Analysis and Interpretation of Risk in Currency and Share Market Investment and Use of Risk Management Instruments

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Trinity Institute Of Professional Studies 1

Table of ContentsObjective of the StudyScop of the studyExecutive SummaryAcknowledgementMETHOLOGY

Chapter1. Introduction of Sharekhan Ltd.1 Type of accounts2 Share research section3 Awards and Achievements

Chapter2. Introduction to Derivatives And Financial markets2.1 Derivative market in India2.2 Participants and Functions2.3 Types of Derivative Instruments2.4 Derivative market at NSE2.5 Approval for Derivative Trading

2.6 Clearing and Settlement2.7 Index Derivatives

2.8 Trading2.9 Order type and condition2.10 SEBI Advisory Committee on Derivative

Chapter3. Introduction to Future and Options3.1 Forward Contracts3.2 Future Contracts3.3 Options3.4 Payoffs for Derivative Contracts

Chapter4. Applicability of Derivative Instruments4.1 Risk Management with Futures Contract4.2Risk Management with Options


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Objective of the Study

To find out the types of Derivative Instruments are applicable in the Indian StockMarket which can work both in good and bad times so that it can minimize the riskand maximize returns.

To know the functions of derivatives in Indian Stock Market. To know whether the derivative instruments are being using for the correctpurpose. To know about what is hedging and risk hedging process and its tools. Compare the f& o segment with cash segment. Find out Derivatives disadvantages. Derivatives are useful for India or not.

5.0 Introduction to Option StrategiesCONCLUSION

BIBILOGRAPHY


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SCOP OF THE STUDY

The financial derivatives are most impotent tools of risk mana gementfor hedging risk.

They are useful for business growth. They helps entrepreneur to setup new business. They help to increase investment in the market; as a result they help in

economy growth. Derivatives help to make mar ket efficient and effective. They help in increasing foreign investment in the marketAll business enterprise and financial institutions use these tools for reducing

risk and increase profit.


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METHODOLOGYDuring this project, I have ana lyzed the Futures and Options. I have tried toanalyze the instruments as per the Market Participant and the Market Trend.Initially, I have given a br ief introduction about the instruments, so that thereader is awar e of basics of the subject.

I have tried to identify various terms related to derivative trading, for which Ihave introduced a separat e chapter, terms related to derivative market

Then I have tried to segregate the use of Instruments as per the MarketParticipants and Market Trend. I identified hedging, arbitrage and speculationstrategies using both futures and options, and then segregated them into achapter each. Segregation involved a thorough study of the strategies andpossible use.

Then I have done a secondary data based study on growth of Indian DerivativeMarket, which includes the comparison of derivative market with cash market,data regarding the traded volume and number of contracts traded from December2008 till May and june 2010. I have also analyzed th e top five most traded symbolsin futures and options segment.


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Trinity Institute Of Professional Studies

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ACKNOWLEDGEMENTI owe a great many thanks to a great many people who helped and supported me duringthis project.

My deepest thanks to Lecturer, mrs. Sashay mam the Guide of the project for guiding andcorrecting various documents of mine with attention and care. She has taken pain to gothrough the project and make necessary correction as and when needed.

I express my thanks to the director of, [trinity institute of professional studies], forextending his support.

My deep sense of study is [financial derivatives] the whole project is based upon secondarydata,

I would also thank my Institution and my faculty members without whom this projectwould have been a distant reality. I also extend my heartfelt thanks to my family and wellwishers.

MANISH KUMAR


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EXECUTIVE SUMMARYI have a great pleasure in presenting this work as a part of the Three years fulltime Bachelor of Business Administration.The objective of my work initiated when I came across various discussions in thefinancial markets. Indian derivatives market is yet to reach its peak level. Thereis still a lack of knowledge about derivatives, amongst the majority of marketplayers.High degree of volatility in the recent times in the Indian market has led todevelopment of more and more sophisticated Hedging, Speculation and Arbitragetechniques and strategies. These strategies are extensively used by Traders, RiskManagers, and Portfolio Managers.Objective of this study is to analyze the growth and prospects of Derivativesmarket in India. The study would facilitate the reader to know about thegrowing trend of Derivatives Market in India


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COMPANY PROFILE:Sharekhan is one of the top retail brokerage houses in India with a strong online trading platform. The

company provides equity based products (research, equities, derivatives, depository, margin funding, etc.).

It has one of the largest networks in the country with 1200+ share shops in 400 cities and Indias premier

online trading portal www.sharekhan.com. With their research expertise, customer commitment and

superior technology, they provide investors with end-to-end solutions in investments. They provide trade

execution services through multiple channels - an Internet platform, telephone and retail outlets.

Sharekhan was established by Morakhia family in 1999-2000 and Morakhia family, continues to remain

the largest shareholder. It is the retail broking arm of the Mumbai-basedSSKI [SHRIPAL SHEWANTILALKANTILAL ISWARNATH LIMITED] Group. SSKI which is established in 1930 is the parent company ofSharekhan ltd. With a legacy of more than 80 years in the stock markets, the SSKI group ventured into

institutional broking and corporate finance over a decade ago. Presently SSKI is one of the leading players

in institutional broking and corporate finance activities. Sharekhan offers its customers a wide range of

equity related services including trade execution on BSE, NSE, and Derivatives. Depository services,

online trading, Investment advice, Commodities, etc.

Sharekhan Ltd. is a brokerage firm which is established on 8th February 2000 and now it is having all the

rights of SSKI. The company was awarded the 2005 Most Preferred Stock Broking Brand by Awaaz

Consumer Vote. It is first brokerage Company to go online. The Company's online trading and investment

site - www.Sharekhan.com - was also launched on Feb 8, 2000. This site gives access to superior content

and transaction facility to retail customers across the country. Known for its jargon-free, investor friendly

language and high quality research, the content-rich and research oriented portal has stood out among its

contemporaries because of its steadfast dedication to offering customers best-of-breed technology and

superior market information.

Sharekhan has one of the best states of art web portal providing fundamental and statistical information

across equity, mutual funds and IPOs. One can surf across 5,500 companies for in-depth information,

details about more than 1,500 mutual fund schemes and IPO data. One can also access other market relateddetails such as board meetings, result announcements, FII transactions, buying/selling by mutual funds and

much more.

Sharekhan's management team is one of the strongest in the sector and has positioned Sharekhan to take

advantage of the growing consumer demand for financial services products in India through investments in

research, pan-Indian branch network and an outstanding technology platform. Further, Sharekhan's lineage

and relationship with SSKI Group provide it a unique position to understand and leverage the growth of


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the financial services sector. We look forward to providing strategic counsel to Sharekhan's management

as they continue their expansion for the benefit of all shareholders.

SSKI Corporate Finance Private Limited (SSKI) is a leading India-based investment bank with strong

research-driven focus. Their team members are widely respected for their commitment to transactions and

their specialized knowledge in their areas of strength. The team has completed over US$5 billion worth of

deals in the last 5 years - making it among the most significant players raising equity in the Indian market.

SSKI, a veteran equities solutions company has over 8 decades of experience in the Indian stock markets.

MISSION: To educate and empower the individual investor to make better investment decisions throughquality advice and superior service.

VISION: To be the best retail brokering Brand in the retail business of stock market.

ACHIEVEMENTS OF SHAREKHAN:A wired company along with Reliance, Hll, Infosys, etc by Business Today, January 2004 edition.

It was awarded Top Domestic Brokerage House four times by Euro and Asia money.

It was Winner of Best Financial Website award.

Indias most preferred brokers within 5 years. CNBC Awaaz customers Award 2005.

STRATEGY:The main strategies used in our training were as follow.

DATA CALLINGIn data calling we were provided data of mobile numbers and our job was to generate appointments. After

that we were required to convert that appointment into closure. Apart from given data we also brought

latest business directory. We called to different business people and tried to generate appointments.


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CALLED CALLINGCalled calling means to go at different corporate houses and to meet different

People and to get their visiting card by it we get lead and our immediate task

Was to call them & to fix appointment.

REFERENCEAnother important strategy was to use our reference means our family, friends, relatives etc. In

marketing or selling we can never neglect references & they always play a major role.

OFFERING OF THE COMPANYSharekhan provides 4 in 1 account.1. De-mat a/c

2. Trading a/c [for cash calculation]

3. Bank a/c [for fund transfer]

4. Dial and Trade [for offline trading/for query relating trading]

[1] Dematerialization account:-

Dematerialization is the process of converting physical shares (share certificates) into an electronic form.

Shares once converted into dematerialized form are held in a De-mat account Sharekhan is a depository

participant. This means that we can keep the shares in dematerialized form in Sharekhan. But for this one

has to purchases the Demat account in Sharekhan. .

Sharekhan provides no opening charge. Sharekhan provide de-mat account free of charge for first year, Rs.400/ year from the next year

(year continued from the day of opening).

-Auto pay-in & Auto pay-out of securities.

- Waver of pay-in and pay-out charges (Due to link De-mate account).

[2] Trading Account:

It is an electronic account which enables customers to trade in share through internet without help to

broker.

NSE/BSE/F&O/Commodity terminal live screen:-

Provides online fluctuations rate on computer screen

Online Daily Tips:-


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Sharekhan is providing tips through mails in 4 sessions Pre market Noon session Post market Late evening sharekhan is provide tips through SMS (chargeable) arekhan is provide tips through Yahoo Messenger Online IPO/MF Online :- Sharekhan provide IPO and MF facility for the customer.

[3] Saving Account:

In Sharekhan, a customer can have a saving account for trading online with net banking facility; Sharekhanhave a tie ups with following Banks.

1. HDFC Bank 2. CITI Bank 3. OBC Bank 4. YES Bank 5. UTI Bank 6. IDBI Bank 7. ICICI Bank8.

Union Bank 9. Inducing Bank 10 . Bank of India 11. Deutsche Bank

A customer can allocate and transfer fund from your respective bank account to your Sharekhan account

for trading and transfer back to link bank account when and where needed.

[4] Dial-N-Trade:-Sharekhan provide Dial-N-Trade facility to the customer.

PRODUCTS & SERVICIESSharekhan ltd. Provide different Product as follows

Share online & offline Derivatives Mutual fund online Commodities online

IPO online Portfolio Management Services Insurance Fixed deposits Advisory products Currency trading


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SHARE ONLINE:Sharekhan provide online facilities.

BENEFITsFreedom from paperwork:-Integrated trading, bank and de-mat account with digital contractsremovers all paperwork.

Instant credit and transfer:-instant transfer of funds from bank account of the choice toSharekhan trading account.

Trade anywhere:-enjoy the ease of trading from any part of the world in a completely secureenvironment.

Dial n Trade:-call toll free number (1-800-22-7050) to place orders through telebrokers.Timey advice:-make informed decisions with expert advice, investment calls and live marketcommentary.


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Real-time portfolio tracking:-benefit from real-time information for investment andcurrent portfolio value.

After-hour orders:-place order after market hours, which get executed as soon as the marketsopens.

Sharekhan provide two different accounts:

1) Classic account2) Trade Tiger3)CLASSIC ACCOUNT:- The Classic Account enables customers to trade online on the NSE and theBSE, invest in IPO and Mutual Funds and access all the research and transaction reports throughSharekhans website. This account is suitable for the retail investors.

In this account Shown the maximum script are 25 in the terminal and the technical chart are not shown in

this account.

The life time registration charge for this account is 750 rupees.

Features Online trading account for investing in Equities and Derivatives Free trading through Phone (Dial-n-Trade) Two dedicated numbers for placing your orders with your cell phone or landline. Automatic funds transfer with phone banking (for Citibank and HDFC bank customers) Simple and Secure Interactive Voice Response based system for authentication Get the trusted, professional advice of our telebrokers. After hours order placement facility between 8.00 am and 9.30 am Integration of: Online trading + Bank + Demat account Instant cash transfer facility against purchase & sale of shares IPO investments Instant order and trade confirmations by e-mail

Single screen interface for cash and derivative Online classic account:


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FAST TRADE:Features

Streaming quotes.

Personalized market watch.

Single screen interface for cash, derivatives and Commodities.

New FastTrade is platform independent will support by all Operating System.

New FastTrade will support all browsers in the market.

New FastTrade is independent of existing website and can work even if content website is down.

Fast trade is web base product and its a shown fluctuation rate.


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TRADE TIGER:Trade tiger is a next-generation online trading product that brings the power of brokers terminal to

customer pc. It is session to capitalize on intra-day price movement. Trade tiger is an internet based

application available on a CD, which provides everything a trader needs on one screen.

Key Features:-single platform for multiple exchange BSE & NSE (Cash & F&O), MCX, NCDEX, Mutual Funds, IPOMultiple Market Watch available on Single ScreenMultiple Chartswith Tick by Tick Intraday and End of Day Charting powered with various Studiesraph Studiesinclude Average, Band- Bollinger, Know Sure Thing, MACD, RSI, etcapply studies such as Vertical, Horizontal, Trend, Retracement & Free linesser can save his own defined screen as well as graph template, that is, saving the layout for future useser-defined alert settings on an input Stock Price triggerlooks available to gauge market such as Tick Query, Ticker, Market Summary, Action Watch, OpPremium Calculator, Span Calculator


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shortcut key for FAST access to order placements & reportsonline fund transfer activated with 11 Banks

Advantages:-vet Streaming Quotes

Access all Trading Calls

Advanced Charting features

Create your own technical rules for trading

A Single Trading Screen for all segments

THE PLATINUM CIRCLE:-The HNI product

Personalized portfolio tracking & restructuring advice.

Monthly stock valuation statements, report profitability statement.

Daily report on transaction sent in printed format as well as available online.

Trader

Name


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Research-based investment advice tailored for different investment approaches

Indexes of Equity market online

NSE:

The national stock exchange of the India was the promoted by leading financial institutions atthe behest of the government of India, and was incorporated in November 1992 as a tax paying company.

In April 1993, it was recognized as a stock exchange under the securities contracts( Regulation) Act, 1956.

NSE commenced its operation in the wholesale Debt Market (WDM) segment in June 1994. The capital

market (Equities) segment of the NSE commenced operation in November 1994.

BSE:

The Bombay stock exchange is the oldest stock exchange in Asia. It is located at Dalal Street, Mumbai,India.

The Bombay stock exchange was established in 1985. There are around 3500 Indian companies listed

with stock exchange, and has the significant stock volume. As of 29 may 2007, the market capitalization

of the BSE is about Rs. 40.5 trillion. The BSE SENSEX (SENSitive indEX), also called the BSE 30, is a widely

used market index in India and Asia. As of 2005, it

is among the five biggest stock exchanges in the world in terms of transactions volume.


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INTRODUCTION OF CURRENCY AND SHARE MARKETA stock market or equity market is a public entity (a loose network of economic transactions, not aphysical facility or discrete entity) for the trading of company stock(shares) and derivatives at an agreedprice; these are securities listed on a stock exchange as well as those only traded privately.

The size of the world stock market was estimated at about $36.6 trillion at the start of October 2008 .[1]Thetotal world derivatives market has been estimated at about $791 trillion face or nominal value,[2]11 timesthe size of the entire world economy.[3]The value of the derivatives market, because it is stated in terms ofnotional values, cannot be directly compared to a stock or a fixed income security, which traditionallyrefers to an actual value. Moreover, the vast majority of derivatives 'cancel' each other out (i.e., a

LIVE

TERMINALS of
http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Shareshttp://en.wikipedia.org/wiki/Derivative_%28finance%29http://en.wikipedia.org/wiki/Security_%28finance%29http://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Stock_market#cite_note-0http://en.wikipedia.org/wiki/Stock_market#cite_note-0http://en.wikipedia.org/wiki/Stock_market#cite_note-0http://en.wikipedia.org/wiki/Stock_market#cite_note-1http://en.wikipedia.org/wiki/Stock_market#cite_note-1http://en.wikipedia.org/wiki/Stock_market#cite_note-1http://en.wikipedia.org/wiki/Stock_market#cite_note-2http://en.wikipedia.org/wiki/Stock_market#cite_note-2http://en.wikipedia.org/wiki/Stock_market#cite_note-2http://en.wikipedia.org/wiki/Notional_amounthttp://en.wikipedia.org/wiki/Notional_amounthttp://en.wikipedia.org/wiki/Actual_cash_valuehttp://en.wikipedia.org/wiki/Actual_cash_valuehttp://en.wikipedia.org/wiki/Notional_amounthttp://en.wikipedia.org/wiki/Stock_market#cite_note-2http://en.wikipedia.org/wiki/Stock_market#cite_note-1http://en.wikipedia.org/wiki/Stock_market#cite_note-0http://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Security_%28finance%29http://en.wikipedia.org/wiki/Derivative_%28finance%29http://en.wikipedia.org/wiki/Shareshttp://en.wikipedia.org/wiki/Stock


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derivative 'bet' on an event occurring is offset by a comparable derivative 'bet' on the event notoccurring).Many such relatively illiquid securities are valued as marked to model, rather than an actual market price.

The stocks are listed and traded on stock exchanges which are entities of a corporation or mutualorganization specialized in the business of bringing buyers and sellers of the organizations to a listing ofstocks and securities together. The largest stock market in the United States, by market capitalization, isthe New York Stock Exchange (NYSE). In Canada, the largest stock market is the Toronto StockExchange. Major European examples of stock exchanges include the Amsterdam Stock Exchange, LondonStock Exchange, Paris Bourse, and the Deutsche Brse (Frankfurt Stock Exchange). In Africa, examplesinclude Nigerian Stock Exchange, JSE Limited, etc. Asian examples include the Singapore Exchange, theTokyo Stock Exchange, the Hong Kong Stock Exchange, the Shanghai Stock Exchange, and the BombayStock Exchange. In Latin America, there are such exchanges as the BM&F Bovespa and the BMV.

The foreign exchange market (forex, FX, or currency market) is a global, worldwide decentralizedfinancial market for trading currencies. Financial centers around the world function as anchors of tradingbetween a wide range of different types of buyers and sellers around the clock, with the exception of

weekends. The foreign exchange market determines the relative values of different currencies.[1]

The primary purpose of the foreign exchange is to assist international trade and investment, by allowingbusinesses to convert one currency to another currency. For example, it permits a US business to importBritish goods and pay Pound Sterling, even though the business' income is in US dollars. It also supportsdirect speculation in the value of currencies, and the carry trade, speculation on the change in interest ratesin two currencies.[2]

In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying aquantity of another currency. The modern foreign exchange market began forming during the 1970s afterthree decades of government restrictions on foreign exchange transactions (the Bretton Woods system ofmonetary management established the rules for commercial and financial relations among the world'smajor industrial states after World War II), when countries gradually switched to floating exchange ratesfrom the previous exchange rate regime, which remained fixed as per the Bretton Woods system.

The foreign exchange market is unique because of

its huge trading volume representing the largest asset class in the world leading to high liquidity; its geographical dispersion; its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sundayuntil 22:00 GMT Friday;

the variety of factors that affect exchange rates; the low margins of relative profit compared with other markets of fixed income; and the use ofleverage to enhance profit and loss margins and with respect to account size.As such, it has been referred to as the market closest to the ideal ofperfect competition, notwithstandingcurrency intervention by central banks. According to the Bank for International Settlements,[3]as of April2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, a growth ofapproximately 20% over the $3.21 trillion daily volume as of April 2007. Some firms specializing onforeign exchange market had put the average daily turnover in excess of US$4 trillion.[4]

The $3.98 trillion break-down is as follows:
http://en.wikipedia.org/wiki/Mark_to_modelhttp://en.wikipedia.org/wiki/Mutual_organizationhttp://en.wikipedia.org/wiki/Mutual_organizationhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/New_York_Stock_Exchangehttp://en.wikipedia.org/wiki/Toronto_Stock_Exchangehttp://en.wikipedia.org/wiki/Toronto_Stock_Exchangehttp://en.wikipedia.org/wiki/Amsterdam_Stock_Exchangehttp://en.wikipedia.org/wiki/London_Stock_Exchangehttp://en.wikipedia.org/wiki/London_Stock_Exchangehttp://en.wikipedia.org/wiki/Paris_Boursehttp://en.wikipedia.org/wiki/Deutsche_B%C3%B6rsehttp://en.wikipedia.org/wiki/Frankfurt_Stock_Exchangehttp://en.wikipedia.org/wiki/Nigerian_Stock_Exchangehttp://en.wikipedia.org/wiki/JSE_Limitedhttp://en.wikipedia.org/wiki/Singapore_Exchangehttp://en.wikipedia.org/wiki/Tokyo_Stock_Exchangehttp://en.wikipedia.org/wiki/Hong_Kong_Stock_Exchangehttp://en.wikipedia.org/wiki/Shanghai_Stock_Exchangehttp://en.wikipedia.org/wiki/Bombay_Stock_Exchangehttp://en.wikipedia.org/wiki/Bombay_Stock_Exchangehttp://en.wikipedia.org/wiki/BM%26F_Bovespahttp://en.wikipedia.org/wiki/Mexican_Stock_Exchangehttp://en.wikipedia.org/wiki/Currency_market#cite_note-0http://en.wikipedia.org/wiki/Currency_market#cite_note-0http://en.wikipedia.org/wiki/Currency_market#cite_note-0http://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/Pound_Sterlinghttp://en.wikipedia.org/wiki/US_dollarshttp://en.wikipedia.org/wiki/Carry_tradehttp://en.wikipedia.org/wiki/Currency_market#cite_note-UNCTAD-1http://en.wikipedia.org/wiki/Currency_market#cite_note-UNCTAD-1http://en.wikipedia.org/wiki/Currency_market#cite_note-UNCTAD-1http://en.wikipedia.org/wiki/Floating_exchange_ratehttp://en.wikipedia.org/wiki/Exchange_rate_regimehttp://en.wikipedia.org/wiki/Fixed_exchange_ratehttp://en.wikipedia.org/wiki/Bretton_Woods_systemhttp://en.wikipedia.org/wiki/Liquidityhttp://en.wikipedia.org/wiki/GMThttp://en.wikipedia.org/wiki/Exchange_ratehttp://en.wikipedia.org/wiki/Leverage_%28finance%29http://en.wikipedia.org/wiki/Perfect_competitionhttp://en.wikipedia.org/wiki/Currency_interventionhttp://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Bank_for_International_Settlementshttp://en.wikipedia.org/wiki/Currency_market#cite_note-BIS-2http://en.wikipedia.org/wiki/Currency_market#cite_note-BIS-2http://en.wikipedia.org/wiki/Currency_market#cite_note-BIS-2http://en.wikipedia.org/wiki/Currency_market#cite_note-3http://en.wikipedia.org/wiki/Currency_market#cite_note-3http://en.wikipedia.org/wiki/Currency_market#cite_note-3http://en.wikipedia.org/wiki/Currency_market#cite_note-3http://en.wikipedia.org/wiki/Currency_market#cite_note-BIS-2http://en.wikipedia.org/wiki/Bank_for_International_Settlementshttp://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Currency_interventionhttp://en.wikipedia.org/wiki/Perfect_competitionhttp://en.wikipedia.org/wiki/Leverage_%28finance%29http://en.wikipedia.org/wiki/Exchange_ratehttp://en.wikipedia.org/wiki/GMThttp://en.wikipedia.org/wiki/Liquidityhttp://en.wikipedia.org/wiki/Bretton_Woods_systemhttp://en.wikipedia.org/wiki/Fixed_exchange_ratehttp://en.wikipedia.org/wiki/Exchange_rate_regimehttp://en.wikipedia.org/wiki/Floating_exchange_ratehttp://en.wikipedia.org/wiki/Currency_market#cite_note-UNCTAD-1http://en.wikipedia.org/wiki/Carry_tradehttp://en.wikipedia.org/wiki/US_dollarshttp://en.wikipedia.org/wiki/Pound_Sterlinghttp://en.wikipedia.org/wiki/Currencyhttp://en.wikipedia.org/wiki/Currency_market#cite_note-0http://en.wikipedia.org/wiki/Mexican_Stock_Exchangehttp://en.wikipedia.org/wiki/BM%26F_Bovespahttp://en.wikipedia.org/wiki/Bombay_Stock_Exchangehttp://en.wikipedia.org/wiki/Bombay_Stock_Exchangehttp://en.wikipedia.org/wiki/Shanghai_Stock_Exchangehttp://en.wikipedia.org/wiki/Hong_Kong_Stock_Exchangehttp://en.wikipedia.org/wiki/Tokyo_Stock_Exchangehttp://en.wikipedia.org/wiki/Singapore_Exchangehttp://en.wikipedia.org/wiki/JSE_Limitedhttp://en.wikipedia.org/wiki/Nigerian_Stock_Exchangehttp://en.wikipedia.org/wiki/Frankfurt_Stock_Exchangehttp://en.wikipedia.org/wiki/Deutsche_B%C3%B6rsehttp://en.wikipedia.org/wiki/Paris_Boursehttp://en.wikipedia.org/wiki/London_Stock_Exchangehttp://en.wikipedia.org/wiki/London_Stock_Exchangehttp://en.wikipedia.org/wiki/Amsterdam_Stock_Exchangehttp://en.wikipedia.org/wiki/Toronto_Stock_Exchangehttp://en.wikipedia.org/wiki/Toronto_Stock_Exchangehttp://en.wikipedia.org/wiki/New_York_Stock_Exchangehttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Mutual_organizationhttp://en.wikipedia.org/wiki/Mutual_organizationhttp://en.wikipedia.org/wiki/Mark_to_model


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$1.490 trillion in spot transactions $475 billion in outright forwards $1.765 trillion in foreign exchange swaps $43 billion Currency swaps $207 billion in options and other products

Market Size and liquidity

Main foreign exchange market turnover, 19882007, measured in billions of USD.

The foreign exchange market is the most liquid financial market in the world. Traders include large banks,central banks, institutional investors, currency speculators, corporations, governments, other financialinstitutions, and retail investors. The average daily turnover in the global foreign exchange and relatedmarkets is continuously growing. According to the 2010 Triennial Central Bank Survey, coordinated bythe Bank for International Settlements, average daily turnover was US$3.98 trillion in April 2010 (vs $1.7

trillion in 1998).[3]

Of this $3.98 trillion, $1.5 trillion was spot foreign exchange transactions and $2.5trillion was traded in outright forwards, FX swaps and other currency derivatives.

Trading in the UK accounted for 36.7% of the total, making UK by far the most important global centerfor foreign exchange trading. In second and third places, respectively, trading in the USA accounted for17.9%, and Japan accounted for 6.2%.[5]

Turnover of exchange-traded foreign exchange futures and options have grown rapidly in recent years,reaching $166 billion in April 2010 (double the turnover recorded in April 2007). Exchange-tradedcurrency derivatives represent 4% of OTC foreign exchange turnover. FX futures contracts wereintroduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other

futures contracts.

Most developed countries permit the trading of FX derivative products (like currency futures and optionson currency futures) on their exchanges. All these developed countries already have fully convertiblecapital accounts. A number of emerging countries do not permit FX derivative products on their exchangesin view of controls on the capital accounts. The use of foreign exchange derivatives is growing in manyemerging economies.[6]Countries such as Korea, South Africa, and India have established currency futuresexchanges, despite having some controls on the capital account.

Top 10 currency traders% of overall volume, May 2011
http://en.wikipedia.org/wiki/Foreign_exchange_spot_tradinghttp://en.wikipedia.org/wiki/Forward_contracthttp://en.wikipedia.org/wiki/Forex_swaphttp://en.wikipedia.org/wiki/Currency_swaphttp://en.wikipedia.org/wiki/Liquidityhttp://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Institutional_investorhttp://en.wikipedia.org/wiki/Speculatorshttp://en.wikipedia.org/wiki/Governmentshttp://en.wikipedia.org/wiki/Financial_institutionshttp://en.wikipedia.org/wiki/Financial_institutionshttp://en.wikipedia.org/wiki/Bank_for_International_Settlementshttp://en.wikipedia.org/wiki/US$http://en.wikipedia.org/wiki/Currency_market#cite_note-BIS-2http://en.wikipedia.org/wiki/Currency_market#cite_note-BIS-2http://en.wikipedia.org/wiki/Currency_market#cite_note-BIS-2http://en.wikipedia.org/wiki/Derivative_securityhttp://en.wikipedia.org/wiki/UKhttp://en.wikipedia.org/wiki/USAhttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Currency_market#cite_note-BIS_survey-4http://en.wikipedia.org/wiki/Currency_market#cite_note-BIS_survey-4http://en.wikipedia.org/wiki/Currency_market#cite_note-BIS_survey-4http://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/Chicago_Mercantile_Exchangehttp://en.wikipedia.org/wiki/Currency_market#cite_note-5http://en.wikipedia.org/wiki/Currency_market#cite_note-5http://en.wikipedia.org/wiki/Currency_market#cite_note-5http://en.wikipedia.org/wiki/Currency_market#cite_note-6http://en.wikipedia.org/wiki/File:G_foreign_exchange_market_turnover.gifhttp://en.wikipedia.org/wiki/File:G_foreign_exchange_market_turnover.gifhttp://en.wikipedia.org/wiki/File:G_foreign_exchange_market_turnover.gifhttp://en.wikipedia.org/wiki/File:G_foreign_exchange_market_turnover.gifhttp://en.wikipedia.org/wiki/Currency_market#cite_note-5http://en.wikipedia.org/wiki/Chicago_Mercantile_Exchangehttp://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/Currency_market#cite_note-BIS_survey-4http://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/USAhttp://en.wikipedia.org/wiki/UKhttp://en.wikipedia.org/wiki/Derivative_securityhttp://en.wikipedia.org/wiki/Currency_market#cite_note-BIS-2http://en.wikipedia.org/wiki/US$http://en.wikipedia.org/wiki/Bank_for_International_Settlementshttp://en.wikipedia.org/wiki/Financial_institutionshttp://en.wikipedia.org/wiki/Financial_institutionshttp://en.wikipedia.org/wiki/Governmentshttp://en.wikipedia.org/wiki/Speculatorshttp://en.wikipedia.org/wiki/Institutional_investorhttp://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Liquidityhttp://en.wikipedia.org/wiki/Currency_swaphttp://en.wikipedia.org/wiki/Forex_swaphttp://en.wikipedia.org/wiki/Forward_contracthttp://en.wikipedia.org/wiki/Foreign_exchange_spot_trading


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Foreign exchange trading increased by 20% between April 2007and April 2010 and has more than doubled since 2004.[8] Theincrease in turnover is due to a number of factors: the growingimportance of foreign exchange as an asset class, the increasedtrading activity of high-frequency traders, and the emergence ofretail investors as an important market segment. The growth ofelectronic execution methods and the diverse selection ofexecution venues have lowered transaction costs, increased marketliquidity, and attracted greater participation from many customertypes. In particular, electronic trading via online portals has madeit easier for retail traders to trade in the foreign exchange market.By 2010, retail trading is estimated to account for up to 10% ofspot FX turnover, or $150 billion per day (see retail tradingplatforms).

Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another,there is no central exchange or clearing house. The biggest geographic trading center is the UK, primarily

London, which according to TheCityUK estimates has increased its share of global turnover in traditionaltransactions from 34.6% in April 2007 to 36.7% in April 2010. Due to London's dominance in the market,a particular currency's quoted price is usually the London market price. For instance, when the IMFcalculates the value of its SDRs every day, they use the London market prices at noon that day.

WHAT IS RISK AND RISK MANAGEMENTRisk - is the potential that a chosen action or activity (including the choice ofinaction) will lead to a loss (an undesirable outcome). The notion implies that achoice having an influence on the outcome exists (or existed). Potential lossesthemselves may also be called "risks". Almost any human Endeavour carries somerisk, but some are much more risky than others.Risk management -is the identification, assessment, and prioritization ofrisks (defined in ISO 31000as the effect of uncertainty on objectives, whether positive or negative) followed by coordinated andeconomical application of resources to minimize, monitor, and control the probability and/or impact ofunfortunate events[1]or to maximize the realization of opportunities. Risks can come from uncertainty in

financial markets, project failures (at any phase in development, production, or sustainment life-cycles),legal liabilities, credit risk, accidents, natural causes and disasters as well as deliberate attack from anadversary or events of uncertain root-cause. Several risk management standards have been developedincluding the Project Management Institute, the National Institute of Science and Technology, actuarialsocieties, and ISO standards. Methods, definitions and goals vary widely according to whether the riskmanagement method is in the context of project management, security, engineering, industrial processes,financial portfolios, actuarial assessments, or public health and safety.

The strategies to manage risk include transferring the risk to another party, avoiding the risk, reducing thenegative effect or probability of the risk, or even accepting some or all of the consequences of a particularrisk.

R Name Market s

1 Deutsche Bank 15.64%

2 Barclays Capital 10.75%

3 UBS AG 10.59%

4 Citi 8.88%

5 JPMorgan 6.43%6 HSBC 6.26%

7 Royal Bank of Scot 6.20%

8 Credit Suisse 4.80%

9 Goldman Sachs 4.13%

1 Morgan Stanley 3.64%
http://en.wikipedia.org/wiki/Currency_market#cite_note-7http://en.wikipedia.org/wiki/Currency_market#cite_note-7http://en.wikipedia.org/wiki/Currency_market#cite_note-7http://en.wikipedia.org/wiki/Retail_forex_platformhttp://en.wikipedia.org/wiki/Retail_forex_platformhttp://en.wikipedia.org/wiki/Over-the-counter_%28finance%29http://en.wikipedia.org/wiki/TheCityUKhttp://en.wikipedia.org/wiki/IMFhttp://en.wikipedia.org/wiki/Special_Drawing_Rightshttp://en.wikipedia.org/wiki/Riskhttp://en.wikipedia.org/wiki/ISO_31000http://en.wikipedia.org/wiki/Risk_management#cite_note-Risk_Management_pg._46-0http://en.wikipedia.org/wiki/Risk_management#cite_note-Risk_Management_pg._46-0http://en.wikipedia.org/wiki/Risk_management#cite_note-Risk_Management_pg._46-0http://en.wikipedia.org/wiki/Act_of_Godhttp://en.wikipedia.org/wiki/Project_Management_Institutehttp://en.wikipedia.org/wiki/National_Institute_of_Science_and_Technologyhttp://en.wikipedia.org/wiki/Risk_analysis_%28engineering%29http://en.wikipedia.org/wiki/Deutsche_Bankhttp://en.wikipedia.org/wiki/Deutsche_Bankhttp://en.wikipedia.org/wiki/Barclays_Capitalhttp://en.wikipedia.org/wiki/Barclays_Capitalhttp://en.wikipedia.org/wiki/UBS_AGhttp://en.wikipedia.org/wiki/UBS_AGhttp://en.wikipedia.org/wiki/Citihttp://en.wikipedia.org/wiki/JPMorganhttp://en.wikipedia.org/wiki/JPMorganhttp://en.wikipedia.org/wiki/HSBChttp://en.wikipedia.org/wiki/HSBChttp://en.wikipedia.org/wiki/Royal_Bank_of_Scotlandhttp://en.wikipedia.org/wiki/Royal_Bank_of_Scotlandhttp://en.wikipedia.org/wiki/Royal_Bank_of_Scotlandhttp://en.wikipedia.org/wiki/Credit_Suissehttp://en.wikipedia.org/wiki/Goldman_Sachshttp://en.wikipedia.org/wiki/Goldman_Sachshttp://en.wikipedia.org/wiki/Morgan_Stanleyhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/United_Kingdomhttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/Morgan_Stanleyhttp://en.wikipedia.org/wiki/Goldman_Sachshttp://en.wikipedia.org/wiki/Credit_Suissehttp://en.wikipedia.org/wiki/Royal_Bank_of_Scotlandhttp://en.wikipedia.org/wiki/HSBChttp://en.wikipedia.org/wiki/JPMorganhttp://en.wikipedia.org/wiki/Citihttp://en.wikipedia.org/wiki/UBS_AGhttp://en.wikipedia.org/wiki/Barclays_Capitalhttp://en.wikipedia.org/wiki/Deutsche_Bankhttp://en.wikipedia.org/wiki/Risk_analysis_%28engineering%29http://en.wikipedia.org/wiki/National_Institute_of_Science_and_Technologyhttp://en.wikipedia.org/wiki/Project_Management_Institutehttp://en.wikipedia.org/wiki/Act_of_Godhttp://en.wikipedia.org/wiki/Risk_management#cite_note-Risk_Management_pg._46-0http://en.wikipedia.org/wiki/ISO_31000http://en.wikipedia.org/wiki/Riskhttp://en.wikipedia.org/wiki/Special_Drawing_Rightshttp://en.wikipedia.org/wiki/IMFhttp://en.wikipedia.org/wiki/TheCityUKhttp://en.wikipedia.org/wiki/Over-the-counter_%28finance%29http://en.wikipedia.org/wiki/Retail_forex_platformhttp://en.wikipedia.org/wiki/Retail_forex_platformhttp://en.wikipedia.org/wiki/Currency_market#cite_note-7


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Derivatives Trading Forum

Organized Exchanges Over The Counter

Commodity Futures Forward ContractsFinancial Futures SwapsOptions (stock and index)Stock Index Future

Derivatives traded at exchanges are standardized contracts having standard delivery dates and trading

units. OTC derivatives are customized contracts that enable the parties to select the trading units and

delivery dates to suit their requirements.

A major difference between the two is that ofcounterparty riskthe risk of default by either party. With

the exchange traded derivatives, the risk is controlled by exchanges through clearing house which act as a

contractual intermediary and impose margin requirement. In contrast, OTC derivatives signify greater

vulnerability.

1. Forwards:A forward contract is a customized contract between two entities, where settlement takesplace

on a specific date in the future at todays pre-agreed price.

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

are standardized exchange-traded contracts.

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

right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date.


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4. Warrants: Options generally have lives of up to one year, the majority of options traded on optionsexchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally

traded over-the-counter.

5. LEAPS:The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options havinga maturity of up to three years.

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

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

are:

a. Interest rate swa ps: These entail swapping only the interest relatedcash flows between the parties in the same currency.

8. b.Currency swaps: These entail swapping both principal and interest between the parties, with the cashflows in one direction being in a different currency than those in the opposite direction.

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

receiver swaptions and payer swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer

swaption is an option to pay fixed and receive floating.

DERIVATIVE MARKET IN INDIAThe 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 24member

committee under the Chairmanship of Dr.L.C.Gupta on November 18, 1996 to develop appropriate regulatoryframework for derivatives trading in India. The committee submitted its report on March 17, 1998 prescribing

necessary preconditions for introduction of derivatives trading in India.

The SCRA was amended in December 1999 to include derivatives within the ambit of securities and the regulatory

framework was developed for governing derivatives trading. The act also made it clear that derivatives shall be legal

and valid only if such contracts are traded on a recognized stock exchange, thus precluding OTC derivatives. The

government also rescinded in March 2000, the threedecade old notification, which prohibited forward trading in

securities.


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PARTICIPANTSDerivative contracts have several variants. The most common variants are forwards, futures, options and swaps. The

following three broad categories of participants

Hedgers: -Hedgers face risk associated with the price of an asset. They use futures or options markets toreduce or eliminate this risk

Speculators: -Speculators wish to bet on future movements in the price of an asset. Futures and optionscontracts can give them an extra leverage; that is, they can increase both the potential gains and potential losses in a

speculative venture.

FUNCTIONS OF DERIVATIVESThe derivatives market performs a number of economic functions. Prices in an organized derivatives market reflect the perception of market participants about the future and leadthe prices of underlying to the perceived future level. The prices of derivatives converge with the prices of the underlyingat the expiration of the derivative contract. The derivatives market helps to transfer risks from those who have them but may not like them to those whohave an appetite for them.Derivatives, due to their inherent nature, are linked to the underlying cash markets. With the introduction of derivatives,the underlying market witnesses higher trading volumes because of participation by more players who would nototherwise participate for lack of an arrangement to transfer risk

Derivatives market at NSEThe derivatives trading on the exchange commenced with S&P CNX Nifty Index futures on June 12, 2010. The

trading in index options commenced on June 4, 2010 and trading in options on individual securities commenced on

June 2, 2010. Single stock futures were launched on November 9, 2001. The index futures and options contract on

NSE are based on S&P CNX Nifty Index. Currently, the futures contracts have a maximum of 3-month expiration

cycles.

Three contracts are available for trading, with 1 month, 2 months and 3 months expiry. A new contract is introduced

on the next trading day following the expiry of the near month contract.


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Trading MechanismThe futures and options trading system of NSE, called NEAT-F&O trading system, provides a fully automated

screenbased trading for Nifty futures & options and stock futures & options on a nationwide basis and an online

monitoring and surveillance mechanism. It supports an anonymous order driven market which provides complete

transparency of trading operations and operates on strict pricetime priority. It is similar to that of trading of equitiesin the Cash Market (CM) segment. The NEAT-F&O trading system is accessed by two types of users.

The Trading Members(TM) have access to functions such as order entry, order matching, and order and trade

management. It provides tremendous flexibility to users in terms of kinds of orders that can be placed on the system.

Various conditions like Good-till-Day, Good-till-Cancelled, Good till- Date, Immediate or Cancel, Limit/Market

price, Stop loss, etc. can be built into an order. The Clearing Members (CM) uses the trader workstation for the

purpose of monitoring the trading member(s) for whom they clear the trades. Additionally, they can enter and set

limits to positions, which a trading member can take.

Membership criteriaNSE admits members on its derivatives segment in accordance with the rules and regulations of the exchange and

the norms specified by SEBI. NSE follows 2tier membership structure stipulated by SEBI to enable wider

participation. Those interested in taking membership on F&O segment are required to take membership of CM and

F&O segment or CM, WDM and F&O segment. Trading and clearing members are admitted separately.

Essentially, a clearing member (CM) does clearing for all his trading members (TMs), undertakes risk management

and performs actual settlement. There are three types of CMs: Self Clearing Member: A SCM clears and settles trades executed by him only either on his own account oron account of his clients.

Trading Member Clearing Member: TMCM is a CM who is also a TM. TMCM may clear and settle hisown proprietary trades and clients trades as well as clear and settle for other TMs.

Professional Clearing Member PCM is a CM who is not a TM. Typically, banks or custodians couldbecome a PCM and clear and settle for TMs.

The TMCM and the PCM are required to bring in additional security deposit in respect of every TM whose trades

they undertake to clear and settle. Besides this, trading members are required to have qualified users and sales

persons, who have passed a Certification programmed approved by SEBI.

Clearing and SettlementNSCCL undertakes clearing and settlement of all deals executed on the NSEs F&O segment. It acts as legal

counterparty to all deals on the F&O segment and guarantees settlement.


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Clearing:The first step in clearing process is working out open positions or obligations of members. A CMs open position is

arrived at by aggregating the open position of all the TMs and all custodial participants clearing through him, in the

contracts in which they have traded. A TMs open position is arrived at as the summation of his proprietary open

position and clients open positions, in the contracts in which they have traded. While entering orders on the trading

system, TMs are required to identify the orders, whether proprietary (if they are their own trades) or client (if

entered on behalf of clients). Proprietary positions are calculated on net basis (buy-sell) for each contract.

Settlement:All futures and options contracts are cash settled, i.e. through exchange of cash. The underlying for index

futures/options of the Nifty index cannot be delivered. These contracts, therefore, have to be settled in cash. Futures

and options on individual securities can be delivered as in the spot market. However, it has been currently mandated

that stock options and futures would also be cash settled. The settlement amount for a CM is netted across all their

TMs/clients in respect of MTM, premium and final exercise settlement.For the purpose of settlement, all CMs are required to open a separate bank account with NSCCL designated

clearing banks for F&O segment.

Index DerivativesIndex derivatives are derivative contracts which derive their value from an underlying index. The two most popular

index derivatives are index futures and index options.

Institutional and large equity-holders need portfolio-hedging facility. Indexderivatives are more suited tothem and more costeffective than derivatives based on individual stocks. Pension funds in the US are known to usestock index futures for risk hedging purposes.

Index derivatives offer ease of use for hedging any portfolio irrespective of its composition.Requirements for an index derivatives market1. Index: The choice of an index is an important factor in determining the extent to which the index derivative canbe used for hedging, speculation and arbitrage. A well diversified, liquid index ensures that hedgers and speculators

will not be vulnerable to individual or industry risk.

2. Clearing corporation settlement guarantee: The clearing corporation eliminates counterparty risk on futuresmarkets. The clearing corporation interposes itself into every transaction, buying from the seller and selling to the

buyer. This insulates a participant from credit risk of another.

3.Strong surveillance mechanism: Derivatives trading brings a whole class of leveraged positions in the

economy. Hence the need to have strong surveillance on the market both at the exchange level as well as at the

regulator level.

4. Education and certification: The need for education and certification in the derivatives market can

never be overemphasized. A critical element of financial sector reforms is the development of a pool of human


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Inquiry windowThe inquiry window enables the user to view information such as Market by Order(MBO), Market by Price(MBP),

Previous Trades(PT), Outstanding Orders(OO), Activity log(AL), Snap Quote(SQ), Order Status(OS), Market

Movement(MM), Market Inquiry(MI), Net Position, On line backup, Multiple index inquiry, Most active security

and so on. Relevant information for the selected contract/security can be viewed. We shall look in detail at theMarket by Price (MBP) and the Market Inquiry (MI) screens.

Placing orders on the trading systemFor both the futures and the options market, while entering orders on the trading system, members are required to

identify orders as being proprietary or client orders. Proprietary orders should be identified asPro and those of

clients should be identified as Cli. Apart from this, in the case of Cli trades, the client account number should

also be provided.

The futures market is a zero sum game i.e. the total number of long in any contract always equals the total number ofshort in any contract. The total number of outstanding contracts (long/short) at any point in time is called the Open

interest. This Open interest figure is a good indicator of the liquidity in every contract.

Based on studies carried out in international exchanges

Market spread/combination order entryThe NEAT F&O trading system also enables to enter spread/combination trades. shows the spread/combination

screen. This enables the user to input two or three orders simultaneously into the market. These orders will have the

condition attached to it that unless and until the whole batch of orders finds a counter match, they shall not be

traded. This facilitates spread and combination trading strategies with minimum price risk.

Basket tradingIn order to provide a facility for easy arbitrage between futures and cash markets, NSE introduced basket-trading

facility. Figure 10.4 shows the basket trading screen. This enables the generation of portfolio offline order files in

the derivatives trading system and its execution in the cash segment. A trading member can buy or sell a portfolio

through a single order, once he determines its size. The system automatically works out the quantity of each security

to be bought or sold in proportion to their weights in the portfolio.

Futures and options market instrumentsThe F&O segment of NSE provides trading facilities for the following derivative instruments:

1. Index based futures

2. Index based options

3. Individual stock options

4. Individual stock futures

Contract specifications for index futures


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NSE trades Nifty futures contracts having one-month, two-month and three-month expiry cycles. All contracts

expire on the last Thursday of every month. Thus a January expiration contract would expire on the last Thursday of

January and a February expiry contract would cease trading on the last Thursday of February. On the Friday

following the last Thursday, a new contract having a three-month expiry would be introduced for trading. Depending

on the time period for which you want to take an exposure in

index futures contracts, you can place buy and sell orders in the respective contracts.

The Instrument type refers to Futures contract on index and Contract symbol -NIFTY denotes a Futures contract

on Nifty index and the Expiry date represents the last date on which the contract will be available for trading. Each

futures contract has a separate limit order book. All passive orders are stacked in the system in terms of price-time

priority and trades take place at the passive order price (similar to the existing capital market trading system). The

best buy order for a given futures contract will be the order to buy the index at the highest index level whereas the

best sell order will be the order to sell the index at the lowest index level.

Trading is for a minimum lot size of 200 units. Thus if the index level is around 1000, then the appropriate value of

a single index futures contract would be Rs.200,000. The minimum tick size for an index future contract is 0.05

units. Thus a single move in the index value would imply a resultant gain or loss of Rs.10.00 (i.e. 0.05*200 units) on

an open position of 200 units.

Contract specification for index optionsOn NSEs index options market, contracts at different strikes, having one-month, two-month and three-month expiry

cycles are available for trading. There are typically one-month, two-month and three-month options, each with five

different strikes available for trading.

Contract specifications for stock optionsThese contracts are American style and are settled in cash. The expiration cycle for stock options is the same as for

index futures and index options. A new contract is introduced on the trading day following the expiry of the near

month contract. NSE provides a minimum of five strike prices for every option type (i.e. call and put) during the

trading month. There are at least two inthemoney contracts, two outof themoney contracts and one atthe

money contract available for trading.

ChargesThe maximum brokerage chargeable by a TM in relation to trades effected in the contracts admitted to dealing on

the F&O segment of NSE is fixed at 2.5% of the contract value in case of index futures and 2.5% of notional value

of the contract[(Strike price + Premium) * Quantity] in case of index options, exclusive of statutory levies. The

transaction charges payable by a TM for the trades executed by him on the F&O segment are fixed at Rs.2 per lakh

of turnover (0.002%) (Each side) or Rs.1 lakh annually, whichever is higher. The TMs contribute to Investor

Protection Fund of F&O segment at the rate of Rs.10 per crore of turnover (0.0001%).

SEBI Advisory Committee on DerivativesThe SEBI Board in its meeting on June 24, 2002 considered some important issues


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Relating to the derivative markets including:

Permitted.

Use of sub-brokers in the derivative markets. use of derivatives by mutual funds The recommendations of the Advisory Committee on Derivatives on some of these issues were also placedbefore the SEBI Board. The Board desired that these issues be reconsidered by the Advisory Committee on

Derivatives (ACD) and requested a detailed report on the aforesaid issues for the consideration of the Board.

Regulatory ObjectivesThe LCGC outlined the goals of regulation admirably well in Paragraph 3.1 of its report.

We endorse these regulatory principles completely and base our recommendations also

on these same principles. We therefore reproduce this paragraph of the LCGC Report:

It has been guided by the following objectives:

(a) Investor Protection: Attention needs to be given to the following four aspects:(i) Fairness and Transparency

(ii) Safeguard for clients moneys

(iii) Competent and honest service

(b) Quality of markets:The concept of Quality of Markets goes well beyond market integrity and aims atenhancing important market qualities, such as cost-efficiency, price-continuity, and price-discovery. This is a much

broader objective than market integrity.

(c) Innovation: While curbing any undesirable tendencies, the regulatory framework should not stifle innovationwhich is the source of all economic progress, more so because financial derivatives represent a new rapidlydeveloping area, aided by advancements in information technology.

INTRODUCTION TO CURRENCY FUTUREA 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 toexchange one currency for another currency at a specified date and a specified rate in the future.


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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: 42.260042.2500Step 2: 4 ticks * 5 contracts = 20 points

Step 3: 20 points * Rupees 2.5 per tick = Rupees 50

OVERVIEW OF THE FOREIGN EXCHANGE MARKET IN

INDIA

Purchase price: Rs .42.2500

Price increases by one tick: +Rs. 00.0025

New price: Rs .42.2525

Purchase price: Rs .42.2500Price decreases by one tick: Rs. 00.0025

New price: Rs.42. 2475


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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 policy-makers 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 well- developed 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 pricediscovery, 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 tradedcurrency futures) 2008.
http://www.bseindia.com/deri/Downloads/CDX/rbirep_290508.pdfhttp://www.bseindia.com/deri/Downloads/CDX/rbi_circular060808.pdfhttp://www.bseindia.com/deri/Downloads/CDX/sebi_060808.pdfhttp://www.bseindia.com/deri/Downloads/CDX/sebi_060808.pdfhttp://www.bseindia.com/deri/Downloads/CDX/rbi_circular060808.pdfhttp://www.bseindia.com/deri/Downloads/CDX/rbirep_290508.pdf


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CURRENCY DERIVATIVE PRODUCTS

Derivative contracts have several variants. The most common variants are forwards, futures, options and

swaps. We take a brief look at various derivatives contracts that have come to be used.

FORWARD :

The basic objective of a forward market in any underlying asset is to fix a price for a contract to be carried

through on the future agreed date and is intended to free both the purchaser and the seller from any risk of

loss which might incur due to fluctuations in the price of underlying asset.

A forward contract is customized contract between two entities, where settlement takes place on a specific

date in the future at todays pre-agreed price. The exchange rate is fixed at the time the contract is entered

into. This is known as forward exchange rate or simply forward rate.

FUTURE :

A currency futures contract provides a simultaneous right and obligation to buy and sell a particular

currency at a specified future date, a specified price and a standard quantity. In another word, a future

contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a

certain price. Future contracts are special types of forward contracts in the sense that they are standardized

exchange-traded contracts.

SWAP :

Swap is private agreements between two parties to exchange cash flows in the future according to a

prearranged formula. They can be regarded as portfolio of forward contracts.


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The currency swap entails swapping both principal and interest between the parties, with the cash flows in

one direction being in a different currency than those in the opposite direction. There are a various types of

currency swaps like as fixed-to-fixed currency swap, floating to floating swap, fixed to floating currency

swap.

In a swap normally three basic steps are involve___

(1) Initial exchange of principal amount

(2) Ongoing exchange of interest

(3) Re - exchange of principal amount on maturity.

OPTIONS :

Currency option is a financial instrument that give the option holder a right and not the 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) MARKETThe 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 oftenly 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.


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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 inthis market. The purchaseand 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.

FOREIGN EXCHANGE QUOTATIONSForeign exchange quotations can be confusing because currencies are quoted in terms of other currencies.

It means exchange rate is relative price.

For example,

If one US dollar is worth of Rs. 45 in Indian rupees then it implies that 45 Indian rupees will

buy one dollar of USA, or that one rupee is worth of 0.022 US dollar which is simply reciprocal of the

former dollar exchange rate.

EXCHANGE RATE

Direct Indirect

The number of units of domestic The number of unit of foreign

Currency stated against one unit currency per unit of domestic

of foreign currency. currency.


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Re/$ = 45.7250 (or) Re 1 = $ 0.02187

$1 = Rs. 45.7250

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 calledmarket makers.

Base Currency/ Terms Currency:In foreign exchange markets, the base currency is the first currency in a currency pair. The second

currency is called as the terms 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.


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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,

If DollarRupee moved from 43.00 to 43.25. The Dollar has appreciated and the Rupee has

depreciated. And if it moved from 43.0000 to 42.7525 the Dollar has depreciated and Rupee has

appreciated.

NEED FOR EXCHANGE TRADED CURRENCYWith 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. Exchange traded futures as compared

to OTC forwards serve the same economicpurpose, yet differ in fundamental ways. An individual entering

into a forwardcontract agrees to transact at a forward price on a future date. On the maturitydate, the

obligation of the individual equals the forward price at which thecontract was executed. Except on the

maturity date, no money changes hands. On the other hand, in the case of an exchange traded futures

contract, mark to marketobligations is settled on a daily basis. Since the profits or losses in the futures

market are collected / paid on a daily basis, the scope for building up of mark to market losses in the books

of various participants gets limited.

The counterparty risk in a futures contract is further eliminated by the presence of a clearing corporation,

which by assuming counterparty guarantee eliminates credit risk.

Further, in an Exchange traded scenario where the market lot is fixed at a much lesser size than the OTC

market, equitable opportunity is provided to all classes of investors whether large or small to participate in

the futures market. The transactions on an Exchange are executed on a price time priority ensuring that the

best price is available to all categories of market participants irrespective of their size. Other advantages of

an Exchange traded market would be greater transparency, efficiency and accessibility.

Source :-(Report of the RBI-SEBI standing technical committee on exchange traded currency futures)

2008.


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The period over which a contract trades. The currency future contracts in Indian market have one month,

two month, 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 :


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The relationship between futures prices and spot prices can be

Documents

Analysis and Interpretation of Risk in Currency and Share Market Investment and Use of Risk Management Instruments