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CURRENCY FUTURE & CURRENCY FUTURE & OPTIONS IN INDIAOPTIONS IN INDIA

Atul GhadigaonkarAditya Mhatre

Brijesh Pal Neelam PawarSupreet ShettyMangesh Borse

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What is currency futures What is currency futures • A transferable futures contract that

specifies the price at which a specified currency can be bought or sold at a future date.

• Currency future contracts allow investors to hedge against foreign exchange risk.

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HistoryHistoryof Currency futuresof Currency futures

• Currency futures were first created at the Chicago Mercantile Exchange (CME) in 1972

• International Monetary Market (IMM) launched trading in seven currency futures on May 16, 1972.

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Currency futures in IndiaCurrency futures in India• Currency futures trading was started in Mumbai

August 29, 2008. • With over 300 trading members including 11

banks registered in this segment, the first day saw a very lively counter, with nearly 70,000 contracts being traded.

• The first trade on the NSE was by East India Securities Ltd

• Amongst the banks, HDFC Bank carried out the first trade. The largest trade was by Standard Chartered Bank constituting 15,000 contracts. Banks contributed 40 percent of the total gross volume.

Fundamentals of Indian Fundamentals of Indian currency futurescurrency futures

• Exchange-traded options on the rupee-dollar spot rate were allowed by Sebi on 30 July 2010.

• At Rs.30,000 crore, the currency futures market is nearly 10 times the size of the options market, according to latest data.

• On the National Stock Exchange (NSE), over 3 lakh contracts (USD 300 million) were traded during the day with an open interest of about 95,000 contracts (USD 95 million).

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• August 2008 Launch of Currency Derivatives

• February 2010 Launch of Currency Futures on additional currency pairs

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Product class(Jan 2009) Turnover (Billion rupees)Index futures 353Index options 1981Stock futures 391Stock options 48Currency futures 178Currency options 30Total 2981

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Fundamentals of Indian Fundamentals of Indian currency futurescurrency futures

• Currency futures can be traded between Indian rupees and US dollar (US$ -- INR)

• The trading of Indian currency futures can be done between 9 am to 5 pm

• The minimum size of currency futures is US$ 1000 periodically the value of the contract can be changed by RBI and SEBI

• The currency future can have maximum validity of 12 months • The currency futures contract can be settled in cash

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Trade exchanges for Trade exchanges for currency futurescurrency futures

• There are 3 trade exchange that trades in currency futures

1. National Stock Exchange (NSE)

2. Bombay Stock Exchange (BSE)

3. Multi-Commodity Exchange (MCX)

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Importance of currency Importance of currency futuresfutures

• According to market analysts, introduction of currency futures in the Indian market will give companies greater flexibility in hedging their underlying currency exposure and will bring in more liquidity into the market as currency future

• Forex derivative contract will enable a person, a bank or an institution to buy or sell a particular currency against the other on a specified future date, and at a price specified in the contract.

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FUTURES CONTRACTSFUTURES CONTRACTSAdvantages of futures:

1.) Smaller contract size

2.) Easy liquidation

3.) Well- organizedand stable

market.

Disadvantages of futures:

1.) Limited to 7 currencies

2.) Limited dates of delivery

3.) Rigid contract sizes.

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PART IIPART IICURRENCY OPTIONSCURRENCY OPTIONS

I. OPTIONSA. Currency options

1. offer another method to hedge exchange rate risk.

2. first offered on PhiladelphiaExchange (PHLX).

3. fastest growing segment ofthe hedge markets.

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CURRENCY OPTIONSCURRENCY OPTIONS

4. Definition:a contract from a writer ( the seller)

that gives the right not the obligation to the holder (the buyer) to buy or sell a standard amount of an available currency at a fixed exchange rate for a fixed time period.

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CURRENCY OPTIONS CURRENCY OPTIONS STYLESSTYLES

• European option – an option that may only be exercised on expiration.

• American option – an option that may be exercised on any trading day on or before expiry.

• Bermudan option – an option that may be exercised only on specified dates on or before expiration.

• Barrier option – any option with the general characteristic that the underlying security's price must pass a certain level or "barrier" before it can be exercised.

• Exotic option – any of a broad category of options that may include complex financial structures.[7]

• Vanilla option – any option that is not exotic.

Over-the-counterOver-the-counter

• Currency trading market is one of the largest amongst any other types of trading market so They are traded over the counter

• Over-the-counter options (OTC options, also called "dealer options") are traded between two private parties, and are not listed on an exchange.

• The terms of an OTC option are unrestricted and may be individually tailored to meet any business need. In general, at least one of the counterparties to an OTC option is a well-capitalized institution

• In such bilateral contract, each party should have credit risk concerns with respect to the other party.

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CURRENCY OPTIONS IN CURRENCY OPTIONS IN INDIAINDIA

Exchange-traded currency options were introduced on 29 October 2010, after NSE received approval from market regulator Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI).

The average daily turnover in the currency options market rose from Rs630 cr in November 2010 to Rs1,915 cr in February 2011 and further to Rs3,095 cr in the first week of March.

Fundamentals of Indian Fundamentals of Indian currency optionscurrency options

• Exchange-traded options on the rupee-dollar spot rate were allowed by Sebi on 30 July 2010.

• At Rs.30,000 crore, the currency futures market is nearly 10 times the size of the options market, according to latest data.

• On the National Stock Exchange (NSE), over 3 lakh contracts (USD 300 million) were traded during the day with an open interest of about 95,000 contracts (USD 95 million), the bourse said in statement.

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• Standard Chartered Bank, India's largest international bank, was amongst the first to transact in the currency options market on the NSE .

• The first trade in the currency options was executed by East India Securities Ltd. About 130 members, including State Bank of India, Axis Bank, IDBI Bank, Standard Chartered Bank and IndusInd Bank actively participated in the trading.

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IMPORTANCE OF IMPORTANCE OF CURRENCY OPTIONSCURRENCY OPTIONS

Buying currency options is a more flexible form of hedging than setting up a forward foreign exchange contract - but it's also more expensive.

To enjoy this flexibility you'll have to pay a premiumThe exact amount will depend on the amount of

currency involved, the exchange rate, the length of the option and may typically be in the region of 1 or 2 per cent of the face value of the contract.

This option suits businesses that:This option suits businesses that:

• want to protect themselves from unfavourable rate changes while retaining the flexibility to benefit from advantageous ones

• are entering into a deal but there's a fair chance of it not going ahead eg a tender situation

• have a foreign exchange exposure in excess of £500,000 per trade, although this may vary between banks

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IMPORTANCE OF IMPORTANCE OF CURRENCY OPTIONSCURRENCY OPTIONS

• Currency trading is a risky business • highly volatile in comparison to other

financial markets• Currency trading market is one of the

largest amongst any other types of trading market so They are traded over the counter

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Currency Trading MarketCurrency Trading Market• The currency trading market is

termed to be the simplest of all and it is very easy to understand.

• the currency trading market is extremely unpredictable and volatile at the same time.

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CURRENCY OPTIONSCURRENCY OPTIONS• Advantages• You're protected from any adverse

movements in the exchange rate.• Your business can benefit if the

exchange rate moves in your favour.• Disadvantages• The expense of setting the option up.• Only available to companies with

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Currency Option Vs Currency FutureCurrency Option Vs Currency Future

• Like all options, when you buy an option your risk is limited to the premium paid for the derivative. Options also carry the "right" to take delivery (exercise) of the underlying asset if so desired.

• When you buy a futures contract you are "obligated" to take delivery (or cash settle) the underlying asset upon expiration. With risk not being limited to a premium (as is the case with buying options), a futures contract's risk profile is more aggressive...having loss potential on both up and downside of the market.

• Buying futures contracts also requires the deposit of an "initial margin" upfront that can be much larger than an option premium, which fluctuates on a variety of factors. The initial margin also earns interest whereas an option premium doesn't - the option premium is paid to the seller, who earns the interest on the amount paid.

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