final report file

A STUDY OF RELATION BETWEEN NIFTY-50 INDEX AND CURRENCY (USDINR) 1

1.1 Introduction To Stock Exchanges

Stock Exchanges

A stock exchange is a mutual organization which provides "trading" facilities for stock

brokers and traders, to trade stocks and other securities.

Stock markets refer to a market place where investors can buy and sell stocks. The price

at which, buying and selling transaction takes place is determined by the market forces

(i.e. demand and supply for a particular stock).

Let us take an example for a better understanding of how market forces determine

stock prices. ABC Co. Ltd. enjoys high investor confidence and there is an anticipation of

an upward movement in its stock price. More and more people would want to buy this

stock (i.e. high demand) and very few people will want to sell this stock at current

market price (i.e. less supply). Therefore, buyers will have to bid a higher price for this

stock to match the ask price from the seller which will increase the stock price of ABC

Co. Ltd. On the contrary, if there are more sellers than buyers (i.e. high supply and low

demand) for the stock of ABC Co. Ltd. in the market, its price will fall down.

Stock exchanges also provide facilities for the issue and redemption of securities as well

as other financial instruments and capital events including the payment of income and

dividends. The securities traded on a stock exchange includes; shares issued by

companies, unit trusts, derivatives, pooled investment products and bonds. To be able

to be traded, a security, on a certain stock exchange, should be listed on that respective

exchange.

Usually there is a central location at least for recordkeeping, but trade is lesser linked to

such a physical place, as modern markets are electronic networks, which give them

advantages of speed and cost of transactions. Trade on an exchange is by members only.

The initial offering of stocks and bonds to investors is by definition done on the primary

market, and the subsequent trading, in the secondary market.

DEPARTMENT OF BUSINESS AND INDUSTRIAL MANAGEMENT, VNSGU, SURAT

http://en.wikipedia.org/wiki/Secondary_market

http://en.wikipedia.org/wiki/Primary_market

http://en.wikipedia.org/wiki/Primary_market

http://en.wikipedia.org/wiki/Investor

http://en.wikipedia.org/wiki/Electronic_networks

http://en.wikipedia.org/wiki/Bond_(finance)

http://en.wikipedia.org/wiki/Derivatives

http://en.wikipedia.org/wiki/Unit_trust

http://en.wikipedia.org/wiki/Shares

http://en.wikipedia.org/wiki/Dividend

http://en.wikipedia.org/wiki/Security_(finance)

http://en.wikipedia.org/wiki/Stock

http://en.wikipedia.org/wiki/Trader_(finance)

http://en.wikipedia.org/wiki/Stock_broker

http://en.wikipedia.org/wiki/Stock_broker

http://en.wikipedia.org/wiki/Mutual_organization


A stock exchange is often the most important component of a stock market. As in all free

markets, Supply and Demand in stock markets is driven by various factors that affect

the price of stocks.

There is usually no compulsion to issue stock via the stock exchange itself, nor is it is

necessary that the stock be subsequently traded on the exchange. Such trading is said to

be off exchange or over-the-counter. This is the usual way by which derivatives and

bonds are traded. Increasingly, stock exchanges are part of a global market for

securities.

In a stock exchange, a person who wishes to sell his security is called a seller, and a

person who is willing to buy the particular stock is called a buyer. The rate of stock

depends on the simple law of demand and supply. If the demand of shares of company x

is greater than its supply then its price of its security increases.

In Online Exchange Trading, the trading is done on a computer network. The sellers and

buyers log on to the network and propose their bids. The system is designed in such

ways that at any given instance, the buyers/sellers are bidding at the best prices.

In earlier times, buyers and sellers used to assemble at stock exchanges in a round to

make a transaction but now with the dawn of IT, most of the operations are done

electronically and the stock markets have become almost paperless. Now investors do

not have to gather at the Exchanges, and can trade freely from their home or office over

the phone or through Internet.


http://en.wikipedia.org/wiki/Bond_(finance)

http://en.wikipedia.org/wiki/Derivatives

http://en.wikipedia.org/wiki/Over-the-counter_(finance)

http://en.wikipedia.org/wiki/Free_market

http://en.wikipedia.org/wiki/Free_market

http://en.wikipedia.org/wiki/Stock_market


1.2 The Indian Stock Market- An Overview

The Indian economy is one of the fastest growing in the world, despite only moderate

growth seen during FY09. After slow growth of 6.7% during FY09, the economy

bounced back to a long-term growth trajectory rate of 7.4% in FY10, as per Central

Statistical Organization (CSO) advance estimates. Recovery in GDP growth was broad

based, except for agriculture. Seven out of eight sectors/sub-sectors showed growth of

6.5% or higher. Industry output, which was affected by the cyclical slowdown,

international commodity price shocks in FY08, and the global recession in FY09,

recovered substantially in FY10. Along with the recovery in industry and core

infrastructure sectors, upturn in business and consumer confidence reflected in the

revival of consumption and investment demand.

The overall improvement in the global economic and financial conditions also boosted

the external economy, with the revival in exports and capital flows.

The main function of the stock market is to enable trade in the shares of public

companies, which in turn reflect the performance of the companies whose shares are

traded in the stock market. Here is providing you with a detailed Stock Market

Overview. Stock markets are also a vital part of an economy or the economic system of a

country. Today most economies around the world are judged by the performance of

their stock markets.

The stock markets serve a vital purpose in the growth and development of a company

that wants to expand. Such companies with expansion plans and new projects are in

need of funding and the stock market serves as the best platform from which a

company can ‘sell’ itself to the discerning public on the basis of merit among other

things. To trade in the stock market a company has to be absolutely transparent about

its vital fundamentals such as revenues, income, assets, liabilities, infrastructure, etc. as

this allows the investing public to make a fair assessment of the said company’s worth.



The stock markets function on the basis of two principles better known as:

Primary markets – When a company decides to sell its shares to the public through

an (Initial Public Offer) IPO then it can be said that it is operating in the primary market.

In fact, for companies that offer their shares to the public for the first time, this process

is a mandatory requirement and involves a few stages of compliance with the market

regulator that eventually allows it to trade in the stock market.

Secondary markets – After a company has successfully completed its IPO it is

allowed to get listed in the particular stock market where it has applied for

membership. Here it may be said that the company has entered the secondary market

and its shares are available for trade as those of other companies listed on the stock

market. The market regulator determines the listing price but thereafter the company’s

shares are traded on a regular basis and the price is determined by the market forces,

primarily demand and supply.

There are two main exchanges in India:

1. BSE Stock Exchange

2. NSE Stock Exchange

The most famous stock exchange in India is the Mumbai Stock Exchange whose market

movement indicator, the (Bombay Stock Exchange) BSE Sensex, is still an icon of India’s

economic performance. However, in an IT enabled environment it is the far more

sophisticated and advanced (National Stock Exchange) NSE that has gradually gained in

prominence due to more substantive profile.



1.3 History of Indian Stock Market – The Origin

The Indian stock market have a 200 years old history and is one of the oldest and

fastest growing financial markets in the world and considered to the best among the

markets of the emerging economies. The history of Indian stock markets dates back 200

years toward the end of the 18th century when India was under the spell of the East

India Company. The development of the capital market in India concentrated around

Mumbai where no less than 200 to 250 stockbrokers were active during the second half

of the 19th century.

The growth of the various stock exchanges in India was more due to local demand-pulls

than anything else and consequently the stock exchanges of Mumbai (BSE), Ahmadabad

and Kolkata were established by the end of the 19th century. By the early 1960s the

total number of stock exchanges in India rose to eight that included Mumbai,

Ahmadabad and Kolkata apart from Madras, Kanpur, Delhi, Bangalore and Pune. Today

there are 21 regional stock exchanges in India in addition to the centralized NSE

(National stock Exchange) and OTCEI (Over the Counter Exchange of India).

The stock markets in India remained stagnant due to the controlled nature of the

economy up to the early 1990s when the Indian economy began ‘liberalizing’. As the

controls began to be dismantled or eased out, the stock markets witnessed a flurry of

IPOs hitting the market. This resulted in many new companies across different industry

segments to come up with newer products and services.

One of the striking features of the growth of the Indian economy in recent years has

been the role played by its stock markets in assisting and fuelling that growth. Much of

the organized sector in India has been affected by high growth and the stock markets

played an all-inclusive role in sustaining that growth. Many PSUs (Public Sector

Undertakings) that decided to offload part of their equity were also helped by the well-

organized stock market in India.

During the mid 1990s the government of India launched the NSE (National Stock

Exchange) and the OTCEI (Over the Counter Exchange of India) to usher in an easier

and more transparent form of trading in stocks. While the NSE has not just done well to



grow and evolve into the virtual ‘backbone’ of capital markets in India the OTCEI

struggled and is yet to show any sign of growth and development. The integration of IT

into the capital market infrastructure has been particularly smooth in India due to the

country’s world class IT industry and this has pushed up the operational efficiency of

the Indian stock market to global standards. As a result the country has been able to

capitalize on its high growth and attract foreign capital like never before.

The SEBI (Securities and Exchange Board of India) is the regulating authority for

capital markets in India. SEBI came into prominence in the 1990s after the capital

markets experienced some turbulence and has grown in strength as one of the

country’s most important institutions.

18th CenturyEast India Company was the dominant institution and by end of the century,

business in its loan securities gained full momentum

1830'sBusiness on corporate stocks and shares in Bank and Cotton presses started in

Bombay. Trading list by the end of 1839 got broader

1840's Recognition from banks and merchants to about half a dozen brokers

1850'sRapid development of commercial enterprise saw brokerage business attracting

more people into the business

1860's The number of brokers increased to 60

1860-61

The American Civil War broke out which caused a stoppage of cotton supply

from United States of America; marking the beginning of the "Share Mania" in

India

1862-63 The number of brokers increased to about 200 to 250

1865A disastrous slump began at the end of the American Civil War (as an example,

Bank of Bombay Share which had touched Rs. 2850 could only be sold at Rs. 87)

(Table 1.1- Evolution of Stock Markets In India, 200 years back)

Pre-Independence Scenario-Establishment of Different Stock Exchanges



1874With the rapidly developing share trading business, brokers used to gather at

a street (now well known as "Dalal Street") for the purpose of transacting

business.1875 "The Native Share and Stock Brokers' Association" (also known as "The

Bombay Stock Exchange") was established in Bombay1880's Development of cotton mills industry and set up of many others 1894 Establishing of "The Ahmedabad Share & Stock Brokers' Association"1880 -

90's

Sharp increase in share prices of jute industries in 1870's was followed by a

boom in tea stocks and coal 1908 "The Calcutta Stock Exchange Association" was formed1920 Madras witnessed boom and business at "The Madras Stock Exchange" was

transacted with 100 brokers.1923 When recession followed, number of brokers came down to 3 and the

Exchange was closed down1934 Establishment of the Lahore Stock Exchange 1936 Merger of the Lahore Stock Exchange with the Punjab Stock Exchange

1937Re-organization and set up of the Madras Stock Exchange Limited (Pvt.)

Limited led by improvement in stock market activities in South India with

establishment of new textile mills and plantation companies1940 Uttar Pradesh Stock Exchange Limited and Nagpur Stock Exchange Limited

was established1944 Establishment of "The Hyderabad Stock Exchange Limited"

1947"Delhi Stock and Share Brokers' Association Limited" and "The Delhi Stocks

and Shares Exchange Limited" were established and later on merged into

"The Delhi Stock Exchange Association Limited"(Table 1.2- Pre-Independence Scenario)

Post Independence Scenario

The depression witnessed after the Independence led to closure of a lot of exchanges in

the country. Lahore Stock Exchange was closed down after the partition of India, and



later on merged with the Delhi Stock Exchange. Bangalore Stock Exchange Limited was

registered in 1957 and got recognition only by 1963. Most of the other Exchanges were

in a miserable state till 1957 when they applied for recognition under Securities

Contracts (Regulations) Act, 1956. The Exchanges recognized under the Act were:

1. Bombay 2. Calcutta 3. Madras 4. Ahmedabad

5. Delhi 6. Hyderabad 7. Bangalore 8. Indore

(Table 1.3- Exchanges Recognized Under Securities Contracts

Regulations Act, 1956)

Many more stock exchanges were established during 1980's, namely:

Cochin Stock Exchange (1980)

Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982)

Pune Stock Exchange Limited (1982)

Ludhiana Stock Exchange Association Limited (1983)

Gauhati Stock Exchange Limited (1984)

Kanara Stock Exchange Limited (at Mangalore, 1985)

Magadh Stock Exchange Association (at Patna, 1986)

Jaipur Stock Exchange Limited (1989)

Bhubaneswar Stock Exchange Association Limited (1989)

Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989)

Vadodara Stock Exchange Limited (at Baroda, 1990)

Coimbatore Stock Exchange

Meerut Stock Exchange

(Table 1.4- Other Exchanges In India)

Government policies during 1980's also played a vital role in the development of the

Indian Stock Markets. The list of National & Regional Stock Exchanges prevailing in the

country is as follows:



Sr.

No.

Stock Exchanges Prevailing In The Country, on 27th June, 2011

1 Bombay Stock Exchange Ltd.

2 National Stock Exchange of India Ltd. (NATIONALIZED EXCHANGE)

3 OTC Exchange of India (NATIONALIZED EXCHANGE)

4 U.P. Stock Exchange Ltd.

5 Jaipur Stock Exchange Ltd.

6 Madras Stock Exchange Ltd.

7 Cochin Stock Exchange Ltd.

8 Bangalore Stock Exchange Ltd.

9 The Gauhati Stock Exchange Limited

10 The Ludhiana Stock Exchange Ltd.

11 The Calcutta Stock Exchange Ltd.

12 Bhubaneshwar Stock Exchange Ltd.

13 The Delhi Stock Exchange Ltd.

14 Vadodara Stock Exchange Ltd.

15 Ahmedabad Stock Exchange Ltd.

16 Madhya Pradesh Stock Exchange Ltd.

17 Pune Stock Exchange Ltd.

18 Inter connected Stock Exchange of India Ltd.

19 MCX Stock Exchange Ltd

20 United Stock Exchange of India Limited (USE)

21 Coimbatore Stock Exchange

(Source:- http://www.sebi.gov.in/investor/stockexchadd.html)

(Table 1.5- Stock Exchanges Prevailing in the country)

1.4 Bombay Stock Exchange (BSE)

Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a rich

heritage. Popularly known as "BSE", it was established as "The Native Share & Stock

Brokers Association" in 1875. It is the first stock exchange in the country to obtain



permanent recognition in 1956 from the Government of India under the Securities

Contracts (Regulation) Act, 1956.The Exchange's pivotal and pre-eminent role in the

development of the Indian capital market is widely recognized and its index, SENSEX, is

tracked worldwide. Earlier an Association of Persons (AOP), the Exchange is now a

demutualised and corporatized entity incorporated under the provisions of the

Companies Act, 1956, pursuant to the BSE (Corporatization and Demutualization)

Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI).

With demutualization, the trading rights and ownership rights have been de-linked

effectively addressing concerns regarding perceived and real conflicts of interest. The

Exchange is professionally managed under the overall direction of the Board of

Directors. The Board comprises eminent professionals, representatives of Trading

Members and the Managing Director of the Exchange. The Board is inclusive and is

designed to benefit from the participation of market intermediaries.

In terms of organization structure, the Board formulates larger policy issues and

exercises over-all control. The committees constituted by the Board are broad-based.

The day-to-day operations of the Exchange are managed by the Managing Director and

a management team of professionals.

The Exchange has a nation-wide reach with a presence in 417 cities and towns of India.

The systems and processes of the Exchange are designed to safeguard market integrity

and enhance transparency in operations. During the year 2004-2005, the trading

volumes on the Exchange showed robust growth. The Exchange provides an efficient

and transparent market for trading in equity, debt instruments and derivatives. The

BSEs’ On Line Trading System (BOLT) is a proprietary system of the Exchange and is BS

7799-2-2002 certified.

(Source: http://www.bseindia.com/about/introbse.asp,

http://www.bseindia.com/aboutus.asp)

1.5 Introduction to National Stock Exchange

The National Stock Exchange of India Limited has genesis in the report of the High

Powered Study Group on Establishment of New Stock Exchanges, which recommended



promotion of a National Stock Exchange by financial institutions (FIs) to provide access

to investors from all across the country on an equal footing. Based on the

recommendations, NSE was promoted by leading Financial Institutions at the behest of

the Government of India and was incorporated in November 1992 as a tax-paying

company unlike other stock exchanges in the country. On its recognition as a stock

exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE

commenced operations in the Wholesale Debt Market (WDM) segment in June 1994.

The Capital Market (Equities) segment commenced operations in November 1994 and

operations in Derivatives segment commenced in June 2000.

► Mission of NSE

NSE's mission is setting the agenda for change in the securities markets in India. The

NSE was set-up with the main objectives of:

establishing a nation-wide trading facility for equities, debt instruments and

hybrids,

ensuring equal access to investors all over the country through an appropriate

communication network,

providing a fair, efficient and transparent securities market to investors using

electronic trading systems,

enabling shorter settlement cycles and book entry settlements systems, and

meeting the current international standards of securities markets.

The standards set by NSE in terms of market practices and technology, have become

industry benchmarks and are being emulated by other market participants. NSE is more

than a mere market facilitator. It's that force which is guiding the industry towards new

horizons and greater opportunities.

(Source: http://www.nseindia.com/)

1.6 Introduction to MCX-SX

MCX Stock Exchange Ltd (MCX-SX), India’s new stock exchange,

appositely reflects how the world’s most evolved and hi-tech new-generation



exchanges should look like in future. With cutting-edge technology, world-class services

and cost optimization, MCX-SX has altered the face of the Indian financial markets.

Within a year of its launch, MCX-SX has proved its mettle as the thought leader and

innovator of the industry by introducing innovative services and pioneering market

development initiatives. Recognized by the market regulator Securities and Exchange

Board of India, MCX-SX currently has more than 600 members and trading terminals in

486 cities and towns across India.

Through deployment of state-of-the-art technology and global best practices for

regulatory compliance and investor protection, MCX-SX enables importers, exporters,

investors, corporations and banks to hedge their currency risks with greater

transparency and safety. Furthermore, it guarantees settlement of all transactions,

through its clearing corporation (MCX-SX Clearing Corporation Ltd), which enhances

safety by eliminating the counterparty risk.

MCX-SX believes in “Systematic development of markets through Information,

Innovation, Education and Research.” Its constant endeavor, therefore, has been to

ensure that its nationwide electronic trading platform is used by market participants

more extensively and effectively. MCX-SX is the first stock exchange in India to launch

pioneering market development initiatives and join hands with India’s reputed industry

& trade bodies and educational institutions to conduct awareness and financial literacy

programmes for financial literacy and financial inclusion.

MCX-SX’s currency derivatives segment offers an India-wide electronic platform for

trading in currency futures under the regulatory control of Securities and Exchange

Board of India (SEBI) and Reserve Bank of India (RBI).

(Source: http://www.mcx-sx.com/)

1.7 Trading Pattern Of The Indian Stock Market



Indian Stock Exchanges allow trading of securities of only those public limited

companies that are listed on the Exchange(s). They are divided into two categories:

(Figure 1.1- Types of Securities)

Types of Transactions

The flowchart below describes the types of transactions that can be carried out on the

Indian stock exchanges:



Indian stock exchange allows a member broker to perform following activities:

Act as an agent,

Buy and sell securities for his clients and charge commission for the same,

Act as a trader or dealer as a principal,

Buy and sell securities on his account and risk.

The transaction cycle for purchasing and selling shares online is depicted below:

1.8 Forex Currency Trading


Transaction Cycle

Stock Exchange Member/

Client Member/ Broking

firm.

Client


Currency trading is done in Paris. They follow the International standards organization

(ISO), which has built a code abbreviation. For instance EUR/USD- EURO AND US

DOLLAR. Similarly we have USD/CHF, GBP/USD etc. Thus foreign exchange is the

trading of one currency for another. It is the ratio of one currency as valued for another.

While trading the first currency is known as the base currency and the other is known

as the counter of quote currency. Counter currency is purchased on one unit of the base

currency. While selling we are told how much the counter or quote currency we will

receive, for every base currency unit.

For simplifying foreign currency trade one monetary unit is considered equal to the

base currency. So if we are talking of the base currency i.e. Rupee, Euro, Dollar, it is 1

Rupee, 1 Euro, and 1 Dollar. As the US Dollar is mostly traded with any currency paired

with the US Dollar is known as the direct rate. If the currency is not against the US

Dollar it is known as the cross rate. As the quote currency is lower than the base

currency it is converted into smaller units of the base currency. Foreign currency

trading involves many intricacies but once one gain knowledge and practice it, it soon

get easy and attractive.

1.9 Currency Trading

Currency trading means to exchange one currency for another currency. This industry

is one of the largest in the world with regards to trading volume. Foreign currency is

the ratio of one currency in consideration with another. How this process takes place.

For example if we take an interbank currency trade for instance, there are two banks A

and B. Then bank A will call bank B and will ask for the quote of the currency. Say, for

e.g.; rupee against dollar. Then bank B will reply to bank A with the rate of his bank. If

the rate seems attractive to bank A then they will enter a deal. All the basic information

like price, amount, and purchased amount will be entered in their systems. When the

actual settlement takes place bank A will depart with the specified rupee amount and

bank B will follow suit by turning in the dollar amount. If the rupee rises against the

dollar then bank A will gain the difference as profit.



When traders enter into currency trading they give a two- way quote. One of them is the

rate of purchase and other is the price of sale. The two prices are mainly separated by a

hyphen. On the left is the price at which the trader will purchase and on the right is the

price at which is the price at which the trader will sell. The difference between the

purchase rate and sale is called the bid-ask spread. The trader expects the slight

variations on the sale and purchase rate. He will also trade in the similar amounts of

what he had purchased. There will not be any drastic differences. The margin thus

earned by the trader is the difference of the bid-ask spread.

The profit gained depends on the variation in the exchange rate and the size of the

position. Speculating over a period of time can be dangerous and hence every

government has the strict rules laid down which have to be adhered to, to prevent the

chaos.

1.10 Currency Trading In India – A Brief Overview

During the early 1990s, India embarked on a series of structural reforms in the foreign

exchange market. The exchange rate regime that was pegged earlier was floated

partially in March 1992 and fully in March 1993. The unification of the exchange rate

was instrumental in developing a market-determined exchange rate of the rupee and an

important step in the progress towards current account convertibility, which was

achieved in August 1994. Banks are now permitted to approve proposals for

commodity hedging in international exchanges from their corporate customers.

Cancellation and rebooking of all eligible forward contracts booked by residents,

irrespective of tenor, has been allowed. The closing time for inter-bank foreign

exchange market in India has been extended by one hour up to 5.00 p.m. The ceiling for

remittances for resident individual under the Liberalized Remittance Scheme for

Resident Individuals has been enhanced in an phased manner and currently it stands at

US $ 2,00,000 (per financial year). The limit on remittances for overseas investments to

facilitate overseas acquisitions by corporates has been enhanced and the guidelines for

external commercial borrowings have also been liberalized by raising the prepayment

limits.



The foreign exchange market has acquired a distinct vibrancy as evident from the range

of products, participation, liquidity and turnover. The average daily turnover in the

foreign exchange market increased from US $ 23.7 billion in March 2006 to US $ 33.0

billion in March 2007 in consonance with the increase in foreign exchange transactions.

Although liberalization helped Indian forex market in various ways, extensive

fluctuations of exchange rate also took place in Indian forex market. These issues have

attracted a great deal of interest from policy-makers and investors. While some

flexibility in foreign exchange markets and exchange rate determination is desirable,

excessive volatility can have 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 required.

With Indians going global and dealing in international trade, currency exchange is very

common. Indian rupee is exchange is anywhere in the world. However it’s still weak to

US Dollar, GB Pound and EURO, so the exchange rate varies according to vagaries of the

day to day market. For the common trader or professional who wished to invest in

currency exchange the best way to do is through official channels.

Banks, forex institutions, authorized travel agents are the only ones who can exchange

the rupee to any other currency. When a person goes abroad for a holiday or for a

business, a certain slab is reserved for exchange. Any amount of currency cannot be

exchanged. Since there a restrictions some people try to smuggle hard cash in suitcases.

Which is an offence, and if caught they can be deported or not allowed to leave the

country, without giving proper explanation.

Trading in Currency in the same manner as equities are traded in secondary market is

no more a novelty. Currency futures trading 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. Among 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.

There are 3 trade exchange that trades in currency futures:

1. National Stock Exchange (NSE)

2. Bombay Stock Exchange (BSE) & United Stock Exchange (USE)

3. Multi-Commodity Exchange (MCX)

(Figure 1.3- Exchanges Concerned with Currency Trading)

(Source: Report Of The Rbi-Sebi Standing Technical Committee On

Exchange Traded Currency Futures Reserve Bank Of India And Securities

And Exchange Board Of India 2008)


SEBI

RBI

MCX-SX NSE BSE - CDX (USE)


1.11.1 Introduction To Currency Derivatives

Each country has its own currency through which both national and international

transactions are performed. All the international business transactions involve an

exchange of one currency for another. For Example,

If any Indian firm borrows funds from international financial market in US dollars for

short or long term then at maturity the same would be refunded in particular agreed

currency along with accrued interest on borrowed money. It means that the borrowed

foreign currency brought in the country will be converted into Indian currency, and

when borrowed fund are paid to the lender then the home currency will be converted

into foreign lender’s currency. Thus, the currency units of a country involve an

exchange of one currency for another. The price of one currency in terms of other

currency is known as exchange rate.

The foreign exchange markets of a country provide the mechanism of exchanging

different currencies with one and another, and thus, facilitating transfer of purchasing

power from one country to another.

With the multiple growths of international trade and finance all over the world, trading

in foreign currencies has grown tremendously over the past several decades. Since the

exchange rates are continuously changing, so the firms are exposed to the risk of

exchange rate movements. As a result the assets or liability or cash flows of a firm

which are denominated in foreign currencies undergo a change in value over a period

of time due to variation in exchange rates. This variability in the value of assets or

liabilities or cash flows is referred to exchange rate risk. Since the fixed exchange rate

system has been fallen in the early 1970s, specifically in developed countries, the

currency risk has become substantial for many business firms. As a result, these firms

are increasingly turning to various risk hedging products like foreign currency futures,

foreign currency forwards, foreign currency options, and foreign currency swaps.



1.11.2 History of Currency Derivatives

Currency futures were first created at the CHICAGO MERCANTILE EXCHANGE (CME) in

1972.The contracts were created under the guidance and leadership of Leo Melamed,

CME Chairman Emeritus. The FX contract capitalized on the U.S. abandonment of the

Bretton Woods agreement, which had fixed world exchange rates to a gold standard

after World War II. The abandonment of the Bretton Woods agreement resulted in

currency values being allowed to float, increasing the risk of doing business. By creating

another type of market in which futures could be traded, CME currency futures

extended the reach of risk management beyond commodities, which were the main

derivative contracts traded at CME until then. The concept of currency futures at CME

was revolutionary, and gained credibility through endorsement of Nobel-prize-winning

economist Milton Friedman.

Today, CME offers 41 individual FX futures and 31 options contracts on 19 currencies,

all of which trade electronically on the exchange’s CME Globex platform. It is the largest

regulated marketplace for FX trading. Traders of CME FX futures are a diverse group

that includes multinational corporations, hedge funds, commercial banks, investment

banks, financial managers, commodity trading advisors (CTAs), proprietary trading

firms; currency overlay managers and individual investors. They trade in order to

transact business, hedge against unfavorable changes in currency rates, or to speculate

on rate fluctuations.

Source: - (NCFM-Currency future Module)



1.11.3 Currency Derivatives Products

Currency derivatives contracts have several variants. The most common variants are

forwards, futures, options and swaps. The various derivatives contracts that have

come to be used are:

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. 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.

Options:

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.

Source: - (NCFM-Currency future Module)



2.1 Broking Insights – The Indian Broking Industry

The Indian equity broking industry has gained momentum in terms of scope and scale.

The industry has tremendous opportunities as India moves toward adding another

trillion in GDP. Competition in the broking space has intensified with entry of new firms

and recognized brands with strong balance sheets.

With the Indian securities market experiencing rapid growth and financial integration

gaining speed, the role of intermediation will strengthen further. However, in the long

term, quality and maturity of services would determine the success and sustainability of

firms in this industry. Key factors driving growth and success in the broking industry

would be distribution networks, diversification of services, expertise and research,

transparency and disclosure, and compliance and market integrity.

The Indian broking industry is one of the oldest trading industries that has been around

even before the establishment of the BSE in 1875. Despite passing through a number of

changes in the post liberalization period, the industry has found its way towards

sustainable growth.

The equity brokerage industry in India is one of the oldest in the Asia region. India had

an active stock market for about 150 years that played a significant role in developing

risk markets as also promoting enterprise and supporting the growth of industry.

The roots of a stock market in India began in the 1860s during the American Civil War

that led to a sudden surge in the demand for cotton from India resulting in setting up of

a number of joint stock companies that issued securities to raise finance. This trend was

akin to the rapid growth of securities markets in Europe and the North America in the

background of expansion of railroads and exploration of natural resources and land

development.

Historical records show that as early as 1864, there were about 1,000 brokers with the

stock markets functioning from three places in Mumbai; between 9 am to 7 pm at the



junction of Meadows Street and Rampart Row, from day break till 9 am and from 7 pm

to early hours of next morning at Bazar-gate.

Share prices rose sharply even at that time. A share of Colaba Land Company during the

boom period of the 1860s rose from Rs 10,000 at par to Rs 120,000 and that of Backbay

Shares went up from Rs 2,000 to Rs 54,000. Bombay, at that time, was a major financial

centre having housed 31 banks, 20 insurance companies and 62 joint stock companies.

Reports on stock markets around that time indicate that an ordinary broker in 1864

earned about Rs 200 per day, a huge sum in those days. The boom period came to an

abrupt end in 1865. In Jul 1865, what was then used to be called the share mania ended

with burst of the stock market bubble? “Never had I witnessed in any place a run so

widely distributed nor such distress followed so quickly on the heels of such

prosperity” thus wrote Richard Temple, who served as the Governor of Bombay at that

time. An interesting aspect is that despite the collapse of the stock market, most of the

brokers met their payment commitments.

In the aftermath of the crash, banks, on whose building steps share brokers used to

gather to seek stock tips and share news, disallowed them to gather there, thus forcing

them to find a place of their own, which later turned into the Dalal Street. A group of

about 300 brokers formed the stock exchange in Jul 1875, which led to the formation of

a trust in 1887 known as the “Native Share and Stock Brokers Association”.

A unique feature of the stock market development in India was that that it was entirely

driven by local enterprise, unlike the banks which during the pre-independence period

were owned and run by the British. Following the establishment of the first stock

exchange in Mumbai, other stock exchanges came into being in major cities in India,

namely Ahmadabad (1894), Calcutta (1908), Madras (1937), Uttar Pradesh and Nagpur

(1940) and Hyderabad (1944). The stock markets gained from surge and boom in

several industries such as jute (1870s), tea (1880s and 1890s), coal (1904 and 1908)

etc, at different points of time



Beginning of a new equity culture

A new phase in the Indian stock markets began in the 1970s, with the introduction of

Foreign Exchange Regulation Act (FERA) that led to divestment of foreign equity by the

multinational companies, which created a surge in retail investing. The early 1980s

witnessed another surge in stock markets when major companies such as Reliance

accessed equity markets for resource mobilization that evinced huge interest from

retail investors.

A new set of economic and financial sector reforms that began in the early 1990s gave

further impetus to the growth of the stock markets in India. As a part of the reform

process, it became imperative to strengthen the role of the capital markets that could

play an important role in efficient mobilization and allocation of financial resources to

the real economy. Towards this end, several measures were taken to streamline the

processes and systems including setting up an efficient market infrastructure to enable

Indian finance to grow further and mature. The importance of an efficient micro market

infrastructure came into focus following the incidence of market abuses in securities

and banking markets in 1991 and 2001 that led to extensive investigations by two

respective Joint Parliamentary Committees.

The Securities and Exchange Board of India (SEBI), which was set up in 1988 as an

administrative arrangement, was given statutory powers with the enactment of the

SEBI Act, 1992. The broad objectives of the SEBI include

To protect the interests of the investors in securities

To promote the development of securities markets and to regulate the securities

markets

The scope and functioning of the SEBI has greatly expanded with the rapid growth of

securities markets in India in the last fifteen years.

Following the recommendations of the High Powered Study Group on Establishment of

New Stock Exchanges, the National Stock Exchange of India (NSE) was promoted by



financial institutions with an aim to provide access to investors all over the country.

NSE was incorporated in Nov 1992 as a tax paying company, the first of such stock

exchanges in India, since stock exchanges earlier were trusts, being run on no-profit

basis. NSE was recognized as a stock exchange under the Securities Contracts

(Regulations) Act 1956 in Apr 1993. It commenced operations in wholesale debt

segment in Jun 1994 and capital market segment (equities) in Nov 1994. The setting up

of the National Stock Exchange brought to Indian capital markets several innovations

and modern practices and procedures such as nationwide trading network, electronic

trading, greater transparency in price discovery and process driven operations that had

significant bearing on further growth of the stock markets in India.

Faster and efficient securities settlement system is an important ingredient of a

successful stock market. To speed the securities settlement process, The Depositories

Act 1996 was passed that allowed for dematerialization of securities in depositories

and the transfer of securities through electronic book entry. The National Securities

Depository Limited (NSDL) set up by leading financial institutions, commenced

operations in Oct 1996. Regulations governing selection of various types of market

intermediaries as depository participations were made. Subsequently, Central

Depository Services (India) Limited promoted by Bombay Stock Exchange and other

financial institutions came into being.

Rapid Growth

The last decade has been exceptionally good for the stock markets in India. In the back

of wide ranging reforms in regulation and market practice as also the growing

participation of foreign institutional investment, stock markets in India have showed

phenomenal growth in the early 1990s. The stock market capitalization in mid-2007 is

nearly the same size as that of the gross domestic product as compared to about 25

percent of the latter in the early 2000s.

Investor base continued to grow from domestic and international markets. The value of

share trading witnessed a sharp jump too. Foreign institutional investment in Indian

stock markets showed continuous rise reaching about USD10 bn in each of these years



between FY04 to FY06. Stock markets became intensely technology and process driven,

giving little scope for manual intervention that has been the source of market abuse in

the past. Electronic trading, digital certification, straight through processing, electronic

contract notes, online broking have emerged as major trends in technology. Risk

management became robust reducing the recurrence of payment defaults. Product

expansion took place in a speedy manner. Indian equity markets now offer, in addition

to trading in equities, opportunities in trading of derivatives in futures and options in

index and stocks.

(Table 2.1- Equity Broking Companies)

(Source: http://www.dnb.co.in/EquityBroking/Industry Insight.asp)

The Indian broking industry has come a long way in the last decade and has also

undergone a significant paradigm shift. The industry has shed most of its negative

trappings of the past and is now being considered a preferred sector for building long

term careers by professionals from all disciplines. Unprecedented growth of market

volumes and growing participation by investors spread beyond the traditional



geographical pockets, coupled with professionalization of work cultures and demand

for value-added services like investment advisory and portfolio management, has

created a huge demand for talent at all levels.

This growth story is expected to be sustained for at least a decade or even more

because of the steady increase in the investor penetration and wider acceptance of

stock investments as a reliable option for long term wealth creation. Robust all round

economic growth and favorable demographics are other important factors which are

transforming India from a nation of savers to investors. Improved quality of the Indian

regulatory framework and high compliance standards, have led to greater transparency

in all transactions and minimized the systemic risks.

Historically, the Indian financial services industry has been dominated by the banking

sector. However, globalization & liberalization of Indian Equity Markets has led to rapid

modernization and the professionalization of the financial sector. This has led to the

emergence of the broking industry, as an important part of the financial services sector,

competing for talent with banks, insurance companies, NBFCs etc. The Indian Broking

industry has indeed come of age & is attracting huge investments from large domestic

corporate houses as well as from international players. The Indian Broking industry is

now in a most exciting phase and is likely to grow at a much faster rate compared with

many other sectors. High quality Research & Advice, State-of-the-art Technology &

Business Analytics, Progressive HR Practices and CRM/Quality Management systems,

have emerged as the new drivers of competitive advantage in this business. The scope

of services provided by domestic brokerages has also moved up the value chain from

mere Execution & Settlement to cover the full range of financial products to meet the

diverse needs of customers, who are better educated and aware about Personal

Financial Planning

In conclusion, it would be appropriate to say that the Indian Broking industry is

now one of the hottest destinations for job seekers at the entry level as well as for

experienced professionals – a trend which is here to stay!!!

3.1 Company Profile – Principal Broker Profile



About Sushil Finance Services Private Ltd

Introduction

Sushil Finance Services Private Ltd was established in 1982 as a Proprietary Concern

with focus on underwriting and marketing IPOs. The Company acquired membership

of the Stock Exchange, Mumbai in 1982. In the year 1986, the company started its

Secondary Market Division, and got itself empanelled on various Financial Institutions

viz. UTI, Canbank Mutual Fund and the like. As on date the company is empanelled with

more than 40 Financial Institutions / Banks. In the year 1998, the BSE membership was

corporatized. It has evolved into a major brokerage house under the leadership of Mr.

Sushil Shah, the founder and driving force of the organization.

Vision

“To be the best investment solutions provider, recognized for its innovative approach,

trustworthiness, investment research, investor friendly attitude & above all its ability to

capitalize on the right opportunities for wealth creation.”

Mission

“To pursue a customer-centric approach, by exceeding customer expectations through

efficient and timely services, besides, persistently upgrading our quality standards,

retaining the spirit of teamwork, integrity, transparency and fairness.”

Key Management Team

(Table 3.1- Sushil Key Mgmt Team)

History of the Organization


Name Designation

Mr. Sushil N Shah Chairman

Mr. Ajay N Shah Director

Mr. Viral Parikh Director


1982 - 1986: The company developed a niche, in underwriting & marketing IPO's and

in a short time achieved a rank among the top 5 Brokers in the field. The company also

earned a reputation by mobilizing subscription through NRI's / PIO's and the company

was also among the first to reach out to various Gulf countries to promote investment

opportunities in India and to elucidate RBI guidelines with a view to make India a

preferred investment destination, such that Sushil Finance became a synonym for trust

with regards to Capital Market Investments.

1986 - 1992: Gauging the need of investors / sub-brokers, the company commenced

secondary market activities whereby it achieved recognition as an 'Investor - Friendly'

Broker. Further, it attained highest reputation amongst investors that can be attributed

to utilization of various in-house developed software and latest technologies for value

addition to investors. This activity gained momentum and forms an integral part of the

business even today.

1992 - 1996: Again a plethora of public issues flooded the market. During this period,

the company brought to play its expertise in marketing large number of Public Issues

hitting the Capital Market. In the year 1994 the company's associate Sushil Financial

Services Private Limited acquired membership on the National Stock Exchange of India

Ltd (NSE) for Capital & Wholesale Debt market segments.

1996 - 2004: This period witnessed the spread of the Stock Market Trading System.

Moving in tandem with the development at the Stock Exchanges, the company

developed its sub-broker network across the country using VSAT / leased lines, etc. Net

Trading was also enabled during this period & also commenced Commodities Trading.

2004 - Till date: It now provides a wide range of Financial Services which are Online

Trading, Stock Broking, Commodity Trading, Portfolio Management, Ipo, Depository

Services, Mutual Fund Management, NRI Services & Investment Advisory.

Milestones- Achievements



The quality of its research and services has earned Sushil Finance high recognition.

“Asia Money " the premier financial magazine ranked it as the 11th best brokerage in

the country.

Group Companies

SFSPL serves the needs of investors through its Group of Companies.

(Figure 3.1- Sushil Group Companies)

(Source: http://www.sushlifinance.com/aboutus.htm)

3.2 Company Profile – Franchisee Profile



3.2.1 About Chirag Share & Stock Broking Private Ltd

Chirag Investments is Surat’s leading investment consulting & share broking firm since

1987. Mr. Arvindbhai K. Shah founded the Business, Chirag Investments started as a

sole proprietary concern & later converted to a corporate body – Chirag Share & Stock

Broking Pvt. Ltd. The Company is a SEBI registered sub-broker for NSE & BSE

Secondary market operation. The service offered by the Company includes investment,

Saving & Holding. Advisory Services are the latest offering of the company with the

support of its principal broker Sushil Finance Consultants Ltd. The Company has been

taking special care for Client’s Investments & provides related guidance – Continuous

recommendations, with a view to make investment more Healthy & Wealthy.

It is affiliated with Sushil finance Consultants Ltd. (SFCL), and Sushil stockbroker Pvt.

Ltd., (SSPL) Mumbai. Chirag Share & Stock Broking Private Ltd is a franchisee of Sushil

Finance, a mediator between Sushil Finance and Clients (Investors)

3.2.2 Principals of the Company

SFCL is member of BSE since 1982 & NSE from 1994. They are member in Cash, WDM &

Derivatives segments. They are having expertise in EQUITY RESEARCH & COMPANY

FUNDAMENTAL RESEARCH especially. They are having highly qualified & experienced

team for technical Analysis, to provide valuable investment option for the different type

of investors. Sushil group of companies have a strong base of clients from a wide cross

section of the investor community. They are one of the most preferred Brokers for NRI.

The group Pioneers in Marketing of IPO’s, Mutual Funds, Bonds.



3.2.3 Contacts

(Figure 3.2- Chirag Share Contacts)

Corporate office : 106, B-wing, Tirupati plaza, Athawa Gate, Surat -1

Branch office : 204,”sheetal’bhojabhai Sheri, Mahidharpura Surat -3

Contact No. : +912614084401- +912614084450

Website : www.susilfinance.com

Email Id : [email protected]



3.2.4 Chirag Investment- Vision, Mission and Objectives

Vision

“To be an ideal investor hub, across the country, for increasing investor wealth.”

Mission

“Increase investors’ wealth by providing the Best services & knowledge through our

transparent, trustworthy & investor friendly approach.”

Objectives of Chirag Investment

Investment Advisory Service Provider (IASP)

The company aims to provide advisory services for client’s entire investment,

savings & insurance. For this it is providing clear INFORMATION, GUIDELINES &

ADVICES about different option of investment, saving & insurance schemes, to manage

clients fund successfully, that will satisfy their financial NEEDS & provide effective

RETURN & SECURITY to their FUND & LIFE.

Milestones - Achievements

5,000 Above Trading Accounts

4,000 Demat Accounts

17 Franchisee In South Gujarat

1,200 Clients Into Mutual Fund

“Most Active Accounts” - Award From SFCL In The Year Of 2007.

“Highest E-Trading Accounts” – Award From SFCL In The Year Of 2009.

Highest PMS Corpus In 2009

Top 10 IMF (Mutual Fund) Across Surat

(Source: http://www.chiraginvest.com/aboutus.aspx )



3.2.5 Products And Services Offered By Chirag Share

Continuous Research Support is available from to CSSPL (Chirag Investment) from its

Principal Brokers in the form of a variety of research products to facilitate sound

investments.

Products

It has research support of 25 PRODUCTS for the INVESTMENT & TRADING. These

products are generated on a DAILY, WEEKLY, PERIODICAL Basis.

The research products include the following:

Early Signal, Value Picks, Jotha Pathak, Kal ke Liye, Khaane Ke Baad, Jara

Sambhalke, Techno – Funda Open Recommendations, Portfolio Track, Daily

Bullets, Visual Aid, Sushil Bonanza etc, out of which Jara Sambhalke, Techno –

Funda Open Recommendations and Portfolio Track are the most popular products.

All the different products are tailored to meet the requirement of different class of

Investors. All Research products guide investors to reap Opportunities.

Services

Equity Trading

E – Trading

Commodity / Currency Trading

Mutual Fund

Depository Services

IPO

Insurance

Portfolio Management Services (PMS)

Fix Deposit and Bonds

Franchisee Development



Equity Trading

CSSPL provides excellent environment and services for equity trader whether he is an

investor or a day trader. One can access and avail the benefits of over 25 research

products from day trading to long terms Investment calls which will help to create

wealth in any market conditions.

E- Trading

Chirag Share provides services of www.savashare.in- India's premium online trading

platform. It offers simple pricing, quality order execution, outstanding tools, and of

course a comfortable service.

Savashare is a swift, simple and secure online trading mechanism. It aims to leverage

the power of the internet to give you the facility of placing your own orders anywhere,

anytime. Based on trading pattern and preferences, client has an option to choose from

two powerful trading accounts:

Swift Trade which is Web Based (Html), with no basic cost, accessible from any

corner of the world.

Power Trade which is software (exe) based, requiring a life time deposit of Rs. 500/-

which is refundable if brokerage in online trading exceeds Rs. 1000/-, accessible on

a particular pc where it is installed.

In online trade one can view online asset report, trade report, cash balance, technical

charts of scripts and many more things by login. Further the brokerage is less in online

trading. Online trading has all the benefits one can have, by trading through ODIN.

Type Of Trade Offline or dealer- through Trading Online Trading

Delivery Based 0.40 paisa per Rs 100/- 0.30 paisa per Rs 100/-

Intraday 0.04 paisa per Rs 100/- 0.03 paisa per Rs 100/-

(Table 3.2- Trading and Brokerage Charges)



Derivative Trading

Derivatives (Futures & Options) are ideal instruments to protect your portfolio against

risk. One can trade with index movements, hedge and leverage one’s portfolio by

limiting risk but keeping one’s upside unlimited. CCSPL provides one of the best views

on how to trade in this segment.

Commodity Trading

Investors looking for a fast-paced dynamic market with excellent liquidity can now

trade in Commodity Market.

Investment Advisory

Sushil has a team of qualified, trained and experienced investment advisors who have

in-depth knowledge of the financial markets mainly of Equities.

Currency Derivatives

Forex, being the world’s largest and the fastest growing industry in the fields of

financial services is now available at Sushil finance. There are several currency pairs

which are available for trading such as USD-INR / EUR – INR / POUND – INR / YEN –

INR. Corporates, institutions, HNI, retail investors and traders can all participate and try

to capitalize the opportunities this segment offers. Currency derivates is also an

efficient and an alternative platform for exporters and importers to hedge their

currency fluctuation risk on the exchange future’s platform.

Mutual Funds

Mutual Funds are a group of funds managed under one umbrella. The most basic fund

family would include a stock, bond and money market-portfolio, although many funds

have variants like sector funds, balanced funds.

NRI Services

A NRI can operate either on NRE (Repatriable) or on NRO (Non Repatriable) or on both

NRE & NRO status.



Depository Services

Depository Services offered by Sushil Finance are Dematerialization of shares, Re-

materialization, Pledging of securities, Transfer of shares, Right issue, IPO, Statement of

Transaction & Electronic Access to Securities Information.

Portfolio Management Services - PMS

Portfolio Management Services is a customized wealth management solution for

investors seeking to enjoy flavor of equity as an asset class with a long term investment

objective. Portfolio Management Services (PMS) is an ideal vehicle for wealth creation

with the help of expert knowledge of focused fund managers blended with a customized

approach towards equity investments depending upon individuals risk appetite and

investment preferences.


Chirag share is master franchisee of Sushil Finance in South Gujarat, which is

authorized by “Sushil Finance” for the development of Franchisee in “South Gujarat”. It

started working in this segment in the year of 2007. Currently, CSSPL has about 17

Active Franchisee under its own branch.

CCSPL offers an enhanced level of services to build and sustain long term relationships

with its business associate. This enables it to respond proficiently and pro-actively to

their changing needs.



3.2.6 Company Hierarchy System

(Figure 3.3- Chirag Share Hierarchy System)

The Company Hierarchy system starts with the founder of the company, Mr. Arvindbhai

Shah at the top, followed by the CEO of Company Mr. Chirag A Shah, son of the founder.

Next come the functional divisions which include:

Divisions Divisional Head

Equity and Dealing Mr. Mitesh Jariwala

Mutual Fund, IPO, Insurance Mr. Manish Dudhwala

Back Office Mrs. Hiral Shah

(Table 3.3- Division/Divisional Head)

Equity and Dealing is further bifurcated into Equity Dealing and team leaders,

Commodity and currency dealing, and Technical Department.

Under Equity and Team leaders there are 3 team leaders:



(Figure 3.4 Chirag Share Equity Division Hierarchy)

Under Commodity and Currency Dealing two persons are in-charge:

1.) Mr. Rajesh Patel

2.) Mr. Sameer Vasa

The entire Equity and Dealing room is under the control of GM, Mr. Mitesh Jariwala.

MF/IPO/Insurance is further bifurcated into MF Executives which include Mr.

Dinesh Salunke and Mr. Nitin Surti, and Back Office Team. Company recently added

Insurance, LIC, to its portfolio which is handled by the division’s divisional head, Mr.

Manish Dudhwala.

Next is the Master Franchisee Development and Customer Care Division handled by

Mr. Sachin Pawar, a DBIM evening batch pass out student. The division includes Mr.

Sachin Pawar, Mrs. Divya Karimbath, Mrs. Nima Gandhi. This division also handles the

marketing activities and is divided into mktg. executives and back office assistants.

Last is the Back Office Division, being handled by Mrs. Hiral K Shah. This division is

includes:



1. Mrs. Hiral K Shah

2. Sagufta Shaikh

3. Nima Gandhi

4. Ashok Kadam

5. Sushil Patel

6. Hitendra Patel

3.2.7 Company’s Departmental Introduction – Departmentation

The departmentation of the company is done on a functional basis. Thus on the

functional basis the following departments are formed:

Financial Services

This department performs various activities related to financial services like

dematerialization, demat and/or trading account depository services, margin funding,

IPO/Mutual Funds/Insurance, PMS, Equity trading, E- Trading, Commodity and

Currency Trading, Company Fixed Deposits and Bonds etc.

Dealing

This department functions in the follo. area: Equity Dealing, Currency and Commodity

Dealing, Gold and Bullion Dealing, IPO and Mutual (SIP) Dealing, Derivatives Dealing.

Back – Office Division

The back office division is concerned with accounting and operational activities,

confirming trades of all clients, receiving files from parent broker, balance tallying,

funds and stocks transfers, managing auctions, printing contract notes and statement of

holdings, managing IPOs subscription of clients, depository services, Its work picks up

after the market ends after 3.30 p.m.

The Back Office division includes the following functions:



Risk Management System

Here every client is given an intra-day limit of trading upto 70% of his total liquid

money. This RMS calculation is given by the principal broker, Sushil Finance.

Work Profile of RMS

It includes:

Limit System, Payment Collection and Entries, Different type of Reports uploading like

Mercantile, Ageing, Margin Summery etc, Brokerage Structure, Different Charges and

Taxes in Bill/Contract, Hold Stock System and Charges, 7 day square – off.

Accounts

This includes: opening trading and demat accounts, handling the fund-stock transfer-

pay-in-pay-out-auctions and still other queries of different accounts.

Courier

Courier services are required to dispatch the statement of holdings-ledger-contract

notes to each client, especially to the ONGC clients.

Customer Care

This including handling customer (client) queries, telecalling to clients in case of

inactive demat or trading account etc. It also includes marketing & allied activities.

Work Profile of Customer Care Division

It includes:

Tele – Calling for Client Reactivation, Handle Online Trading, Daily SMS Service, Daily E-

mail Service, Site Updation, Tele – Calling for new Registration, Client Care.

DP



Depository Services offered by CSSPL are Dematerialization of shares, Re-

materialization, Pledging of securities, Transfer of shares, Right issue, IPO, Statement of

Transaction & Electronic Access to Securities Information.

Work Profile of DP Division

It includes:

New Accounts Opening [Types Of Accounts (Individual, Currency, Commodity, Demat,

LAS, Partnership, Corporate, HUF, NRI, PMS)], Different Schemes For Demat Account

Opening, Knowledge Of Agreements And Charges, Handling Pay-In – Pay-Out, Colletral

System, Registration Process And Formalities After Registration, Modification Process,

DRF Work (Physical Share Demat), Renew Accounts Calling, Client Queries Regarding

Stock, Physical Share And Registration Process.

Office- Assistance

Office Assistant includes the peons and persons concerned with dispatch work, pantry

work, cleansing activities and other miscellaneous activities.

Work Profile of Office Assistance Division

It includes:

Daily Courier Dispatch, Daily Courier Receive, Cheque Deposit, Payment Cheque-giving

to Clients, Handle Reception Area, Attend walk-in Clients and Incoming Calls,

Cleaning–All Office, Office - Outside Work, ONGC Visit and Collection, Ledger, Stock

detail and Bills Printing/Distribution.




Chirag share is authorized by “Sushil Finance”, for the development of Franchisee into

“South Gujarat”. One can become Franchisee partner in 3 ways:

Channel Partners- having their own office, assets etc

Introducing Partners

Standing Partners- sharing the office and assets of CSSPL

One can own a franchisee and become a partner by paying Rs. 75000/- for a single cash

segment, and Rs. 1,50,000/- for all the segments including NSE Cash, BSE Cash and NSE

F&O, and some processing and renewals charges. All one needs to be a franchisee is a

certification of NCFM CAPITAL MARKET DEALER’s MODULE from NCFM for NSE Cash

Segment and NSE Equity Derivatives Dealer’s Module.

Marketing and Customer Care

This including handling customer (client) queries, telecalling to clients in case of

inactive demat or trading account etc. It also includes marketing & allied activities like

tele-calling clients, sms services, emailing, contacting clients on their time and at their

place etc.

Work Profile of Customer Care Division

It includes:

Tele – Calling for Client Reactivation, Handle Online Trading, Daily SMS Service, Daily E-

mail Service, Site Updation, Tele – Calling for new Registration, Client Care.

3.2.8 Human Resource Management



The company, CSSPL, runs with a staff of 30 people located at 2 different branches:

One at Tirupati Plaza, Athwagate and the other at Mahidharpura.

The company’s HR Policy is as follows:

Employment

The Company offers a wide range of jobs in support of the Organization. Employees

work in their respective departments; schedules vary according to the needs of the

department and requirements of the position.

Hiring Process

Appointments are made by letter from the Human Resources Office upon the

recommendation of the head of the hiring department.

All new employees must have a completed, signed application on file.

All new employees must complete an employee data record to indicate acceptance

of the position and the Employment Eligibility Verification before they begin doing

work for the Organization.

Employment will be confirmed subject to submission of duplicate copies of ID Proof,

Address Proof, Educational documents, Experience certificate, Medical Clearance and

other necessary documents.

In order to ensure benefit eligibility, new employees must make an appointment

with the Coordinator in the Human Resource department to review benefits and

complete all appropriate applications within 30 days of the date of hire.

It is the employee's responsibility to make certain they have properly filled out,

signed and returned to the Human Resources Office all necessary paperwork, on time.

Employees transferring from one department to other department will have to make

necessary changes of Human Resource Department documentations to ensure changes

of his benefits.

Probation Period



The probation period is the length of time given to employee to learn about the job.

Employee will be required to serve on a probationary period of 3 month from the date

of joining of the company, after which their service will be confirmed subject to

satisfactory performance. The probationary period may be extended or shortened at

the absolute discretion of the company. The organization however reserves the right to

extend the probationary period by further three months. During the probationary

period, the appointment may be terminated by either party giving 10 days notice in

writing to organization or on payment of 10 days salary in lieu of notice. If however

employee performance is found unsatisfactory during the probation period, they can be

terminated by the organization, any time during or on expiry of said period.

During this period, concerned senior will typically review employees’ performance on

completion of probation period. During first three months of employment, employee is

not eligible for sick or vacation pay, and they will not be granted a leave of absence.

Leave/Holidays

Employees are entitled to get weekly off and gazetted holidays observed by the

organization in a Calendar year. Employee will get 10 leaves during the whole year.

Employee will inform in two days before, by Leave Application form in writing for

getting leave. Balanced leaves would be encashed in salary at the end of calendar year.

Termination Period

In case of Permanent job, employees have the right to terminate their employment at

any time, for any reason with 30 days notice period but Organization can also terminate

the employment with 30 days notice period, but in case of misconducts done by

employees, company can terminate employee with cause and without notice, and they

will be relieved subject to This Handbook does not constitute a contract between the

Organization and the employee. All policy statements, procedures, manuals or

documents as well as statements by an employee or representative shall not in any way

modify this at will status.



Break In Service

If employee terminates prior to one year of regular employment, no service will be

credited.

If they return to regular employment at a later date, prior service will be credited if they

return to regular employment within one calendar year of the prior date of termination.

Personal Life

Every person owns his or her private life. The firm respects employees’ personal life

and problems but they have to ensure that they do not spend unreasonable time in

carrying out activities of purely personal matter. Firm will try to extend all possible

assistance in case of personal exigency. Please do not hesitate to approach concerned

head. Employee welfare is of firm’s concern.

Regular Working Hours

The normal hours of work for offices are 09:00 a.m. to 06:00 p.m.; however, there are

some departments whose work day may begin end at different timings. All offices are

expected to be staffed during office hours.

The normal work schedule is 9-hour day and a half an hour for lunch. Employees may

be required to work beyond their regular schedules, depending upon the needs of their

department.

A 15-minute rest period or coffee break is allowed to administrative employees in the

morning. There must be adequate coverage of the phones and the office at break times.

Overtime



In the organization no over time is encouraged. If at all it required overtime work must

have the prior approval of concerned senior.

Employee will be paid for any hours worked beyond their normal workweek schedule

up to 25 hours at their normal hourly rate. If they work beyond 25 hours, they will be

paid at time and one-half their regular hourly rate.

If employees are required to work on one of the organization’s scheduled holidays and

because of departmental needs they are not given a different day off within the same

workweek. They will be paid straight time for hours worked on the holiday in addition

to pay or will be offered comp off leave.

Performance Appraisal

Performance appraisal is carried out in the month of January each year. Terms and

Conditions of Performance Appraisal change as per market conditions. Appraisal

Reward would be carried out quarterly. A reward for extra ordinary performance by

any employee would be subject to management decisions or non monetary rewards.

Pay

The pay scale is based on a fixed pay plus a commission of a fixed percentage if the

results achieved exceeds the targets set for.

Thus,

Salary = Fixed Salary + A Variable, Commission-Based Pay.

3.2.9 Marketing Management



The goal of marketing function of the firm is:

new demat and trading accounts opening,

making new clients,

retaining the old ones,

trading and dealing in different financial instruments,

increasing volumes and trades per client,

increasing the number of clients

franchisee development,

selling online trading software to clients, requiring a one life time deposit of Rs. 500.

cross selling. For e.g. A Equity Dealer selling LIC Insurance or Mutual Funds and

Vice-Versa.

The following activities are performed in the area of marketing:

handling customer (client) queries,

Tele – Calling for Client Reactivation,

Handle Online Trading,

Daily SMS Service,

Daily E-mail Service,

Site Updation,

Tele – Calling for new Registration,

Client Care.

To achieve these goals the following tools are used by the firm:

Telecalling clients in case of inactive demat or trading account etc.

Telecalling clients and insist them to trade in lucrative stocks and ventures.

Telecalling to unknown client database to open up their demat and trading account

with the firm, taking their appointments, making them understand the schemes of

account opening and other policies,

Insisting clients to deal in other instruments like LIC Insurance, Mutual Funds

through core selling as well as cross selling,



Using Mobile SMS technology to reach a number of clients and people,

Using Email Internet Technology to reach a number of clients and people.

Using Newspaper & Television as a medium of adverts of the firm & its services.

Using the Word Of Mouth channel and Personal Selling to reach, attract and make

customers, the two most important tools in this field.

Meeting personally, HNI clients & guiding & directing them towards lucrative

investments.

Meeting Individuals interested in owning a franchisee or interested in becoming a

channel partner.

Insisting existing Clients to access at home online trading through net Trading

Platform, Savashare Online Trading.

Service (Product) Mix of Chirag Investments

The 7 P’s of Chirag Investments are as follows:

1. Product

The Product (services) offered by Chirag share are Depository Services, Demat and

Trading Account opening, LAS, MF, Equity-Commodity-Currency-Bullion trading,

Research Products, PMS, etc.

2. Place

The services refer to the distribution network. Since it is a service firm the distribution

and discharge of the services is done by following modes:

At the firm in the dealing room, on phones / mobiles, SMS mobile technology, Email

Internet Technology, Online Trading etc.



3. Price

The price charged by the company is on cost plus basis. Demat and brokerage charges

charged are as follows:

Brokerage Charges





Demat and Trading Charges

Account

Details

Investor Economy Classical

One-time payment Rs 100 + taxes

& notary charge

Rs 250 + taxes

& notary charge

Rs 999 plus taxes

& notary charges

Charge on Mkt trading Rs. 25 min or 4% Rs.15 min or 4% Nil

(Table 3.5- Demat and Trading Charges)

4. Promotion

To reach the masses the company uses the following tools to promote its product and

services:

Interactive Media (via Websites, Emails), SMS Technology, Personal Selling, Word Of

Mouth Channel, Seminars.

5. People

CSSPL has a dedicated-qualified-competent staff of 30 personnels who are always ready

to serve the customers in the best manner, solve their queries with minimum

processing time, make them feel happy and have fruitful experiences while dealing with

the firm.



6. Processes

The process of the company is simplified involving minimum steps of a procedure to be

followed by a client to become a part and parcel of the firm. For a novice, one first

enters either the front office or the back office, asks for the demat and/or trading

account opening, understands the different schemes, selects the scheme, deposits

necessary proofs and within a week gets his account opened. After the account opens he

can trade in many ways:

Internet trading from dealing room, Offline trading via Phones, Mobiles, SMS,

Emails, Messengers, At Home Online Trading through Net trading platform

After the trade takes place the client receives the trade confirmation via email as well as

sms along with the net debit credit balance. If the net balance is debit he receives a sms

as well as phone call from the firm, and deposits the balance amount within 6 trading

days. If he can’t do so, his position will be squared off on the 7th day following the day

when trade was executed.

7. Physical Evidence

The physical evidence is proved as there is presence of Place (CSSPL, Athwagate, Surat)

People (Employees), Equipment (Computers, Printers, Scanners), Communication

(Telephones, Mobiles, SMS, Emails, Internet, Fax), Material (Contract Notes, Print Outs

of Research Products), Symbols and Price.



3.2.10 Production Management

A number of services are produced and delivered on a day-to-day basis. The services

include:

Depository Services, Dispatch and Distribution Services, Dealing Services, Contract

Printing and Emailing and Messaging Services, PMS, Advisory Services etc. Services are

delivered spontaneously as soon as customer requests.

3.2.11 Finance Management

Since in this firm Finance section is kept under back-office division, Finance

Management is done from this division.

The finance management includes risk management system, pay-in and pay-out system,

LAS/MF, accounting and ledger posting, trade confirmations and balance tallying,

managing share and fund transfers, managing short sale and auctions of clients etc. The

entire topic is covered previously under the back office topic.



3.2.12 Current Status Of The Firm And Its Working

The company currently added Insurance to its portfolio of services by tying up with

LIC.

The company also started a new activity as a part of creating eco-friendly

environment. Previously it used to provide trade confirmation in physical form via

printed contract notes. Now it has decided to go paperless by providing ECN i.e.

Electronic Contract Notes to all the clients which will include their trade details for that

date. For this the company asks for email IDs of clients and those clients who didn’t

have email IDs or who do not have an access to PC or internet at their residence, email

IDs are created by the firm so that the clients can access their trade reports at CSSPL,

after the market hours. The company also provides trade confirmation and balance via

SMS.

Due to changes in NSE-BSE timings in 2009 the office now stars at 8.00 A.M. Since

the firm also runs commodity dealing terminal, the office runs late till midnight.

Brokerage Schemes





Demat and Trading Account Schemes

Account

Details

Investor Economy Classical

One-time payment Rs 100 + taxes

& notary charge

Rs 250 + taxes

& notary charge

Rs 999 plus taxes

& notary charges

Charge on Mkt trading Rs. 25 min or 4% Rs.15 min or 4% Nil

(Table 3.7- Demat and Trading Charges)



Account Opening Schemes

New Accounts can be opened up of following types: Individual, Currency, Commodity,

Demat, LAS, Partnership, Corporate, HUF, NRI, PMS.

Opening any kind of account requires some basic common documents and proofs like

identity card, PAN card, Permanent Address proof, original but cancelled cheque,

signature verification, passbook bank transaction details not older than 4 months etc.

All the documents must be true copies and they must be self attested.

Some different documents are also required for different type of accounts. Like:

In case of individual account nomination is required if it is not a joint account.

NRI account opening requires NRI address proof as well Indian residence address

proof, RBI approval, foreign bank transaction details.

Partnership account requires partnership deed, PAN card of all the partners. Demat

will be individualized for each partner, whereas trading will be centralized in the name

of partners’ firm.

Joint stock companies are required to give a board resolution, accounts statements of

corporate not older than 2 years, MOA-AOA, to open up account. In addition corporate

accounts are required to pay Rs. 500 p.a, as an additional charge, not applicable to any

other type of accounts.

HUF requires HUF pan card and details

PMS account requires a minimum investment of Rs. 10 lacs. The client has the option

of selecting one of the two plans and is charged on the following basis:

Plan 1: Variable fee Plan

Plan 2: Fixed Fee Plan

Fixed Management Fees 2.5% p.a. irrespective of profit or loss

Loan Against Shares (LAS) v/s Margin Funding (MF)


Fixed Management Fees 1.5% p.a.

Performance Fees 15% sharing above 12% hurdle rate


Though sounding similar and aiming at fulfilling customer’s financial requirements

there is a wide difference between LAS and MF.

LAS, is a Sushil finance’s standardized form while MF is Chirag Investments

personalized form.

For LAS a special type of account is required to be opened up with Sushil / Chirag,

whereas Margin funding can be availed on an existing account.

The amount provided by LAS and MF differ widely because LAS is based on Sushil’s

standardized formulas and calculations whereas MF is based on Chirag’s personalized

formulas and calculations.

For e.g. If a investor has an investment in shares amounting to Rs. 1 lac, then under LAS

first it will be observed that what amount of total stock is invested in BSE A Group

companies. Suppose it amounts to Rs. 50,000. Than after deducting 25% for

adjustments and multiplying it by 2, the resultant is the amount of LAS will be,

(100000-50000) * (1-.025) * 2 = Rs 75,000

Now if the same investors avails facility of MF then the amount of MF will be jus double

of liquid money.

1,00,000 * 2 = Rs 2,00,000

The amount of LAS is provided by Sushil Finance whereas the amount of MF is

provided by CCSPL from their personal equity/debt.

The period for which these two are given also differs. LAS can last long till the client’s

account is active, whereas MF is given for 21 days and after that period one has to

square off his position by repaying the debt.

On both; LAS as well as MF 17-18% yearly interest is charged.

4. Review Of Literature



Apte (2001) investigated the relationship between the volatility of the stock market and

the nominal exchange rate of India by using the EGARCH specifications on the daily

closing USD/INR exchange rate, BSE 30 (Sensex) and NIFTY-50 over the period 1991 to

2000. The study suggests that there appears to be a spillover from the foreign exchange

market to the stock market but not the reverse.

Bhattacharya and Mukharjee (2002) studied the nature of causal relation between the

stock market, exchange rate, foreign exchange reserves and value of trade balance in

India from 1990 to 2001 by applying the co-integration and long-run Granger Non-

causality tests. The study suggests that there is no causal linkage between stock prices

and the three variables under consideration.

To examine the dynamic linkages between the foreign exchange and stock markets for

India, Nath and Samanta (2003) employed the Granger causality test on daily data

during the period March 1993 to December 2002. The empirical findings of the study

suggest that these two markets did not have any causal relationship. When the study

extended its analysis to verify if liberalization in both the markets brought them

together, it found no significant causal relationship between the exchange rate and

stock price movements, except for the years 1993, 2001 and 2002 during when a

unidirectional causal influence from stock index return to return in forex market is

detected and a very mild causal influence in the reverse direction is found in some

years such as 1997 and 2002.

Yamini Karmarkar and G Kawadia tried to investigate the relationship between RS/$

exchange rate and Indian stock markets. Five composite indices and five sectoral

indices were studied over the period of one year: 2000. the results indicated that

exchange rate has high correlation with the movement of stock markets

5. Research Methodology



“Research is systematic, gathering, reporting and analyzing of data about problems

relating with the marketing of goods and services and implementing it to overcome the

problem.” Business research is a systematic inquiry that gives information to take

business decisions.

Research helps to gather information for solving problems. Research gives an idea to

solve the problem of consumers and their satisfaction.

5.1 Problem Statement

In the last two decades, globalization, inter-linkages of the capital markets, gradual

eradication of capital inflow barriers and the implementation of more flexible exchange

rate mechanism in developed as well as transition economies, created a systematic

interdependency between and within the stock markets and foreign exchange markets.

The individual have very vague idea about such relationship between two markets.

Thus, investigating the relationship between stock index and exchange rates has

received unprecedented attention in the literature. A number of studies have

empirically examined the relationship between the stock and foreign exchange markets.

Theory says that exchange rates should have a direct impact on the companies with

heavy import or export activities and thus affecting the profitability and hence the stock

prices. An exchange rate has two effects on stock prices, a direct effect through Multi

National Firms and an indirect effect through domestic firms.

This study explores the evidence of relationship between exchange rates and Nifty-50

Index. If we view the recent trends in currency prices (USDINR) and NSE NIFTY-50

Index, we can figure out there exists some kind of cause-effect relationship between

Nifty-50 Index and USDINR. Some intervening variables act as an intervener between

these two thus leading to cause and effect relationship between these two. Thus the

problem statement is. “A Study Of Relation Between NIFTY-50 INDEX and Currency

(USDINR)”

5.2 Research Questions



When the above given problem is broken down into number of questions we get

research questions. The basic research questions for the research problem are:

What is Currency Trading?

What is the trading mechanism of currency trading?

Which currencies are traded on forex exchange?

What is the use of currency hedging?

What is the impact of price movements in currency on stock markets?

5.3 Research Objectives

The prima-facie objectives of this research project are:

To study the working, departmentalization and different areas of the firm where I

pursued my summer training.

To study hedging in currency trading.

To determine the correlation between NIFTY 50 INDEX and Currency (USD

INR- Dollar in terms of rupees). If we view the recent trends in currency prices

(USDINR), we can figure out there exists some kind of cause-effect relationship

between Nifty-50 Index and USDINR. Some intervening variables act as a

intervener between these two thus leading to cause and effect relationship

between these two.

To study currency trading in relation to currency futures.

To know the growth of currency markets, the trading value and number of contracts

in currency futures in past two years.

To find out the trend of price movement in the different currencies in terms of

Indian Rupees.

5.4 List Of Information Needed



Volume and trades of different currencies.

Currency (USDINR – US Dollar in Indian Rupees) v/s Nifty rates.

Prices of Different Currencies in terms of Indian Rupees.

Market Share of different exchanges in different currencies.

5.5 Variables

The variables considered under study are:

Closing Prices (Daily, Monthly)

Trades

Volumes

Percentage Share

Market Share

5.6 Hypotheses

The hypotheses here are made, based on the assumption that the current trends in the

currency markets have a considerable impact on the movement in Nifty 50 Index prices,

through some intervening variables.

Ho: There is no significant relationship between the Nifty-50 Index and Currency (USD-

INR i.e. US Dollar in Indian Rupee terms)

H1: There is a significant relationship between the Nifty-50 Index and Cross Currency

Pair (USD-INR i.e. US Dollar in Indian Rupee terms)

Research Design



Causal Research

For this research a descriptive research will be conducted to answer: who, where,

when, what and how of a phenomenon. After this the Causal Research will be conducted

to establish relationship between the two variables: X= (Currency Prices) & Y= (Nifty

– 50 Index Prices), to find out whether there exists a true relationship between this

two variables and the extent of positive or negative correlation-ship & the reasons for

it.

5.7 Data Collection

Primary Data

Primary Data are those data that are collected by the researcher for the first time for his

research purpose or objectives. This report includes primary data, collected through

observation and personal interviewing, for company profile.

Secondary Data

Secondary Data are the data which are already collected by someone else for one’s own

purpose. When we use such primary data collected by someone else for one’s own

purpose and objectives it becomes secondary data. For this research project the

Secondary Data are collected through magazines, journals, articles and earlier

reports. Secondary Data are also collected from different Websites and Capital

Market Softwares. Secondary data were also collected from various books, report

submitted by RBI/SEBI committee and NCFM/BCFM modules.

5.8 Sampling Plan

The sampling done here is based on judgmental sampling.

Period: The Monthly Closing Prices data of Nifty and USD-INR are form 2001-2011

(138 months)

5.9 Measurement



Measurement is the process of assigning the numbers or symbols to the characteristics

of an object according to some standard-pre-specified rules. The data measured here is

nominal in nature.

5.10 Data Analysis Plan

Data will be analyzed using SPSS (Statistical Package for Social Sciences) package v

17.0 by IBM. The data analysis tool applied here is Karl Pearson’s Correlation

Coefficient

Correlation is a statistical relation between two or more variables such that

systematic changes in the value of one variable are accompanied by systematic

changes in the other.

Correlation is (statistics) a statistic representing how closely two variables co-

vary; it can vary from -1 (perfect negative correlation) through 0 (no correlation)

to +1 (perfect positive correlation).

In statistics, correlation indicates the strength and direction of a linear relationship

between two random variables.

The quantity r, called the linear correlation coefficient, measures the strength and the

direction of a linear relationship between two variables. The linear correlation

coefficient is sometimes referred to as the Pearson product moment correlation

coefficient in honor of its developer Karl Pearson.

The mathematical formula for computing r is:


http://en.wikipedia.org/wiki/Random_variables

http://en.wikipedia.org/wiki/Statistics


Where n is the number of pairs of data.

The value of r is such that -1 < r < +1. The + and – signs are used for positive linear

correlations and negative linear correlations, respectively.

Positive correlation: If x and y have a strong positive linear correlation, r is close to

+1. An r value of exactly +1 indicates a perfect positive fit. Positive values indicate a

relationship between x and y variables such that as values for x increases, values for y

also increase.

Negative correlation: If x and y have a strong negative linear correlation, r is close to

-1. An r value of exactly -1 indicates a perfect negative fit. Negative values indicate a

relationship between x and y such that as values for x increase, values for y decrease.

No correlation: If there is no linear correlation or a weak linear correlation, r is close

to 0. A value near zero means that there is a random, nonlinear relationship between

the two variables

Scope of the study

The study includes only one currency pair i.e. INR/USD for the representation of the

forex market while the NIFTY -50 Index, the major stock exchange market of India are

covered. Thus the relation and effects of other currencies is out of the preview of the

research.



5.11 Limitations Of The Study

Time & Money & Energy are a scarce resource & hence major constraints.

Study is limited to currency trading and hedging in currency trading, to currency

exchange and factors deciding currency fluctuations.

Owing to the dynamic nature of the global economy in particular, the findings of the

report will not be applicable after a point of time.

The analysis is purely based on the secondary data. So, any error in the secondary

data might also affect the study undertaken.

The study is limited to period of 11 years.

Only one pair of USD/INR is used and NIFTY 50 Index is taken as a representative of

NSE NIFTY 50 Scrips.

5.12 Benefits Of The Study

The study will be useful to the company, CSSPL, to the clients who are totally ignorant

or unaware of currency trading or have a little knowledge of currency trading.

Furthermore this research study can be taken as a base for research studies which can

be extended from the point at which this research study concluded. The benefits are:

This study will help the company to explain its clients about the currency

trading, its benefits and uses.

It will help us to assess the impact of currency prices on stock markets.

The determination of relationship between the foreign exchange market and

stock market will help to increase their understanding about these markets.

It would also provide a platform for participants to enhance their views about

the relationship between the two markets.



6. Theoretical Framework

6.1 Introduction To Currency Futures

A 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”.

Currency futures contract

In other words, it is a contract to exchange one currency for another currency at a

specified date and a specified rate in the future.

Therefore, the buyer and the seller lock themselves into an exchange rate for a specific

value or delivery date. Both parties must fulfil 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.

6.2 Importance of Currency Futures

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 or 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 & at price specified in the contract.

6.3 Currencies Traded In The Indian Forex Market

The following four currency futures are allowed on the Indian exchanges.

Symbol

Country Currency Nickname

USD United States Dollar Geenback

EUR Euro members Euro Fiber

JYP Japan Yen Yen

GBP Great Britain Pound Cable

(Table 6.1- Currencies Traded in the Indian Forex Market)

India is 16th largest forex market in the world. The daily global FX turnover is USD

4 Trillion.

Market Share in World FX Market has increased from 0.1% (in 1998) to 0.9%

(2009)

Daily FX Indian Market volume is $50 bn

59% of the total market USD – INR

Daily Currency Futures Turnover – Rs 32000 Crs. (NSE + MCX –SX)

Main trading centers are Chicago, London, NY, Tokyo, Singapore & now Mumbai

USD-INR volatility has seen an average increase of over 9% p.a.

Available FX Derivatives: Futures, Options & Swaps

6.4 Fundamental Features of Currency Futures

• It is a standardized foreign exchange derivative contract.

• Here the underlying asset is the exchange rate

• Price and date of delivery are predetermined

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



• The currency future can have maximum validity of 12 months

• The currency futures contract can be settled in cash.

• Traded in limited number of currencies – USD, GBP. EUR, JPY

• Here the contract size is $1000

• Only resident Indians are allowed to trade in currency futures

• Future Price = Spot Price + Cost of Carry

• Contract Cycle is of 3 months while Active Contract is for 3 nearest months

• Every Settlement takes place through cash. Thus it is a cash based settlement

• Expiry day is the last Thursday of every month

• Maturity of the contract shall not exceed 12 months

6.5 Benefits Of Currency Futures

Greater accessibility to potential participants (Online / Offline platforms).

Standardized Contracts, small lot size – US$ 1,000 encourages retail and SME

participation.

Electronic Settlement of MTM Profits / Losses: Control and track losses.

No counterparty default risk.

Large number of market participants.

High Transparency – Real time dissemination of prices.

No requirement of underlying document to book the FCY.

Cost efficient: Low brokerage thus lower transaction cost.

Intraday volatility (43 Bps): Short term profits for the traders.

Lower margins: 3- 3.5% of the contract value compared to average of 10- 15% on

index/stock futures.

Payoff is simple

No Import – Export Documents required

Efficient price discovery due to high liquidity

Access through internet from remote locations



6.6 Currency Futures Terminology

Spot Price

The price at which an asset trades in the spot market is the Spot Price. It is also the

rate at which, the transaction in which securities and foreign exchange get traded for

immediate delivery. Since the exchange of securities and cash is virtually immediate,

the term, cash market, has also been used to refer to spot dealing. In the case of

USD/INR, spot value is T + 2.

Future Price:

The price at which the future contract traded in the future market is the Future Price.

Contract Cycle

The period over which a contract trades is a Contract Cycle. The currency future

contracts in Indian market have 1 month, 2 months and 3 months up to 12 months

expiry cycles. NSE/BSE will have 12 contracts outstanding at any given point of time.

Value Date / Final Settlement 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.

Basis

Basis refers to difference between the spot rate & the future contract price



Contract Size

The amount of asset that has to be delivered under one contract, also called as lot size.

In case of USD/INR it is USD 1000.

Cost Of Carrying

The relationship between futures prices and spot prices can be summarized in terms of

what is known as the cost of carry. This measures the storage cost plus the interest

that is paid to finance or ‘carry’ the asset till delivery less the income earned on the

asset. For equity derivatives carry cost is the rate of interest.

Initial Margin

When the position is opened, the member has to deposit the margin with the clearing

house as per the rate fixed by the exchange which may vary asset to asset. Or in

another words, the amount that must be deposited in the margin account at the time a

future contract is first entered into is known as initial margin.

Marking To Market

At the end of trading session, all the outstanding contracts are reprised at the

settlement price of that session. It means that all the futures contracts are daily settled,

and profit and loss is determined on each transaction. This procedure, called marking

to market, requires that funds charge every day. The funds are added or subtracted

from a mandatory margin (initial margin) that traders are required to maintain the

balance in the account. Due to this adjustment, futures contract is also called as daily

reconnected forwards.

Long Position & Short Position

Taking a long position in currency futures means a trader will “buy” a futures contract

with the expectation that the price will rise in the future.

On the other hand, taking a short position means the trader will “sell” a futures

contract with the expectation that the price will decrease in the future.



Maintenance Margin

Members’ account are debited or credited on a daily basis. In turn customers’ account

are also required to be maintained at a certain level, usually about 75% of the initial

margin, is called the maintenance margin a somewhat lower than the initial margin.

This is set to ensure that the balance in the margin account never becomes negative. If

the balance in the margin account falls below the maintenance margin, the investor

receives a margin call and is expected to top up the margin account to the initial margin

level before trading commences on the next day.

Tick Size/Pip & Tick Value

Tick Size is the minimum tradable price movement that an exchange makes in a

currency pair. For example, 1 pip=one hundredth of 1%=0.0001.

Tick value is the change in value of 1 lot of the future contract for every tick movement.

For example; if a trader takes long position in 1lot of USD/INR currency future contract

at 48.5020 & if future price increased by 1 paisa to 48.5125, then the trader would

make a profit of Rs 10 i.e. 1 pip = 0.0001 100pips = INR0.01 per USD Hence profit is

0.01*1000 = INR 10

Bid Price & Ask Price

The Bid price is the highest or the best among all prices that the buyers are willing to

pay to the seller at that particular period of time.

The Ask price is the price at which seller at the exchange are ready to sell their

currency to the buyers.

Base Currency & Quote Currency

The first currency in the currency pair is referred to as the base currency & the second

currency in a currency pair is called the quote currency. In USD/INR currency pair

USD- Base currency & INR-Quote currency.



Foreign Exchange Quotations

Foreign exchange quotations can be confusing because currencies are quoted in terms

of other currencies. It means exchange rate is relatively priced. In currency markets,

the rates are generally quoted in terms of USD. The price of a currency in terms of

another currency is called ‘quote’. A quote where USD is the base currency is referred to

as a ‘direct quote’ (e.g. 1 USD – INR 48.5000) while a quote where USD is referred to as

the terms currency is an ‘indirect quote’ (e.g. 1 INR = 0.021 USD).

USD is the most widely traded currency and is often used as the vehicle currency. Use of

vehicle currency helps the market in reduction in number of quotes at any point of time,

since exchange rate between any two currencies can be determined through the USD

quote for those currencies. This is possible since a quote for any currency against the

USD is readily available. Any quote not against the USD is referred to as ‘cross’ since the

rate is calculated via the USD.

For example,

The cross quote for EUR-GBP can be arrived through EUR-USD quote * USD-GBP quote

(i.e. 1.406 * 0.606 = 0.852). Therefore, availability of USD quote for all currencies can

help in determining the exchange rate for any pair of currency by using the cross-rate.

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.

Direct- $1 = Rs. 45.7250 Indirect. Re 1 = $ 0.02187

(Source: - NCFM-Currency future Module)



Dollar Costing

Per Dollar Per Dollar Buy Value Sell ValueNote: Maximum Allowed Is 10 Million Dollars For Client As Of Now

Buy Quote

Sell Quote 20000

Current Exchange Rate 50 50 1000000 1000000Brokerage (Indicative Approximate)

0.03 0.03 600 600

Service Tax (10.3% Of Brokerage) 0.0031 0.0031 61.8 61.8

Stamp Duty ( Re. 2 Per Lakh) 0.0005 0.0005 20 20

Transaction Charge ( As Of Now Not Charged)

0 0 0 0

Sebi Charges (Rs 20 Per Crore) 0.0001 0.0001 2 2

Totalcost Per Dollar / Transacation Cost

0.0337 0.0337 683.8 683.8

Total Cost Per Dollar 50.0337 49.9663

(Table 6.2- Dollar Costing)

6.7 Uses Of Currency Futures



Hedging

First of all what actually Hedging is?

Hedging means taking a position in the future market that is opposite to a position in

the physical market with a view to reduce or limit risk associated with unpredictable

changes in exchange rate. Hedging means to try to keep the profit intact or

minimizing the losses by reducing or controlling risk. This is done by taking a

position in futures market that is opposite to one in the physical market with the aim of

keeping the profit intact or reducing or limiting risks associated with price changes.

Hedging is a two-step process. A gain or loss in the cash position due to changes in

price levels will be countered by changes in the value of a futures position. For

instance, a wheat farmer can sell wheat futures to protect the value of his crop prior to

harvest. If there is a fall in price, the loss in the cash market position will be countered

by a gain in futures position.

A hedger has an Overall Portfolio (OP) composed of (at least) 2 positions:

1. Underlying position

2. Hedging position with negative correlation with underlying position

Value of OP = Underlying position + Hedging position; and in case of a Perfect

hedge, the Value of the OP is insensitive to exchange rate (FX) changes.

Why to hedge our currency risk?

Currency movements have become more volatile and difficult to predict.

Business needs to protect its profit margins.

To help arrive at a selling price for exports.

To protect import purchase cost.

To protect export sales revenue.

Who can Hedge Currency?



Importers, Exporters, Banks, Foreign currency authorized dealers, Corporates with

exposure to foreign currency, Resident Indians

Exchange-traded currency futures are used to hedge against the risk of rate volatilities

in the foreign exchange markets. Let us understand a case study taking two examples

to illustrate the concept and mechanism of hedging:

Suppose an exporter wants to export his worth USD 20,000 and exports the goods on

1st June, 2011, with the collection date being 3 months ahead. His main objective is to

keep his profit intact and minimize any loss arising out of uncertainty in currency rates.

At the time when the trade is placed, in the spot market, 1 USD was worth say INR 50.

Receipt : $ 20000 SPOT MARKETUSD / INR

FUTURE SeptemberUSD / INR

1st Jun 2011 50 51Qty Of Exports 2000 2000Cost In Usd $10 Per Piece $10 Per Piece Value Of Exports 1000000 1020000

(10 X 2000 X 50) STRATEGY:SELL 20000 US DOLLARS

Case I – Rupee Weak RBI Spot Rate – Sep 11 50.5 51.5Value Received / Paid 10,10,000 (51.50 - 51 * 20,000)Forex Loss / Profit 10000 -10000 Case II– Rupee Strong 49.5 50.5Value Received / Paid 990000 (51 – 50.5 * 20,000)Forex Loss / Profit -10000 10000

(Table 6.3- Hedging Hypothetical Case Study)



Case - I Rupee Weak

Now under case – I the hedging strategy for the importer would be to SELL 20000 US

DOLLARS in future market at CMP INR 51 per USD. Now if the Indian Rupee

depreciates to INR 51.5 per USD when the collection is due in September 2011, the

value of the collection for the exporter goes up to INR 10,10,000 rather than INR

10,00,000 thus accruing a profit of INR 10000 (Collection Amount 10,10,000-Sell

Amount 10,00,000) whereas the contract would expire at a higher price thus indicating

a loss of INR 10,000 (Sell 20000*51 – Purchase 20000*51.5).

So net position after both the transactions is: Net Profit 10000- Net Loss 10000= 0

Thus the net position is 0.

Similarly, when under Case – II Rupee Strong, the hedger will have profit in future

transaction and loss in sales transaction, thus having no profit no loss situation.

SPECULATION:

Take the case of a speculator who has a view on the direction of the market. He would

like to trade based on this view. He expects that the USD/INR rate presently at Rs.42, is

to go up in the next two-three months. How can he trade based on this belief? In case

he can buy dollars and hold it, by investing the necessary capital, he can profit if say the

Rupee depreciates to Rs.42.50. Assuming he buys USD 10000, it would require an

investment of Rs.4,20,000. If the exchange rate moves as he expected in the next three

months, then he shall make a profit of around Rs.5000. This works out to an annual

return of around 4.76%. It may please be noted that the cost of funds invested is not

considered in computing this return.

A speculator can take exactly the same position on the exchange rate by using futures

contracts. Let us see how this works. If the INR/USD is Rs.42 and the three month

futures trade at Rs.42.40. The minimum contract size is USD 1000. Therefore the

speculator may buy 10 contracts. The exposure shall be the same as above USD 10000.

Presumably, the margin may be around Rs.21, 000. Three months later if the Rupee



depreciates to Rs. 42.50 against USD, (on the day of expiration of the contract), the

futures price shall converge to the spot price (Rs. 42.50) and he makes a profit of

Rs.1000 on an investment of Rs.21, 000. This works out to an annual return of 19 %.

Because of the leverage they provide, futures form an attractive option for speculators.

ARBITRAGE:

Arbitrage is the strategy of taking advantage of difference in price of the same or

similar product between two or more markets. That is, arbitrage is striking a

combination of matching deals that capitalize upon the imbalance, the profit being the

difference between the market prices..

One of the methods of arbitrage with regard to USD-INR could be a trading strategy

between forwards and futures market. As we discussed earlier, the futures price and

forward prices are arrived at using the principle of cost of carry. Such of those entities

who can trade both forwards and futures shall be able to identify any mis-pricing

between forwards and futures. If one of them is priced higher, the same shall be sold

while simultaneously buying the other which is priced lower. If the tenor of both the

contracts is same, since both forwards and futures shall be settled at the same RBI

reference rate, the transaction shall result in a risk less profit.

Well, the hedgers, arbitrageurs and the speculators constitute the major players in the

currency market.



6.8 Trading Process And Settlement Process

Like other future trading, the future currencies are also traded at organized exchanges.

The following diagram shows how operation take place on currency future market:

(Figure 6.1- Currency Futures Trading Mechanism in India)

It has been observed that in most futures markets, actual physical delivery of the

underlying assets is very rare and it hardly ranges from 1 percent to 5 percent. Most

often buyers and sellers offset their original position prior to delivery date by taking an

opposite positions. This is because most of futures contracts in different products are

predominantly speculative instruments.



6.11 Contract Specifications For Usd - Inr

Symbol USD/INR

Instrument Type FUTCUR

Unit of trading 1 (1 unit denotes 1000 USD)

Underlying USD

Quotation/Price Quote Rs. per USD

Tick size 0.25 paise or INR 0.0025

Trading hours Monday to Friday 9:00 a.m. to 5:00 p.m.

Contract trading cycle 12 month trading cycle.

Last trading dayTwo working days prior to the last business day of

the expiry month at 12 noon.

Final settlement day

Last working day (excluding Saturdays) of the expiry

month. The last working day will be the same as that

for Interbank Settlements in Mumbai.

Base priceTheoretical price on the 1st day of the contract. On all

other days, DSP of the contract.

Minimum initial margin 1.75% on first day & 1% thereafter.

Extreme loss margin 1% of MTM value of gross open position.

Settlement Daily settlement : T + 1 Final settlement : T + 2

Mode of settlement Cash settled in Indian Rupees

Daily settlement price (DSP)

DSP shall be calculated on the basis of the last half an

hour weighted average price of such contract or such

other price as may be decided by the relevant

authority from time to time.

Final settlement price (FSP) RBI reference rate

(Table 6.4- Contract Specifications for USD-INR)

(Source: - NCFM-Currency future Module)

6.12 Factors Affecting Exchange Rates



There are various factors affecting the exchange rate of a currency. They can be

classified as fundamental, technical, political and speculative factors.

Fundamental factors:

The fundamental factors are basic economic policies followed by the government in

relation to inflation, balance of payment position, unemployment, capacity utilization,

trends in import and export, etc. Normally, other things remaining constant the

currencies of the countries that follow sound economic policies will always be stronger.

Similarly, countries having balance of payment surplus will enjoy a favorable exchange

rate. Conversely, for countries facing BOP deficit, the exchange rate will be adverse.

Technical factors:

Interest rates: Rising interest rates in a country may lead to inflow of hot money in the

country, thereby raising demand for the domestic currency. This in turn causes

appreciation in the value of the domestic currency.

Inflation rate: High inflation rate in a country reduces the relative competitiveness of

the export sector of that country. Lower exports result in a reduction in demand of the

domestic currency and therefore the currency depreciates.

Exchange rate policy and Central Bank interventions: Exchange rate policy of the

country is the most important factor influencing determination of exchange rates. For

example, a country may decide to follow a fixed or flexible exchange rate regime, and

based on this, exchange rate movements may be less/more frequent. Further,

governments sometimes participate in foreign exchange market through its Central

bank in order to control the demand or supply of domestic currency.

Political factors:

Exchange rates are prone to political instability & can be volatile during political crises.

Speculation:

Speculative activities by traders worldwide also affect exchange rate movements. For

example, if speculators think that the currency of a country is over-valued and will

devalue in near future, they will pull out their money from that country resulting in

reduced demand for that currency and depreciating its value.



6.13 Net effect of Factors affecting USDINR which in turn

creates a positive or negative impact on NIFTY-50 INDEX

Factors: Appreciation of INR

Events likely to impact

USD/INR rate

General trend for

demand/supply of USD

Impact on USD

Impact on INR

Increase in exports of India

Excess inflow of USD in the country

Depreciates Appreciates

RBI is selling USD to meet demand for the dollar

Supply of USD increases


NRI Forex remittance is increasing

Increase in USD inflow


Positive trade balance

Increase in USD inflow


(Table 6.5- Factors in Appreciation of INR)

Factors: Depreciation of INR

Events likely to impact USD/INR rate

General trend for

demand/supply of USD

Impact on USD

Impact on INR

Increase in imports of India

Demand for USD increases

Appreciates Depreciates

Rise in global prices of commodities

Demand for USD rises due to costlier imports


FIIs buying back USD Excessive USD outflow


RBI is buying USD to absorb excess USD due to forex inflows

Absorption of excess USD liquidity


(Table 6.6- Factors in Depreciation of INR)



7. Data Analysis – I - Descriptive Statistics

Descriptive Statistics - Quantitative Data Analysis

7.1 The market share of different exchanges where currency futures contracts

are traded

Exchange

sPercentage Share

MCX-SX 48.87%

NSE 37.88%

USE 13.25%

(Table 7.1- % Market Share of Different Currency Exchanges)

(Figure 7.1- % Market Share of Different Currency Exchanges)

(Figure Source: http://www.mcx-sx.com/downloads/Factsheet.pdf )

Interpretation: Thus from the chart we can say that MCX-SX has a major share of

approx 49% as far as trading in currency futures is concerned, followed by NSE 38%

approx and USE 13% approx.



7.2 The growth of volume and open interest in currency derivatives in the last

year, i.e. from March-2010 to March-2011

(Figure 7.2- Currency Derivatives Open Interest v/s Volume)


Interpretation: Thus from chart we can interpret that the Open Interest increased

in the initial months of 2010, and then stabilized, whereas there were good deal of

fluctuations in Volume. Thus the currency market is growing in terms of volume.



7.3 The market share of each of the exchanges in the 4 different currencies

ExchangesPercentage Share

USDINR EURINR GBPINR YENINR

MCX-SX 51.01% 54.51% 51.97% 40.90%

NSE 34.83% 42.44% 43.42% 53.83%

USE 14.16% 3.06% 4.61% 5.27%

(Table 7.3- % Share of Different Exchanges in Different Currencies)

(Figure 7.3- % Share of Different Exchanges in Different Currencies)


Interpretation: The share of MCX is the highest in USD-Euro-GBP, traded in

the Indian Currency market, whereas in YEN NSE leads with the highest market

share. USE ranks 3rd in all the currencies traded.



7. 4 The Traded Value and Number of contracts on NSE Currency Future

Month Traded Value (Notional) in ten thousandsNo. of

Contracts

Apr-09 39385700 7,851,502

May-09 66431500 13,682,468

Jun-09 75362700 15,724,507

Jul-09 96522900 19,888,011

Aug-09 90395700 18,672,623

Sep-09 107788800 22,251,896

Oct-09 150843000 32,267,958

Nov-09 157554100 33,794,926

Dec-09 191414700 41,004,341

Jan-10 276741900 60,223,714

Feb-10 227633700 52,112,185

Mar-10 264241300 61,132,852

Apr-10 335908000 77,085,167

May-10 343851900 77,744,870

Jun-10 318776600 69,837,533

Jul-10 202884400 44,924,854

Aug-10 192922400 42,639,638

Sep-10 278344400 61,586,474

Oct-10 305,597,000 68,099,263

Nov-10 266,332,000 58,303,944

Dec-10 237,564,000 51,935,953

Jan-11 274,833,000 59,571,331

Feb-11 254,654,000 55,228,606

Mar-11 378,517,000 82,644,442

(Table 7.3- Traded Value v/s No. of Contracts on NSE Currency Future)

(Source: http://www.nseindia.com/content/us/fact2011_sec7.pdf)



(Figure 7.4- Traded Value v/s No. of Contracts on NSE Currency Future)

Interpretation: The trading value of currency futures has increased throughout

the period of 2 years with the trading value and number of contracts reaching its peak

in Mar-2011. We can say that the currency market is growing rapidly in India with the

trade value reaching its peak in March-2012.



7. 5 The trend of price movement in the different currencies

Year USDINR YENINR GBPINR EUROINR

31/12/200

0 43.53 43.00 70.39 43.78

31/12/200

1 46.69 41.00 69.73 43.99

31/12/200

2 48.34 37.00 70.37 43.12

31/12/200

3 48.12 41.00 77.54 50.53

31/12/200

4 45.69 43.00 81.60 57.49

31/12/200

5 43.47 42.00 83.41 58.98

31/12/200

6 45.19 38.00 77.91 53.52

31/12/200

7 44.12 37.00 86.44 58.25

31/12/200

8 39.42 35.00 78.72 57.96

31/12/200

9 48.30 55.00 70.34 70.07

31/12/201

0 46.90 50.00 73.72 67.39

(Table 7.4- Direct Quotes of All Currencies Traded on Yearly Basis)

(Source :-Data were provided by the firm from their software named, Spider Ace)



31/12/2000

31/12/2001

31/12/2002

31/12/2003

31/12/2004

31/12/2005

31/12/2006

31/12/2007

31/12/2008

31/12/2009

31/12/2010

0.005.00

10.0015.0020.0025.0030.0035.0040.0045.0050.0055.0060.0065.0070.0075.0080.0085.0090.0095.00

USDINRYENINRGBPINREUROINR

(Figure 7.5- Direct Quotes of All Currencies Traded)

Interpretation: In the last ten years, the Indian Rupee has depreciated against

USD-YEN-EURO-GBP. Indian Rupee is still week and has not recovered yet. For

importers it is a loss for exporters it’s a profit. Still Indian has not developed itself self-

reliant because it has to import many products from other countries.



8. Data Analysis – II

Inferential Statistics

8.1 Correlation Analysis

Data will be analyzed using SPSS (Statistical Package for Social Sciences) package v

17.0 by IBM. The data analysis tool applied here is Correlation.

Correlation is a statistical relation between two or more variables such that

systematic changes in the value of one variable are accompanied by systematic

changes in the other.

Correlation is (statistics) a statistic representing how closely two variables co-

vary; it can vary from -1 (perfect negative correlation) through 0 (no correlation)

to +1 (perfect positive correlation.

The method used here is Karl Pearson’s Correlation Test which is two-tailed. We will

find the correlation between USDINR and NIFTY-50 INDEX on the basis of their closing

monthly prices.

Here,

X = USDINR

Y= Nifty-50 Index

Since there is not any direct association between currency (USDINR) and Nifty-50

Index, the hypotheses are two-tailed, because there is an underlying assumption that

there exists a few or many intervening variables which leads to some kind of cause and

effect relationship between Currency and Nifty Index.



8.2 Monthly Closing Prices of NIFTY-50 INDEX and USDINR

(Source: Data were provided by the firm from their software named, Spider Ace)



8. 3 KARL PEARSON’s CORRELATION TESTCorrelations

USDINR NIFTY

USDINR Pearson Correlation 1 -.400**

Sig. (2-tailed) .000

N 138 138

NIFTY Pearson Correlation -.400** 1

Sig. (2-tailed) .000

N 138 138

**Correlation is significant at the 0.01 level (2-tailed)

(Table 8.2- Karl Pearson’s Correlation Coefficient)Interpretation: Thus a partial negative correlation exists between Currency

(USDINR- US Dollar in Indian Rupees) and NIFTY – 50 Index which means that if the

USDINR- US Dollar appreciates or in other words if Indian Rupee Depreciates, NIFTY 50

Index shows a downward movement, and if USDINR depreciates or Indian Rupee

appreciates, NIFTY 50 Index shows a upward movement because there exists a few

intervening variables which lead to cause and effect relationship between the two

variables.

The correlation is significant as the significance p-value is 0.000<0.10. We reject

the null hypothesis and accept the alternate hypothesis that there is a significant but

partial negative correlation between Nifty-50 Index and USDINR.

One of the reasons for Nifty Index to go up is investment made by Foreign Institutional

Investors (FIIs). Thus FIIs have to sell Dollar to buy Indian rupee.

More demand for Domestic currency and excessive supply of foreign currency

results in Appreciation of Domestic currency and thus rise in Nifty 50 Index.

8. 4 NIFTY-50 INDEX v/s USDINR Daily and Weekly Closing

Prices Comparison for this year



(Figure 8.1- NIFTY-50 Index v/s USDINR, Daily Closing Prices Comparison)

(Figure 8.2- NIFTY-50 Index v/s USDINR, Weekly Closing Prices Comparison)



Interpretation: If we closely visualize both the charts we can figure out that Nifty

Index and USDINR chart show exactly opposite price movements, i.e. both create a

mirror image of each other in most of the cases. The chart also reveals a clear negative

correlation between Nifty Index and USDINR.

Understanding Correlations

The table below represents the impact of increase or decrease in USDINR index on

currencies, Gold, NIFTY INDEX, COPPER and CRUDE OIL.

DOLLAR

INDEX

EURO

USD

USD

INR*GOLD

NIFTY

*COPPER CRUDE OIL

UP DOWN UP DOWN DOWN DOWN DOWN

DOWN UP DOWN UP UP UP UP

(Table 7.3- Understanding Correlation between Dollar Index and

Different Markets and Commodities)

Interpretation: Thus we can say that if INR appreciates, Nifty will also rise and if

INR depreciates, Nifty will tend to fall. Conversely, if USD appreciates Nifty will fall and

if USD depreciates, Nifty will rise, owing to some intervening variables which create a

cause-effect relationship between the two.



9. Research Findings and Conclusions

As the index is nothing but weighted average of the share prices of various companies

from different sectors, the Nifty-50 Index has been considered to see the impact of ER

on it. Nifty is considered to see whether it moves in the same direction or not.

The following are the research finding and conclusions:

USD, EURO, YEN and GBP are the currencies traded in Indian Forex Market.

Currency trading can be used for Hedging, Speculation and arbitrage.

As far as trading in currency futures is concerned, MCX-SX leads with 49% market

share followed by NSE 38% and USE 13%.

Open Interest increased in the initial months of 2010, and then stabilized, whereas

there were good deal of fluctuations in Volume round the year.

The share of MCX-SX is the highest in USD-Euro-GBP, traded in the Indian Currency

market, whereas in YEN NSE leads with the highest market share. USE ranks 3rd in

all the currencies traded.

The trading value of currency futures has increased throughout the period of 2

years with the trading value and number of contracts reaching its peak in Mar-2011.

In the last ten years, the Indian Rupee has depreciated against USD-YEN- EURO-GBP.

Indian Rupee is still week and has not recovered yet. For importers it is a loss, for

exporters it’s a profit. Still Indian has not developed itself self-reliant because it has

to import many products from other countries, especially crude oil.

A partial negative correlation exists between Currency (USDINR- US Dollar in Indian

Rupees) and NIFTY – 50 Index which means that if the USDINR- US Dollar

appreciates or in other words if Indian Rupee Depreciates, NIFTY 50 Index shows a

downward movement, and if USDINR depreciates or Indian Rupee appreciates,

NIFTY 50 Index shows a upward movement because there exists a few intervening

variables which lead to cause and effect relationship between the two variables. The

correlation is significant as the significance p-value is 0.000<0.10. We reject the null

hypothesis and accept the alternate hypothesis that there is a significant but partial

negative correlation between Nifty-50 Index and USDINR.



One of the reasons for Nifty Index to go up is investment made by Foreign

Institutional Investors (FIIs). Thus FIIs have to sell Dollar to buy Indian rupee.

More demand for Domestic currency and excessive supply of foreign currency

results in Appreciation of Domestic currency and thus rise in Nifty 50 Index.

The Comparison charts of Nifty Index and USDINR chart show exactly opposite price

movements, i.e. both create a mirror image of each other in most of the cases. The

chart also reveals a clear negative correlation between Nifty Index and USDINR.

Thus we can say that if INR appreciates, Nifty will also rise and if INR depreciates,

Nifty will tend to fall. Conversely, if USD appreciates Nifty will fall and if USD

depreciates, Nifty will rise, owing to some intervening variables which create a

cause-effect relationship between the two.

At last I’d like to sum up the conclusions in a nutshell:-

Thus we conclude that there exists a partial negative correlation but significant

between the Currency (USDINR) and Nifty-50 Index owing to some intervening

variables.

While investing in stock markets or trading in currencies, one must understand the

inter-correlation between these two markets.

Though the stock markets are affected by a myriad of factors, yet the fluctuations

and changes in exchange index and exchange prices, especially USDINR, has an

impact on stock market, if viewed the pattern clearly in the last few years.

Currency trading instruments are mainly used as hedge tools, meant to reduce

losses and keep profit intact. So if an investor is trading in stock market, he can

hedge his risk by investing some amount in currency derivatives, as we saw that

there exists a negative correlation between the two owing to the working of some

intervening variables.



10. Suggestions

Here at last I’d like to make a few suggestions and recommendations for Chirag Shares

and Stock Broking Pvt Ltd.

The company must reduce its brokerage rate which is very high compared to

other brokers in city.

The Company must pay the commission to the investors on the company FDs

which the company is not paying currently but other firms are paying.

The convincing power of the marketing staff and relationship managers is not

very good. They do not possess the required marketing skills. So the company must

arrange for training and seminars aimed at increasing the marketing-communication-

convincing skills of its employees.

The company is leading in online trading platform, but weak at spreading its use

among investors. Thus the company must try to increase the use of Online Trading

Platform, Savashare, among its users.

The company doesn’t follow any strategies for franchise development. It doesn’t

have any particular criterion for developing new franchisees. This is a major drawback

for the company as other broking firms in Surat such as Jainam Securities Pvt. Ltd. are

systematically developing new franchisees.

The company hasn’t been able to develop its own Risk Management System. It

largely relies on the principle brokers for risk management.

The company used to provide trade confirmation in physical form via printed

contract notes. Now it has decided to go paperless by providing ECN i.e. Electronic

Contract Notes to all the clients for their trade details on that particular day. For this the

company asks for email IDs of clients and those clients who don’t have email IDs or who

do not have an access to PC or internet at their residence, email IDs are created by the

firm so that the clients can access their trade reports. Though it’s a good cost cutting

strategy, it may not work among those who are not computer savvy and who don’t have

access to a computer or internet.



11. Bibliography

Book References

May 2010, NISM-Series-I Currency Derivatives Certification Examination,

National Institute of Securities Markets

2009, Currency Derivatives- A Beginner’s Module, National Stock Exchange Ltd.

Website References

Search Engine : http://www.google.com/

Search Engine: http://www.enwikipedia.org/

http://www.mcx-sx.com/downloads/Factsheet.pdf 15th June 2011 4.45P.M

http://www.mcx-sx.com/ 9th June 2011 5.40 P.M

http://www.bseindia.com/aboutus.asp 5th June 2011 3.50 P.M

http://www.bseindia.com/about/introbse.asp 5th June 2011 2.00P.M

http://www.nseindia.com/ 5th June 2011 5.00P.M

http://www.nseindia.com/content/us/fact2011_sec7.pdf 16th June 2011 7.45P.M

http://www.use.com/ 17th June 2011 10.00 A.M

http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/84986.pdf 19th June 2011

14.45P.M

http://www.chiraginvest.com/aboutus.aspx 3rd May 2011 11.00 A.M

http://www.sushlifinance.com/aboutus.htm 5th May 2011 6.00 P.M

http://ww.sebi.gov.in/commreport/irfreport.pdf 25th June 2011 8.00 P.M

Other References

The prices of Nifty Index and USDINR were provided by the firm, from their software

named ACE Spider Software was used.



12. ANNEXURE


final report file

Documents

american civil

foreign institutional

cochin stock

lahore stock

notary charge

handle online

human resources

national stock