copy of currency deriveative

8/6/2019 Copy of Currency Deriveative

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Currency DerivativeHedge your Currency Risk

Presented by - Ashwani kumar

6/14/2011 www.systematixshares.com


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Table of Contents

Currency Future Market

Benefits of Currency Trading for Exporter & Importer

Effect of Currency Rate Fluctuation on Exporter & Importer

OTC vs Exchange Traded Future

Other Trading Strategy Arbitrage & Speculation Factors Affecting Currency Prices

Market Statistics

About Systematix

6/14/2011


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Currency Future Market

A currency future, also FX future or foreign exchange future, is a futures

contract to exchange one currency for another at a specified date in the

future at a price (exchange rate) that is fixed on the purchase date.

Currency futures were first created at the Chicago Mercantile Exchange

(CME) in 1972 . In India trading in Currency Future started in August2008.

Major Exchange NSE, MCX-SX.

SEBI is the regulatory Body for Currency Future Trading in India.


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Product Available for Trading

i). US Dollar INR

ii). Euro INR

iii). Pound INR

iv). Yen INR

6/14/2011 www.systematixshares.com


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Product Infomation

Symbol USD-INR EUR-INR GBP-INR JPY-INR

Lot Size 1000 1000 1000 100000*

Tick Size .25 Paisa or INR .0025

Trading Hours Monday Friday, 09:00 AM 5:00 PM

Contract Trading

Cycle

12 month Trading Cycle

Last Trading Day Two working Days prior to the Last Business Day of of the Expiry month at 12

noon

* Price Quotation is of 100 JPY


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Contd.

Final Settlement Day Last working Day ( Excluding Saturday) of the Expiry month.

Initial Margin SPAN Based Margin

Settlement Daily Settlement : T+1

Final Settlement : T+2

Mode of Settlement Cash settled in Indian Rupee

Daily Settlement Price Calculated on the basis of the last half an hour weighted average

price.

Final Settlement Price RBI Reference Rate


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Benefits of Currency Future Trading for

Importer & Exporter In Todays world Every Financial Instrument has become volatile. It is very

important for companies to safeguard their financial Risk in Best Possible way.

Exporter & Importer who are dealing in Foreign Currency have always Risk of

Currency Rate Fluctuation. Some time it may work in Favour but also may causehuge losses. So its very important for Exporter Importer to cover their Currency

Risk.

Currency Risk can be mitigated by using Currency Future.


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Exporter Exporter Recieve Foreign Currency, which in normal trading circumstance is

received on some Future date from the time when the deal is done. But between

these two period Currency might Fluctuate causing loss of Revenue. It can be

Explained from below example:

On 15th July 2010 Rajshree Diamond which is into Business of Diamond Processing

agreed to sell Diamond worth $100 mn to a party in US. Payment is due on 15th

Aug. Financial aspect of the Trade for Rajshree is as below:

Sale ( In US Dollar) $ 100 mn

Exchange Rate 46.5 (on 15th July)

Sale in Rupee (Exp.) Rs. 465 cr.

Cost of Goods Sold Rs. 450 cr.

Operating Profit Rs. 15 cr.


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Exporter contd.

Exchange Rate 46.5 46 47

Sale in Rupee 465 460 470

CostofGoods Sold 450 450 450

Operating Profit 15 10 20

-33%

But Exchange Rate on 15th Aug. is not known, sowe will do analysis

taking differentsitutation:

We can see that profit get hit by 33% when the Exchange Rate moves

to46from 46.5.

Fig. in cr.


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Importer: On 15th July 2010 Sindh Engineering Works which is into Business of Importing

Machinery agreed to Buy Machinery worth $100 Euro from a party in Germany.

Payment is due on 15th Aug. Financial aspect of the Trade for Sindh Engineering is

as below:

Purchase ( In Euro) Euro 100 mn

Exchange Rate 59.5 (on 15th July)

Purchase in Rupee (Exp.) Rs. 595 cr

Goods agreed to be sold in India Rs. 650 cr.

Operating Profit Rs. 55 cr.


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Importer contd.

Exchange Rate 59.5 60 59

Purchase Cost ( In cr.) 595 600 590

Goods Sold in India 650 650 650

Operating Profit 55 50 60

-9%

But Excahnge Rate on 15th Aug. is not known, sowe will do analysis

taking differentsitutation:

We can see that profit get hit by 9% when the Exchange Rate moves

to60from 59.5.

Fig. in cr.


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Effect of Exchange Rate on Margin

Profit Margin %Change in Interest Rate

1% 2% 5% 10%

05.00% 0.80 0.60 0.00 -1.00

10.00% 0.90 0.80 0.50 0.00

15.00% 0.93 0.87 0.67 0.33

20.00% 0.95 0.90 0.75 0.50

In the above table effectofExchange Rate on Margin isshown taking different

Scenario . For e.g. ifthe Net Margin ofthe Project/Order/Company is10% and

Exchange Rate moves* by 1% then from the table we can foundthat Margin will

hit by 10%.

*Unfavorable Move


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Why & How to Hedge Currency Risk?

Organization should always focus on their core competencies to improve efficiency

and profit. In the example shown a Diamond Processors main business is to

process the diamond and sell. Naked currency position can result in Profit for

Rajshree Diamond some time but there is huge Risk of wiping of entire profit

margin is also attached with this.

So Rajshree Diamond should always focus on its main business of Processing

Diamond to Maximize Profit rather than speculating on Currency.

Also, Hedged Currency Position helps in predicting better Cash Flow Management.

Bankers & Creditors feel more comfortable while lending to these Institution.

Better Valuation of Equity as Expected profit is less Volatile.


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Why & How to Hedge Currency Risk?

Currency Risk can be hedge by using Currency Future Traded on NSE.

Exporter - Exporter can hedge their Currency Risk by taking short position on their

respective recievable currency.

Importer Importer can hedge their Currency Risk by taking Long Position on their

respective Payable Currency.


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How to Hedge Export Position

E.g. 1 Rajshree Diamond :

On 15th July when the deal is done by Rajshree Diamond to receive $100 mn. In

month of August, it should take short position of 100000 USD-INR August Future

contract. Suppose at that time Aug. Future Contract is trading at 46.6 ( 10 paisa

premium)

On 15th Aug. Rajshree Diamond will square off the position on Exchange and

receive the dollar and convert it into Rupee. Suppose the future premium reduce

from 10 paisa to 5 paisa.


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Exporter Position:

Situtation 1 Situtation 2

Sell Rate 46.6 46.6

Buy Rate 46.1 47.1

Profit perContract 500 -500

Total Profit ( In Cr.) 5 -5

Profit/ Lossfrom the future will offsetthe loss/ Profitdue to Fluctuation in

Currency Rates.


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How to Hedge Import Position ?

E.g. 2 Sindh Machinery :

On 15th July when the deal is done by Sindh Machinery to Pay Euro100 mn. In

month of August, it should take long position of 100000 Euro-INR August Future

contract. Suppose at that time Aug. Future Contract is trading at 59.6 ( 10 paisa

premium)

On 15th Aug. Palak Diamond will square off the position on Exchange and receive

the dollar and convert it into Rupee.


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Import Position

Situtation 1 Situtation 2

Buy Rate 59.6 59.6

Sell Rate 60.1 59.1

Profit perContract 500 -500

Total Profit ( In Cr.) 5 -5

Profit/ Lossfrom the future will offsetthe loss/ Profitdue to Fluctuation in

Currency Rates.


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OTC vs Future Market

OTC Market Exchange Traded Futures

Accessibility Low High

Price Transparency Low High

Liquidity Subject to credit limits High

Agreements Customized Standard

Credit Exposure Yes Mitigated through the clearing corporation

Settlement Physical Delivery Net Settled in INR

Underlying exposure Required Not required


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Other Trading Strategy - Arbitrage

Arbitrage Getting the Benefit of Price Mismatch between two Markets.Take long position where market price is lower and simultaneously take short

position where market price is higher. Square off the position when the difference

between the two market prices is narrowed.

e.g. On 15th July $ traded on NSE & MCX is as below:

NSE 46.6425 - BuyMCX- SX 46.6575 Sell

As per the strategy we will Buy $-INR contract at NSE & sell at MCX.

Suppose on 16th July Price on both the exchange equals as follows

NSE 46.6025 - Sell ( loss of .04*1000 = 40)

MCX- SX 46.6025 Buy ( Profit of .055*1000 = 55)

ARBITAGE PROFIT = Rs.5 per lot


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Other Trading Strategy - Speculation

View: INR will depreciate against USD, caused by Indias sharply rising import bill andpoor FII equity flows

Trade:

USDINR 31 July contract: 43.5000

Current Spot rate (9 July 10): 43.0000Buy 1 July contract: Value Rs. 43,500 (USD 1000 * 43.5000)

Hold contract to expiry: RBI fixing rate on 29 July 10 44.0000

Economic return: Profit, Rupees 500 (44,000 43,500)

A Currency Futures contract is exactly like a futures contract on the NIFTY or onINFOSYTCH. A futures price F is traded on screen. The price is the USDINR

exchange rate at a future date.


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Factors Affecting Currency Prices

Macro economic views

Monetary Policy

RBI intervention

Flow information

Performance of other Asiancurrencies

Performance of equity markets

USD sentiment

Performance of key commodities

affecting trade

Policy announcements affecting flows

trade or capital

REER Real Effective Exchange Rate

Data announcements


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Market Statistics - June 2010Exchange N

SE* M

CX- SX

Contracts Turnover

Contract

Traded OI Turnover

Contracts

Traded OI

USD- INR 13683 2933068 512420 16848 3609036 728429

EURO - INR 329 57800 18200 2031 356110 25109

POUND- INR 19 2869 4000 290 42146 13727

YEN - INR

8.2 1596 2060 151 29460 5723

Total 14881 3174433 860550 19322 4038024 772988

Note - Turnover in cr. , OI isOpen Interest

* NSE Volume forseparate script is For June Month Contract


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Market Statistics contd.

Contract Wise Market Share - June

U S D - I N R

9 2 %

Y E N - I N R

0 %

E UR O - I N R

7 %

P O UN D - I N R

1%

Mark et Share in % - June 2010

M C X - SX

56 %

N SE

4 4 %


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About US

Founded in 1995 by Mr. C.P. Khandelwal

One stop service provider for a wide spectrum of Financial services

Systematix Group has strategically branched into different business units offering

holistic finance and investment services.

400 plus Branches & Franchisee well networked and connected offices acrossIndia.

400 plus employees. Over 60% are professionals.

Strong research team and competent and experienced professional.

Product available are Equities, Derivatives, Currency Derivatives, E-broking, Wealth

management services, Commodities, PMS, Investment Banking, Merchant

Banking, Institutional Equity etc.


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Group Companies

Systematix Corporate Services Ltd.

SEBIRegd. Category 1 Merchant Banker

SystematixShares & Stocks (I)Ltd.

Capital Market Services

InstitutionalEquityServices

Retail FinancialProducts

Private Client Group Services

Systematix Commodities Services Pvt. Ltd.

CommodityBroking Services

MCX and NCDEX exchanges

Systematix CapitalServices Pvt. Ltd.

Business consulting

Mergers and Acquisitions

Restructuring

Consulting on emerging opportunities


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Group Companies contd.

Systematix Finance and Investment Ltd.

Providing Loans against Shares

SQLStar InternationalLtd. (Listed Company) Consulting in education

Knowledge Services and Elearning Products

IT Management Services

Content Delivery for embedded Solutions

E-Governance products


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Why join Systematix ?

Personalized Service

Competent Research & Advisory

Offline as well as Online Trading facility

Office Network across the country


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Contact us

Head OfficeAddress

Systematix Shares & Stock (I) Ltd.

3rd Floor, JK Somani Bldg.,

British Hotel Lane, Fort.

Mumbai 400001

Contact Person Ashwani Kumar

Contact No.- 022-30298000/8055

Mobile 93214-49397

Email ID- [email protected]

[email protected]

Branch OfficeAddress

Systematix Shares & Stock (I) Ltd.

Contact Person

Contact No.-

Mobile

Email ID- [email protected]


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