currency presentation 2

8/8/2019 Currency Presentation 2

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Currency Futures in India


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Introduction

Largest financial market in the world

ADTV (Average Daily Trading Volume ) globally is over US$ 3 trillion

Forex derivatives accounts for 40% of ADTV (Average Daily Trading Volume)

Futures contracts introduced in 1972 at the CME (Chicago Mercantile

Exchange)

Minimum trading size for most deals internationally is $100,000

Forex as an asset class

Main trading centers are London, NY, Tokyo & Singapore

(and now..MUMBAI)


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Forex Market: 24 Hrs a day 7 days a week24 Hrs Market

Location Regional timeIndian StandardTime

Tokyo 9:00 a.m - 5:00 p.m 5:30 a.m - 1:30 p.m

Hong Kong 9:00 a.m - 5:00 p.m 6:30 a.m - 2:30 p.m

Singapore 9:00 a.m - 5:00 p.m 6:30 a.m - 2:30 p.m

Mumbai 9:00 a.m - 5:00 p.m 9:00 a.m - 5:00 p.m

London 9:00 a.m - 5:00 p.m 2:30 p.m - 10:30 p.m

New York 9:00 a.m - 5:00 p.m 7:30 p.m - 3:30 a.m

Los angles 9:00 a.m - 5:00 p.m 9:00 p.m - 5:30 a.m


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Few Terms

Base Currency

Term Currency

Pips


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Pricing

Future Rate = So e (rd-rf) T

Notation:

So = Spot Rate

rd = Domestic Rate of Interest

rf = Interest Rate in the foreign countryT = Tenure

E = 2.718


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Major Events in International and Indian Monetary System1. Free floatofcurrencies - 1973.2. Oil crisisin1973 - quadruplingofoil prices3. European Currencies float against US$ - 19784. Postemergencyyears5. Majority Govt. formed - 1984-856. LiberalizationofIndianEconomy: devaluationofINR - 19917. East and SouthEast Asian Currencycrisis - 19978. NucleartestsbyIndia - 19989. RobusteconomicgrowthinIndia10. Highcrudeoil andcommodity prices


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Factors Affecting Exchange Rate

Other Asiancurrencies

EquityMarket

PolicyDecision

RBIIntervention

CapitalFlows

FundamentalFactors

UncertainEvents

PoliticalFactors

ExchangeRate


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Factors Affecting Currency Market

Interest Rates

Interest rates changes by central banks

Expectation of change in interest rates

Interest rates are positively correlated with currency of that country

When interest rates increase in a country, its currency strengthens

against other currencies


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Inflows of Foreign Funds Strong economic fundamentals attract funds into the

country

Political stability and clear economic direction

Country specific ratings based on economic indicators

Foreign funds inflows are positively correlated with a strong currency

When funds enter the country, they create a demand for the local

currency (read Rupee) resulting in the currency strengthening


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Release of Economic Data (Indicators) Buy sell decisions can be triggered by just a single statistic

Source of statistic can be both national and international

Numerous economic indicators are released every week

Economic Indicators have a unique relationship in the manner in

which they impact markets

Identifying the manner in which an indicator will impact

the existing exchange rate is the challenge



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RBI Intervention

A tool in the hands of the government

To meet long term economic objectives of growth

and full employment

Protect fledgling economic sectors

Currency trader should be aware of government policies and thelimits beyond which RBI intervention could be expected



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Natural Calamities

Hurricanes (e.g. Katrina)

Flooding, Drought

Earthquake

Natural calamities weaken the economy and hence could result indevaluation of currency



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Currency Reserve

Countries with large reserves are considered to have robust economies

Depleting reserves are a sign of slowdowns

Impact on exchange rates



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Advantages from Currency Futures

Provide an additional tool for hedging currency risk

Further development of domestic foreign exchange market

Commodity traders can hedge in currency futures

Provide a platform to retail segment of the market to ensure broad based

participation based on equal treatment

Efficient method of credit risk transfer through the Exchange

Create a market to facilitate large volume transactions to go through on

an anonymous basis


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Forward Vs. Futures

Forward Contracts OTC

Terms of contract

changeable

Poor liquidity Few Players

High Margins

Settled by taking Physical

delivery

Relationship based

Skill to Structure

No Regulations

Future Contracts Exchange Traded

Exchange assumesrisk

TermsdefinedbyExchange

High Liquidity

Many Players

LowMargins

Generally Cash Settled

Price Transparency

Standardstructure

AbidebyRegulations


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Benefits of Currency Futures

Linear Payoff not complicated for market participants to understand

Standardized Contracts, small lot size US $1,000 (and similarly for other

pairs)

Electronic Settlement of MTM Profits / Losses

No counterparty default risk

Efficient price discovery due to high liquidity

Large number of market participants

Transparency real time dissemination of prices

Access through internet from remote locations


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Contract Specification Snapshot

Note: The above product specification is as per the RBI-SEBI Standing Technical Committee

Report on Exchange Traded Currency Futures

Trading Monday To Friday

Trading Hours 9:00 AM to 5:00 PM

Price Quotation In INR

Tenorof Contract Maximum of 12 Months

Available Contracts Monthly

SettlementMechanism In INR

SettlementReferenceRate RBI Reference Rate

Last Trading Date Two working days prior to Final Settlement Date

Final Settlement Date Last working day of month, except Saturday.

SettlementDaily settlement : T + 1Final settlement : T + 2


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US Dollars - INR

Symbol USD-INR

Contract Size USD 1000

Ticksize 0.25 Paisa or INR 0.0025

Quantity Freeze Above 10,000

Priceoperatingrange+/-3 %(Tenure upto 6 months )+/- 5% (Tenure greater than 6 months

Client position limitHigher of 6% of total open interest or USD 10

million

Calendarspreads

Minimum Rs. 400/- per contract for one month ofspread, Rs. 500 for Two month Spread andRs.800/- for three months spread

Initial Margin Minimum 1.75 % on First day and 1% thereafter

Extreme LossMargin 1 %


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EURO - INR

Symbol EUR - INR

Contract Size EURO 1000



Priceoperatingrange+/-3 %(Tenure up to 6 months )+/- 5% (Tenure greater than 6 months

Client position limit Higher of 6% of total open interest or EURO 5 million

Calendarspreads

Minimum Rs. 700/- per contract for one month of

spread, Rs. 1000/- for Two month Spread andRs.1500/- for three months spread or more


Extreme LossMargin 0.3 %


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Pound Sterling - INR

Symbol GBP - INR

Contract Size Pound Sterling 1000




Client position limit Higher of 6% of total open interest or GBP 5 million

Calendarspreads




Extreme LossMargin 0.5 %


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Japanese Yen - INR

Symbol JPY - INR

Contract Size Japanese Yen 100000




Client position limit Higher of 6% of total open interest or YEN 200 million

Calendarspreads



Initial Margin Minimum 4.50 % on First day and 2.30% thereafter

Extreme LossMargin 0.7%


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Benefits of New Currency Pairs (EUR/INR, GBP/INR,JPY/INR)

Hedging against cross-currency volatility

Mitigate risk in exports and imports across all majorcurrencies

Will improve the depth and breadth of currencymarket

Will help mid and small-sized manufacturers tosecure the right market rate and increasetransparency

Exporters can price their products and servicesappropriately by taking into account the prices of

contracts maturing in different months

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Appreciation and Depreciationof Currency

Event Importer Exporter

Appreciation of USD Loses Money Gains Money

Depreciation of INR Loses Money Gains Money

Event Importer Exporter

Depreciation of USD Gains Money Loses Money

Appreciation of INR Gains Money Loses Money

USDINR 45

USDINR 49

USDINR 40

USDINR 45

Scenario 1

Scenario 2


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Using Futures to Hedge Currency Risk

Transaction

An exporter who has executed an export order and money is to be

received on 31 Dec 10, say USD 500,000.

Spot USD/INR was as 43.80 when contract was executed.

Risk

Rupee will appreciate and export will realize USD 500,000 at a rate

lower than 43.80

Hedge Strategy

Short (Sell) 500 contracts of each expiry 31 Dec 10


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Payoff of Hedge vis--vis the transaction:

On 28th August

Spot is at 43.80

USDINR Dec futures at 44.10

Short (Sell) 500 USDINR futures contracts expiry Dec 2010

On Expiry Date 31st Dec 2010

Spot on Expiry P/L on Exchange P/L on Physical

44.50 (INR 2,00,000) INR 3,50,000

43.50 INR 3,00,000 (INR 1,50,000)

So if rupee moves either way corporate is hedgedagainst currency fluctuation.


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Commodities Vs. Currency

Commodity MCX price ifUSD/INR(49.35)Rs

Internationalprice ($)

MCX price ifUSD/INR(50.35)(Rs.)

Gold 14500 915 14800

Silver 22600 14.00 23050

Crude 2850 57.85 2910

Copper 240 4826 245

Change in price of commodities prices if USD/INR change form 49.35 to 50.35

All international reference commodities prices are taken frominternational market and reflected in MCX in Rs. The prices of theseare in parity with international market most of the times. So MCXprices are multiplication or USD/INR rate and international price.


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Commodities Vs. Currency

Expectation :- Gold prices going down form 915 to 900

Scenario 1: trading in commodities market only

Short Position: 1 lot of MCX Gold futures at 14500

USD/INR rate49.35

Gold comes down to 900 but currency goes to 50.35.

So MCX gold price comes 14560.

Loss in Gold MCX Futures is (14560 14500) x 100 = INR 6000


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Equity Vs. Currency

ense rs. u ee

2 00

4 00

00

00

10 00

12 00

14 00

1 00

1 00

20 00

22 00

1/2/2004

/2/2004

12/1

/2004

//200

12/

/200

/1/200

11/22/200

/22/200

11/

/200

//200

10/31/200

V

u

3

40

4

0

0

V

u

SENSEX VS. USD


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Equity Vs. Currency

As the last graph shows Equity market and USD/INRare inversely proportional. Equity market hasfollowing factor related Currency market

FII- inflow and outflow

Countrys Growth Indicator

Equity investor can make the portfolio much safer byadding USD/INR in his portfolio


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Benefit over currency Forward

The differences between currency futures and currencyforward

Currency futures have been standardized, like lotsizes, margin and fixed MTM (Mark to Market),forwards can vary from bank to bank, and lots might

differ, generally banks dont offer quotes below 5million, and if they do also such quotes can be wayaway from the market

In future the quotes are transparent and the marketparticipants determine them, banks on the other handconsider premium or discount on forwards.

Transparency and dissemination in futures is easyand available, bank forwards on the other hand mightbe costly and disseminated is through letters, faxes oremails, which can become cumbersome


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Benefit s over currency Forward

Futures are traded through an exchange and it acts asa counter party risk guarantee, bank forwards are OTC(Over the counter) contracts and hence this feature isnot available

Banks develop exotics and custom made contracts for

large deals and the portfolio is generally not adjustedso can result in sudden losses for customers after aperiod of time. In futures the transaction istransparent and daily MTM (Mark to Market) ensuresthat the transaction is monitored actively

Bank forwards are not for common people with smallneeds, not for SME (Small Medium Enterprise) or

people with smaller risks, futures helps the smallest ofthe participant to fine tune their hedges


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Currency Futuresisbestsuited for-

NRIs involved in remitting money into India

SMEs (Small Medium Enterprises) / Individualsinvolved in Imports/Exports

Corporate/ Institutions involved in Imports/Exportsand anybody else who has foreign currencyexposure

Who want to Hedge against their equity exposure


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A C opening

Documentary requirements for Currency DerivativeFOR INDIVIDUALCLIENTS:

1. Photograph of account holder (s).

2. PAN Card Copy

3. Address Proof

4. Bank Proof containing name of the constituent

5. All documents should be self attested & duly verified byReligare Official with In Person stamp

6. Client master data printout from LD or AXIS in case of existingequity client.

Contact :- Rajesh Gupta

Phone No. 011-40552676

The A/c opening forms are also available at our websitehttp://www.religaresecurities.com/Currency_futures.asp


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All payment instrument like Cheque, DD etc. need to bedeposited in Religare Securities Ltd.

Exchange wise Margin allocation % need to defined

Mail to [email protected] for any queries

STOCK EXCHANGES PERCENTAGE OF MARGIN

MCX-SX

NSE-CDS

Combined Equity- Cash &F&O Segment [NSE +BSE]


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Research

For currency research you can contact metals(commodities and currencies) research desk at0120-3395520-28

USD/INR, EURO/INR, YEN/INR, GBP/INR report sentevery day

Included in commodities Monthly newsletter


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Regulation

Currency Futures are regulated by RBI and SEBI both. Profit-Loss from Currency Futures is not considered as

Speculative income.

For CTCL id NISM in Derivative or Currency Market isrequired.

CTCL Application

Form


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Thank You

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