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    Development of Currency Derivatives

    Markets in India

    Group 6

    27NMP51 Komal Tagra

    27NMP56 Mayank Ashok Mirani

    27NMP66 Raman Vig

    27NMP70 Shyam Kumar S L

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    Derivative Definition

    "Never keep all your eggs in one basket"

    DEFINITION OF "DERIVATIVE"A security whose price is dependent upon or derived from one ormore underlying assets. The derivative itself is merely a contractbetween two or more parties. Its value is determined byfluctuations in the underlying asset. The most common

    underlying assets include stocks, bonds, commodities,currencies, interest rates and market indexes. Most derivativesare characterized by high leverage.

    CURRENCY DERIVATIVEAn Exchange Traded Derivative or Over the counter Derivative

    with an Underlying reference based on FOREIGN EXCHANGErates and flows. A Currency Derivative can be structured as aCurrency Option, Currency Forward, Currency Future,Currency Swap or Currency Warrant

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    Lets say there is a farmerwho grows tea in India, which

    is exported to the USA.

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    And there is an importerof tea in the USA.

    Lets assume the currentrate of exchange is Rs. 55

    for 1 USD.

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    Let us also assume that the teagrower agrees to supply 10quintals of tea to the importer at 10

    dollars a quintal three monthsdown the line upon harvesting.

    (1 Quintal = 100 kgs)

    It is important tounderstand that the

    importer buys tea at 10dollars a quintal, no matterwhat the exchange rate is.

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    The tea grower thinks that the rate of exchange,

    which is currently trading at Rs. 55 to a US

    dollar, could fall to Rs. 54 in 3 months.

    This would mean that while the importer wouldpay her 100 dollars ( $10 per quintal x 10

    quintals = $ 100), as per their business deal, she

    would earn only Rs. 5400 ( $100 x Rs 54 per

    dollar) instead of Rs 5500 ( $100 x Rs 55 per

    dollar) thus incurring a loss of Rs. 100. ( Rs 5500

    Rs 5400)

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    In such a scenario, the tea grower goes to

    a currency trader and signs a forward

    contract which says that at the end of 3

    months the currency trader would hedge

    her against a possible decrease inexchange rates.

    This means that, at the end of 3 months,

    the currency trader would pay her Rs.

    5500 for her 100 USD, no matter what the

    prevailing exchange rate.

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    Such a contract is calleda Forward CurrencyDerivatives contract

    because it is a currencycontract that has to be

    executed at some future

    date.

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    Classification of DerivativesOTC Exchange Traded

    Rupee Interest RateDerivatives

    Forward Rate agreements,Interest rate Swaps

    Interest Rate futures

    Foreign CurrencyDerivatives

    Forwards, Swaps, Options Currency Futures, Options

    Equity Derivatives Index Futures, IndexOptions, Stock futures,

    Stock options

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    Overview of Currency Derivatives in

    IndiaA currency future, also known as FX future, is a futurescontract to exchange one currency for another at a specifieddate in the future at a price (exchange rate) that is fixed on

    the purchase date. On Stock Exchange like BSE, NSE theprice of a future contract is in terms of INR per unit of othercurrency e.g. US Dollars. Currency future contracts allowinvestors to hedge against foreign exchange risk. Currency

    Derivatives are available on four currency pairs viz. USDollars (USD), Euro (EUR), Great Britain Pound (GBP) andJapanese Yen (JPY). Currency options are available on USDollars ONLY.

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    Currency derivatives are a bundle of opportunities for a number ofplayers.It is a new asset class for diversification of investments for all residentIndians.

    It gives hedging opportunities to:Importers and exporters, who can hedge their future payablesand receivables.Borrowers, who can hedge foreign currency (FCY) loans forinterest and principal payments, with the need for proof of

    documented exposure.It gives arbitrage opportunities.It gives trading opportunities because of its volatility and multiplicity.It provides highly transparent rates to traders as it is exchange-traded.

    What are the benefits of currency

    Derivatives?

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    Presently, all Futures contracts on Exchanges are settled in cash. There are no physical

    contracts. All trades on Currency Exchanges take place on their respective nationwideelectronic trading platforms. These can be accessed from dedicated member terminals at

    various locations across India.All participants on the Currency Exchange trading platform can participate only throughtrading members of the Exchange. Participants have to open a trading account and depositstipulated cash and/or collaterals with the trading member.Exchanges stand in as the counter-party for each transaction. Therefore, participants donot need to worry about defaults . In the event of a default, Exchanges will step in and fulfillthe obligations of the defaulting party, and then proceed to recover dues and penalties fromthem.Those who enter the market either by buying (long) or selling (short) a Futures contractcan close their contract obligations by squaring-off their positions at any time during thelife of that contract by taking an opposite position in the same contract.A long (buy) position holder has to short (sell) the contract to square-off their positionand vice versa.Participants will be relieved of their contract obligations to the extent they square-off theirpositions.

    All contracts that remain open at expiry are settled in INR in cash at the reference ratespecified by the Reserve Bank of India

    How Does Currency Derivatives

    Trading Work in India?

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    TRADER

    ( BUYER )

    TRADER

    ( SELLER )

    MEMBER

    ( BROKER )

    MEMBER

    ( BROKER )

    CLEARING

    HOUSE

    Purchase order Sales order

    Transaction on the floor (Exchange)

    Informs

    Currency DerivativeTrading & Settlement Process

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    Screen Shot / application of FX derivative

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    Currency Derivatives Markets in India

    Its Development

    August 29, 2008 Currency Futures trading launched atNSE.

    October 2008 Currency futures trading launched at MCX

    and BSE. January, 2010 SEBI and RBI permitting the trade of

    INRGBP, INREUR, INRYEN. 29thOctober, 2010 - NSE started currency option trading. Trades guaranteed by guaranteed by the National

    Securities Clearing Corporation Limited (NSCCL) MCX-SX Average daily turnover increased from Rs. 356 cr

    to Rs. 11,650 cr in August 2013 and Average daily turnoverfor the year 2014-2015 to Rs. 11,475.08

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    Figure - Daily movement in the open interest of currency futures in NSEand MCX

    The upward trend of the open interest, number ofcontracts traded and average daily turnover since itsinspection explain the whole story in detail.

    Suggested future developments: Introduction of late evening sessions. Products on other currencies.

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    Thanks