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Currency Derivatives









CURRENCY FEATURES

Currency Futures trading will be of interest of those who wish to:

Invest Hedge Arbitrage

Market Players on a Currency Exchange:

Banks / MF Importer Exporter Traders

Advantages:

Low Transaction Charges Low Brokerage Fixed settlement as per RBI reference rate Good Arbitrage Opportunity Cost of carry is low

Factors Influencing Indian Currency Market:

Change in Interest Rates Prices of Crude Oil Inflow of Foreign Funds Natural Calamities Political Environment

Why Currency Futures ?

Trade on a regulated and efficient platform Allow for transparent pricing Equalise the playing field for investors Allow individuals and smaller corporates to access favorable rates usually reserved for larger corporates Represents a relaxation of exchange controls for individuals and corporate entities Less administration for corporates Indian currency exchange will soon start trading in EURO, YEN & POUND also, and the option contracts too will be launched sooner Inflow of Foreign Funds

Quotation & Settlement In Currency Exchange:

NSE quotes all currency future prices in the same way as the underlying spot exchange rate This is represented as the number of rupees per foreign currency quoted to four decimal places, e.g. INR 49.1175 to 1$ Last working day for each contract is two working days prior to the contract expiration date Contract Expiration Date for each contract is the last working day of the month All the contracts will be settled in INR

Currency Futures Product Specifications:

Underlying Instrument Rate of exchange between one US Dollar & Indian Rupee Standardized Contracts Contracts open for 12 consecutive month with fixed monthly expiries Rupee Denominated Contracts quoted in INR per one underlying foreign currency (e.g. US Dollar) to four decimal places Cash Settled No physical delivery of foreign currency Contract Sizes 1000 foreign underlying currency e.g. $1000

How to Trade/Close a Position:

If an investor has a view on which direction the currency is going to move, the investor needs to contact their broker to transact on their behalf To close the contract, they enter into an equal but opposite transaction For example, if an investor had bought a currency future contract, the investor would close out the trade by selling the contract

Profit & Loss/ Variation Margin-Example :


Profit Trades Lose Trades
Buy Low-Sell High Buy High-Sell Low
Sell High-Buy Low Sell Low-Buy High


Profit /Loss is calculated at the end of day on closing price (fair value) Position holders of profitable trades receive Variation Margin Position holders of loss trades pay in Variation Margin

How to Roll Over a Position:

All investors who wish to hold their positions beyond the expiry date will be required to roll their positions over into the next expiry date Investors will need to close out their positions and subsequently enter into the next contract expiry. This is usually done automatically on the investors behalf by the broker Example - investors holding a June contract will need to roll their position into the September contract. If an investor had bought a June contract, the investor would have to sell the June contract and subsequently buy a September contract The benefit to the investor is that the same exposure is maintained. The Exchange offers discounted trade fees for all positions that are rolled over World’s daily turnover is app. US $ 4.5 trillion India’s daily turnover is app. US $25 bn or Rs. 1.5 Lk crore Currency Future accounts for a meager Rs 2000cr.