sold for one another and this constitutes currency trading. Like other future trading, the future currencies are also traded at organized exchanges. The following diagram shows how operation take place on currency future market:

It has been observed that in most futures markets, actual physical delivery of the underlying assets is very rare and hardly it ranges from 1 percent to 5 percent. Most often buyers and sellers offset their original position prior to delivery date by taking an opposite positions. This is because most of futures contracts in different products are predominantly speculative instruments. For example, X purchases American Dollar futures and Y sells it. It leads to two contracts, first, X party and clearing house and second Y party and clearing house. Assume next day X sells same contract to Z, then X is

out of the picture and the clearing house is seller to Z and buyer from Y, and hence, this process is goes on.

TRADING PARAMETERS y Base Price Base price of the USD/INR Futures Contracts on the first day shall be the theoretical futures price. The base price of the Contracts on subsequent trading days will be the daily settlement price of the USD/INR futures contracts. y Closing Price The closing price for a futures contract is currently calculated as the last half an hour weighted average price of the contract. In case a futures contract is not traded on a day, or not traded during the last half hour, a 'theoretical settlement price' is computed as may be decided by the relevant authority from time to time. y Dissemination of Open, High, Low, and

Last-Traded Prices During a trading session, the Exchange continuously disseminates open, high, low, and lasttraded prices through its trading system on real time basis.

TENORS OF FUTURES CONTRACT The tenor of a contract means the period when the contract will be available for futures trading, i.e. the period between the start of trading and the day it expires. This period is also known as the trading cycle of the contract. The currency future contract will be available for trading with a maximum maturity of 12 months. y Expiry Date All contracts expire on the last working day (excluding Saturdays) of the contract months. The last day for the trading of the contract shall be two working days prior to the final settlement. y Final Settlement Rate Final Settlement rate would be the Reserve Bank (RBI) Reference rate for the date of expiry.

TYPES OF ORDERS The system allows the trading members to enter orders with various conditions attached to them as per their requirements. These conditions are broadly divided into the following categories: y y y Time conditions Price conditions Other conditions

Several combinations of the above are allowed thereby providing enormous flexibility to the users. The order types and conditions are summarized below.

Time conditions - Day order: A day order, as the name suggests is an order which is valid for the day on which it is entered. If the order is not executed during the day, the system cancels the order automatically at the end of the day. - Immediate or Cancel (IOC): An IOC order allows the user to buy or sell a contract as soon as the order is released into the system, failing which the order is cancelled from the system. Partial match is possible for the order, and the unmatched portion of the order is cancelled immediately.

Price condition - Market price: Market orders are orders for which no price is specified at the time the order is entered (i.e. price is market price). For such orders, the trading system determines the price. - Limit price: An order to a broker to buy a specified quantity of a security at or below a specified price, or to sell it at or above a specified price (called the limit price). This ensures that a person will never pay more for the futures contract than whatever price is set as his/her limit. It is also the price of orders after triggering from stop-loss book. Stop-loss: This facility allows the user to release an order into the system, after the market price of the security reaches or crosses a threshold price e.g. if for stop-loss buy order, the trigger is Rs. 42.0025, the limit price is Rs. 42.2575 , then this order is released into the system once the market price reaches or exceeds Rs. 42.0025. This order is added to the regular lot book with time of triggering as the time stamp, as a limit order of Rs. 42.2575. be less than the limit price and for the stop-loss sell order, the trigger price has to be greater than the limit price.

 Other conditions - Pro: Pro means that the orders are entered on the trading member's own account. - Cli: Cli means that the trading member enters the orders on behalf of a client.

In exchange traded derivative contracts, the Clearing Corporation acts as a central counterparty to all trades and performs full notations. The risk to the clearing corporation can only be taken care of through a stringent margining framework. Also, since derivatives are leveraged instruments, margins also act as a cost and discourage excessive speculation. A robust risk management system should therefore, not only impose margins on the members of the clearing corporation but also enforce collection of margins from the clients.

Price Limit Circuit Filter There shall be no daily price bands applicable for Currency Futures contracts. However in order to prevent erroneous order entry by members, operating ranges will be kept at +/-3% of the base price for contracts with tenure upto 6 months and +/-5% for contracts with tenure greater than 6 months. In respect of orders which have come under price freeze, the members would be required to confirm to the Exchange that there is no inadvertent error in the order entry and that the order is genuine. On such confirmation, the Exchange may take appropriate action.

REGULATORY FRAMEWORK FOR CURRENCY FUTURES

With a view to enable entities to manage volatility in the currency market, RBI on April 20, 2007 issued comprehensive guidelines on the usage of foreign currency forwards, swaps and options in the OTC market. At the same time, RBI also set up an Internal Working Group to explore the advantages of introducing 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 benefits of exchange traded currency futures, it was decided in a joint meeting of RBI and SEBI on February 28, 2008, that an RBI-SEBI Standing Technical Committee on Exchange Traded Currency and Interest Rate Derivatives would be constituted. To begin with, the Committee

would evolve norms and oversee the implementation of Exchange traded currency futures. The Terms of Reference to the Committee was as under: 1. To coordinate the regulatory roles of RBI and SEBI in regard to trading of Currency and Interest Rate Futures on the Exchanges. 2. To suggest the eligibility norms for existing and new Exchanges for Currency and Interest Rate Futures trading. 3. To suggest eligibility criteria for the members of such exchanges. 4. To review product design, margin requirements and other risk mitigation measures on an ongoing basis. 5. To suggest surveillance mechanism and dissemination of market information. 6. To consider microstructure issues, in the overall interest of financial stability.

PRODUCT DEFINITIONS OF CURRENCY FUTURE ON NSE/BSE

y Underlying
Initially, currency futures contracts on US Dollar Indian Rupee (US$-INR) would be permitted.

y Trading Hours
The trading on currency futures would be available from 9 a.m. to 5 p.m.

y Size of the contract

The minimum contract size of the currency futures contract at the time of introduction would be US$ 1000. The contract size would be periodically aligned to ensure that the size of the contract remains close to the minimum size.

y Quotation
The currency futures contract would be quoted in rupee terms. However, the outstanding positions would be in dollar terms.

y Tenor of the contract

The currency futures contract shall have a maximum maturity of 12 months.

y Available contracts
All monthly maturities from 1 to 12 months would be made available.

y Settlement mechanism
The currency futures contract shall be settled in cash in Indian Rupee.

y Settlement price
The settlement price would be the Reserve Bank Reference Rate on the date of expiry. The methodology of computation and dissemination of the Reference Rate may be publicly disclosed by RBI.

y Final settlement day

The currency futures contract 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 for Interbank Settlements in Mumbai. The rules for Interbank Settlements, including those for known holidays and subsequently declared holiday would be those as laid down by FEDAI. The contract specification in a tabular form is as under:

PRICE WATCH AS ON 7 JULY 2011 ON NSE

MCX Stock Exchange (MCX-SX), Indias new stock exchange, commenced operations in the Currency Derivatives Segment on October 7, 2008 under the regulatory framework of Securities & Exchange Board of India (SEBI) and Reserve Bank of India (RBI). The Exchange is recognized by SEBI under Section 4 of Securities Contracts (Regulation) Act, 1956. A new generation stock exchange, MCX-SX offers a world-class electronic platform for trading in currency futures contracts and is currently the market leader in this segment. Within a year of inception, MCX-SX has achieved a stupendous growth in average daily turnover and open interest. The average daily turnover increased from Rs 355 crore during its first month of operations to Rs 18,359 crore in March 2011. In line with global best practices and regulatory requirements, clearing and settlement is conducted through a separate Clearing Corporation MCX-SX Clearing Corporation Ltd. (MCX-SX CCL). MCX-SX currently witnesses participation from 555 towns and cities across India and has a strong member base of 734. MCX-SX believes in the philosophy of Systematic Development of Markets through Information, Innovation, Education and Research. The Exchange endeavours to ensure continuous innovation and to introduce various new products under the extant regulatory framework. The Exchange is in readiness to commence Equity segment and Equity Futures & Options segment besides other products such as Interest Rate Futures, SME segment securities, Index Funds and Exchange Traded Funds etc, on receiving regulatory approvals.

CURRENCY FUTURES MARKET - A PERSPECTIVE

Globalization and integration of financial markets, coupled with progressive increase of cross-border flow of capital, have transformed the dynamics of Indian financial markets. This has increased the need for dynamic currency risk management. The steady rise in Indias foreign trade along with liberalization in foreign exchange regime has led to large inflow of foreign currency into the system in the form of FDI and FII investments. In order to provide a liquid, transparent and vibrant market for foreign exchange rate risk management, Securities & Exchange Board of India (SEBI) and Reserve Bank of India (RBI) have allowed trading in currency futures on stock exchanges for the first time in India, initially based on the USDINR exchange rate and subsequently on three other currency pairs EURINR, GBPINR and JPYINR. The USDINR futures contract is already being traded on MCX-SX with more than US$ 2 billion average daily turnover. This would give Indian businesses another tool for hedging their foreign exchange risk effectively and efficiently at transparent rates on an electronic trading platform. The primary purpose of exchange-traded currency derivatives is to provide a mechanism for price risk management and consequently provide price curve of expected future prices to enable the industry to protect its foreign currency exposure. The need for such instruments increases with increase of foreign exchange volatility.

Does the national economy of India need currency futures? Every business exposed to foreign exchange risk needs to have a facility to hedge against such risk. Exchange-traded currency futures, as on MCX-SX, are a superior tool for such hedging because of greater transparency, liquidity, counterparty guarantee and accessibility. Since the economy is made up of businesses of all sizes, anything that is good for business is also good for the national economy.

Participants of a currency futures market A host of benefits are available to a wide range of financial market participants, including hedgers (exporters, importers, corporate and Banks), investors and arbitrageurs on MCX-SX.

Hedgers: A high-liquidity platform for hedging against the effects of unfavourable fluctuations in the foreign exchange markets is available on exchange. Banks, importers, exporters and corporate houses hedge on MCX-SX. Investors: All those interested in taking a view on appreciation (or depreciation) of exchange rate in the long and short term can participate in the MCX-SX currency futures. For example, if one expects depreciation of the Indian Rupee against the US dollar, then he can hold on long (buy) position in USDINR contract for returns. Contrarily, he can sell the contract if he sees appreciation of the Indian Rupee. Arbitrageurs: Arbitrageurs get the opportunity of trading in currency futures by simultaneous purchase and sale in two different markets, taking advantage of price differential between the markets.

Product Specifications - JPYINR

Symbol JPYINR

Instrument Type

FUTCUR

Unit of trading

1 (1 unit denotes 100000 YEN)

Underlying

JPY

Quotation/Price Quote

Rs per 100 YEN

Tick size

0.25 paise or INR 0.0025

Trading hours

Monday to Friday - 9:00 a.m. to 5:00 p.m.

Contract trading cycle

12 month trading cycle.

Settlement price

Exchange rate published by the Reserve Bank in its

Press Release captioned RBI Reference Rate for US$ and Euro.

Last trading day

Two working days prior to the last business day of the expiry month at 12 noon.

Final settlement day

Last working day (excluding Saturdays) of the expiry month. The last working day will be the same as that for Interbank Settlements in Mumbai.

Base price

Theoretical price on the 1st day of the contract. On all other days, DSP of the contract

Price operating range

Tenure upto 6 months: +/-3 % of base price Tenure greater than 6 months: +/- 5% of base price

Position limits

Clients

Higher of 6% of total open interest or JPY 200 million

Trading Members

Higher of 15% of the total open interest or JPY 1000 million

Banks

Higher of 15% of the total open interest or JPY 2000 million

Minimum initial margin

4.50% on first day & 2.30% thereafter

Extreme loss margin

0.7% of MTM value of gross open positions.

Calendar spreads

Rs. 600 for a spread of 1 month; Rs 1000 for a spread of 2 months and Rs 1500 for a spread of 3 months or more

Settlement

Daily settlement : T + 1 Final settlement : T + 2

Mode of settlement

Cash settled in Indian Rupees

Daily settlement price (DSP)

DSP shall be calculated on the basis of the last half an hour weighted average price of such contract or such other price as may be decided by the relevant authority from time to time.

Final settlement price (FSP)

Exchange rate published by the Reserve Bank in its Press Release captioned RBI Reference Rate for US$ and Euro.

Product Specifications - EURINR

Symbol EURINR

Instrument Type

FUTCUR

Unit of trading

1 (1 unit denotes 1000 EURO)

Underlying

EURO

Quotation/Price Quote

Rs. per EUR

Tick size

0.25 paise or INR 0.0025

Trading hours

Monday to Friday - 9:00 a.m. to 5:00 p.m.

Contract trading cycle

12 month trading cycle.

Settlement price

RBI Reference Rate on the date of expiry.

Last trading day

Two working days prior to the last business day of the expiry month at 12 noon.

Final settlement day

Last working day (excluding Saturdays) of the expiry month. The last working day will be the same as that for Interbank Settlements in Mumbai.

Base price

Theoretical price on the 1st day of the contract. On all other days, DSP of the contract

Price operating range

Tenure upto 6 months: +/-3 % of base price Tenure greater than 6 months: +/5% of base price

Position limits

Clients

Higher of 6% of total open interest or

EUR 5 million Trading Members Higher of 15% of the total open interest or EUR 25 million Banks Higher of 15% of the total open interest or EUR 50 million Minimum initial margin 2.8% on First day & 2% thereafter

Extreme loss margin

0.3% of MTM value of gross open positions

Calendar spreads

Rs.700/- for a spread of 1 month, 1000/for a spread of 2 months, Rs.1500/- for a spread of 3 months or more

Settlement

Daily settlement : T + 1 Final settlement : T + 2

Mode of settlement

Cash settled in Indian Rupees

Daily settlement price (DSP)

DSP shall be calculated on the basis of the last half an hour weighted average price of such contract or such other price as may be decided by the relevant authority from time to time.

Final settlement price (FSP)

RBI reference rate

Product Specifications GBPINR

Symbol GBPINR

Instrument Type

FUTCUR

Unit of trading

1 (1 unit denotes 1000 POUND STERLING))

Underlying

POUND STERLING

Quotation/Price Quote

Rs. per GBP

Tick size

0.25 paise or INR 0.0025

Trading hours

Monday to Friday - 9:00 a.m. to 5:00 p.m.

Contract trading cycle

12 month trading cycle.

Settlement price

Exchange rate published by the Reserve Bank in its Press Release captioned RBI Reference Rate for US$ and Euro.

Last trading day

Two working days prior to the last business day of the expiry month at 12 noon.

Final settlement day

Last working day (excluding Saturdays) of the expiry month. The last working day will be the same as that for Interbank Settlements in Mumbai.

Base price

Theoretical price on the 1st day of the contract. On all other days, DSP of the contract

Price operating range

Tenure upto 6 months: +/-3 % of base price Tenure greater than 6 months: +/- 5% of base price

Position limits

Clients

Higher of 6% of total open interest or GBP 5 million

Trading Members

Higher of 15% of the total open interest or GBP 25 million

Banks

Higher of 15% of the total open interest or GBP 50 million

Minimum initial margin

3.2% on first day & 2% thereafter

Extreme loss margin

0.5% of MTM value of gross open positions.

Calendar spreads

Rs.1500/- for a spread of 1 month, 1800/for a spread of 2 months, Rs.2000/- for a spread of 3 months or more

Settlement

Daily settlement : T + 1 Final settlement : T + 2

Mode of settlement

Cash settled in Indian Rupees

Daily settlement price (DSP) DSP shall be calculated on the basis of the last half an hour weighted average price of such contract or such other price as may be decided by the relevant authority from time to time.

Final settlement price (FSP) Exchange rate published by the Reserve Bank in its Press Release captioned RBI Reference Rate for US$ and Euro.

Product Specifications USDINR

Symbol USDINR

Instrument Type

FUTCUR

Unit of trading

1(1 unit denotes 1000 USD)STERLING))

Underlying

The exchange rate in Indian Rupees for a US Dollar

Quotation/Price Quote

Rs. per GBP

Tick size

0.25 paise or INR 0.0025

Trading hours

Monday to Friday - 9:00 a.m. to 5:00 p.m.

Contract trading cycle

12 month trading cycle.

Settlement price

Exchange rate published by the Reserve Bank in its Press Release captioned RBI Reference Rate for US$ and Euro.

Last trading day

Two working days prior to the last business day of the expiry month at 12 noon.

Final settlement day

Last working day (excluding Saturdays) of the expiry month. The last working day will be the same as that for Interbank Settlements in Mumbai.

Base price

Theoretical price on the 1st day of the contract. On all other days, DSP of the contract

Price operating range

Tenure upto 6 months: +/-3 % of base price Tenure greater than 6 months: +/- 5% of base price

Position limits

Clients

Higher of 6% of total open interest or USD 10 million

Trading Members

Higher of 15% of the total open interest or USD 50 million

Banks

Higher of 15% of the total open interest or USD 100 million

Minimum initial margin

1.75% on first day & 1% thereafter

Extreme loss margin Calendar spreads

1% of MTM value of gross open position. Rs. 400/- for a spread of 1 month, Rs. 500/- for a spread of 2 months, Rs. 800/- for a spread of 3 months & Rs. 1000/- for a spread of 4 months or more

Settlement

Daily settlement : T + 1 Final settlement : T + 2

Mode of settlement

Cash settled in Indian Rupees

Daily settlement price (DSP) DSP shall be calculated on the basis of the last half an hour weighted average price of such contract or such other price as may be decided by the relevant authority from time to time.

Final settlement price (FSP) RBI reference rate

USDINR
PRICE

VOLUME

OPEN INTEREST

During May 2011, the market share of the Exchange stood at 41.18% in the Currency Futures market. The average traded daily turnover in MCX-SX was `17,023.07 crores with average daily contracts of 3,695,791.

Geo -Insights
Globally, recovery is expected to sustain in 2011 even as it is projected to moderate marginally from its 2010 pace due to the phasing out of the fiscal stimulus. However new risks have emerged with challenges like rising oil and other commodity prices, inflationary pressures in some emerging economies and after effects of tragic earthquake in Japan. Turning to the domestic macroeconomic situation as reported by RBI in its Monetary Policy Statement for 2011-12, the Indian economy is estimated to have grown by 8.6% last year. The index of industrial production (IIP), which grew by 10.7% during the first half of last year, moderated subsequently, bringing down the overall growth for April 2010 - February 2011 to 7.8%. Particularly significant were the slowdown in capital goods production and investment spending. Going forward, high oil and other commodity prices and the impact of the Reserve Banks anti-inflationary monetary stance will moderate growth. Based on the assumption of a normal monsoon, and crude oil prices averaging US$110 a barrel over the full year 2011-12, the baseline projection of real GDP growth for 2011-12, for policy purposes, is around 8%.

Can currency futures help small traders? Yes. The minimum size of the USDINR futures contract is USD 1,000. Similarly EURINR future contract is EURO 1000, GBPINR future contract is GBP 1000 and JPYINR future contract is YEN 1,00,000. These are well within the reach of most small traders. All transactions on the Exchange are anonymous and are executed on a price time priority ensuring that the best price is available to all categories of market participants irrespective of their size. As the profits or losses in the futures market are also paid / collected on a daily basis, the scope of accumulation of losses for participants gets limited.

What are the terms and conditions set by RBI for Banks to participate in exchange traded fx futures? RBI has allowed Banks to participate in currency futures market. The AD Category I Banks which fulfill stipulated prudential requirements are eligible to become a clearing member and / or trading member of the currency derivatives segment of MCX-SX.

AD Category I Banks which are urban co-operative banks or state co-operative banks can participate in the currency futures market only as a client, subject to approval thereof, from the respective regulatory department of RBI.

Which are the global exchanges that provide trading in currency futures? Internationally, exchanges such as Chicago Mercantile Exchange (CME), Johannesburg Stock Exchange, Euronext.liffe, BM&FBOVESPA and Tokyo Financial Exchange provide trading in currency futures.

Why should one trade in Indian exchanges as compared to international exchanges? Indian currency futures enable individuals and companies in India to hedge and trade their Indian Rupee risk. Most international exchanges offer contracts denominated in other currencies.

Trends in Currency Future in India Currency futures trading started in India on August 29, 2008 on National Stock Exchange. This was the first time currency derivatives got listed on an exchange in India. Till this time, the currency futures trading took place over the counter and were unorganized. With the entry of the National Stock Exchange in the picture, currency trading became more organized with the NSE acting as a counter party to all the transactions. Soon after the BSE and MCX also marked their entry into the currency derivatives market.

Volumes on currency futures exchanges (mainly NSE and MCX) have consistently increased since the start of trading. Combined daily volumes on the most active currency futures bourses MCX Stock Exchange (MCX-SX) and the National Stock Exchange (NSE) The BSE has failed to generate enough interest in this segment and the volumes remain abysmally low on the exchange. Although volatility has ensured that volumes surged after the launch, trading has been concentrated on front-month contracts as majority of users are traders, small exporters and brokers/banks. (Refer history currency)

BENEFITS OF CURRENCY TRADING IN INDIA

y Easy Accessibility - Small investors would get an easy access to currency futures trading on the popular exchanges y y Easy Affordability - Margins are very low and the contract size is very small. Low Transaction Cost - As opposed to the high pay-out of commissions in overseas forex trading, currency futures carries low costs for investors y Transparency - It is possible for you to verify trade details on NSE if you have a doubt that the broker has tried to cheat you. y Counter-party default risk - All the trades done on the recognized exchanges are guaranteed by the clearing corporations and hence it eliminates the risks associated with counter party default. NSCCL (National Securities Clearing Corporation Limited) carries out all the notation, clearing and settlement process of currency futures trading y Standardized Contracts - Exchange Traded currency futures are standardized in respect of lot size ($1000) and maturity (12 monthly contracts). Retail investors with their limited resources would find it tremendously beneficial to take positions in standardised USD INR futures contracts. y Moreover, the currency futures market is used by some companies for hedging. These companies either purchase currency futures for their future payables, or sell the futures on currencies for their future receipts. y Speculators may also buy or sell futures on a foreign currency as a protection against the strengthening or weakening of the US dollar. So, speculators may be able to earn profit from the rise or fall of these exchange rates.

OPPORTUNITIES
y y y Introduction of Options trading FII participation could be allowed. NRI participation could be allowed which would add to more volumes and liquidity.

Positions larger than $5 million could be allowed - a tiny limit when compared with the size of exposure that is found in a trillion dollar economy.

FINDINGS
y Cost of carry model and Interest rate parity model are useful tools to find out standard future price and also useful for comparing standard with actual future price. And its also a very help full in Arbitraging. y New concept of Exchange traded currency future trading is regulated by higher authority and regulatory. The whole function of Exchange traded currency future is regulated by SEBI/RBI, and they established rules and regulation so there is very safe trading is emerged and counter party risk is minimized in currency Future trading. And also time reduced in Clearing and Settlement process up to T+1 days basis. y Larger exporter and importer has continued to deal in the OTC counter even exchange traded currency future is available in markets because, There is a limit of USD 100 million on

open interest applicable to trading member who are banks. And the USD 25 million limit for other trading members so larger exporter and importer might continue to deal in the OTC market where there is no limit on hedges. y 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
y Currency Future need to change some restriction it imposed such as cut off limit of 5 million USD, Ban on NRIs and FIIs and Mutual Funds from Participating. y 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 POUNDINR, CAD-INR etc. y 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 its 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 extraordinary development and expansion of financial derivativesThese instruments enhances the ability to differentiate risk and allocate it to those investors most able and willing to take it- a process that has undoubtedly improved national productivity growth and standards of livings. The currency future gives the safe and standardized contract to its investors and individuals who are aware about the forex market or predict the movement of exchange rate so they will get the right platform for the trading in currency future. Because of exchange traded future contract and its standardized nature gives counter party risk minimized. Initially only NSE had the permission but now 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.

Currency Futures the road ahead

Standardised rules for lot sizes and trading, framed by the Reserve Bank of India, means exchanges and brokers have to rely on better technology and back-end support to attract clients. Currency futures today are offered only for rupeedollar contracts for longer periods (12 contracts) than the existing forward contracts (3 contracts 3 months, 6

monthsand 12 months). MCX-SX will launch 11 currency trading websites in regional languages (having launched 5 so far in Hindi, Marathi, Gujarati, Tamil and Malayalam).

Liberalisation in terms of changes in the contract size, variable lot sizes and extended trading hours could help encourage larger participation. The rupee futures have a contract size of $1,000. The position limit for a client is higher of 6% of the total open interest or $ 5 million. For the trading member it is higher of 15% of the total open interest or $25 million. If the trading member is a bank it is higher of 15% of the total open interest or $ 100 million. Hence till the total open interest rises, a participant cannot increase his open interest beyond present proportion/limits. Foreign institutional investors are excluded from the market and their inclusion as participants can help in stepping up volumes significantly. SEBI has approved a fourth exchange, promoted by a clutch of public and private sector banks, to commence trading in rupee-dollar futures. United Stock Exchange of India, expected to come on line in February 2009, is the fourth currency futures bourse after National Stock Exchange, MCX-SX and BSE. The new stock exchange has been promoted by key PSU lenders such as Bank of India, Bank of Baroda, Canara Bank, Andhra Bank, Allahabad Bank, Indian Overseas Bank and Oriental Bank of Commerce, Union Bank of India and United Bank of India jointly with MMTC that together will hold minimum 49% in the bourse. Other shareholders include Standard Chartered Bank, Federal Bank, Tata Consultancy Services and STCI, who will jointly own 25% and national-level brokers with 20% stake.