cds -final1
TRANSCRIPT
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Currency Futures
National Stock Exchange of India Limited
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Why Currency Risk emerged ???
The last few years have seen extreme volatility in USDINR and G3 currencies
Correlation to equities and oil has been high
Corporate selling of USD contributed significantly to volatility.
Not only spot, forwards have also been very volatile.
Initiatives towards stricter Accounting principles.
Translates to
Need for a sound Risk Management Policy
Analyzing the profit and loss profile and balance sheet exposures
Strict definition of treasury role
Dynamic review of applicability and execution of the risk management policy
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Factors affect trading decisions
Macro economic views
Monetary Policy
RBI intervention
Supply and demand of forex
Economical and political scenario
Data announcements
USD sentiment
Performance of equity markets
Performance of other Asian
currencies
Performance of key commodities
affecting trade
Policy announcements affecting
flows trade or capital
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Foreign exchange markets
Products
Spot
Forwards
Outright forwards = Spot + Forwards (Points)
Market participants
Market makers
Hedgers, arbitrageurs, speculators
Banks, institutions, corporate entities, individuals
Regulators
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Understanding Currency Quotes
Concept of Base Currency & Quoted Currency
USD / INR
Base Currency / Quoted Currency
First two letters of the code are the two letters of the Countrys code and the
third letter represents initial of the Currency name of respective Country
For example: USD - US represents United States and D represents Dollar
Except EURO as it is the official currency of Euro Zone
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Understanding Currency Quotes - 1
Two way quotes
Forex markets works on two way quotes
Bid rate - rate at which the bank is ready to buy dollars
Ask rate - rate at which the bank is ready to sell dollars
The difference between the Bid and the Ask is called the Spread
Quotation methods
Direct method (European Method)
Indirect method (American method)
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Understanding Currency Quotes - 2
Bid Ask
USDINR 46.48/46.49
Bid Ask
Bank is ready to buy dollars, Bank is ready to sell dollars
i.e. exporters will have at this rate, i.e. importers will have
to sell at this rate to buy at this rate
Note : In case of indirect quote, one must take care of Bid Ask rate.
Also the difference between the Bid/Ask is Banks profit.
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European Method(Direct)Exchange Rate expressed inlocal currency in terms of perunit of Foreign Currency.
Bid Ask
Banks buying rate Banks selling rate
USD/INR 46.41 46.43
USD/JPY 89.32 89.34
EUR/USD 1.4000 1.4009
GBP/USD 1.6193 1.6195
AUD/USD 0.8989 0.8991
NZD/USD 0.7066 0.7067
American Method(Indirect)
Exchange Rate expressed inforeign currency in terms ofper unit of Local currency.
Understanding Currency Quotes - 3
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Exchange rate movements European Method
USD/INR
46.50
47.50
This would mean that US dollar has appreciated against the rupee.
That Rupee has depreciated against the dollar.
E.g. - USD/INR current rate 46.50
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Exchange rate movements American Method
EUR/USD
1.4100
1.4500
This would mean that EURO has appreciated against the Dollar.
That US $ has depreciated against the Dollar.
E.g.
EURO/USD current rate
1.4045
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How does the exchange rate affect corporateentities?
Cost of imports
Realization on exports
Capital goods imports
Service contracts realizations
Engineering contracts offshore
Cost of capital equity / debt
Interest costs
Indirect exposures
PROFITABILITY
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Usage of New Currency Futures Contract
According to estimates by market players, around 20 per cent of the currencytrades in over the counter (OTC) market is done in non-dollar currency.
Introduction of new currency pairs will help in improving the depth andbreadth of the currency market.
Directional Views
Hedging Existing Exposure
Transparency in the Cross rates on the CDS platform will help the corporateto mitigate the curtail two-currency risk
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Contract specification
Category Description
Trading Hours9:00 am to 5:00 pm(Monday to Friday on all business day)
Contract Months 12 near calendar months
Last Trading DayTwo business days prior to last business day of themonth (spot convention).
Final Settlement Day Last working day of the month
Settlement INR cash settled at RBI reference rate
Holiday Calendar Mumbai-Interbank
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Features of Currency Pairs
USD-INR EUR-INR GBP-INR JPY-INR
Quotation
Rate of exchangebetween 1 USD
and INR(USDINR)
Rate of exchangebetween 1 EURO and
INR (EUR-INR)
Rate ofexchangebetween 1GBP and
INR (GBP-INR)
Rate of exchangebetween 100 JPYand INR (JPY-INR)
Contract Size USD 1000 EURO 1000 GBP 1000 JPY 100000
CalendarSpreadMargin
Rs. 400 for aspread of 1
month; Rs 500for a spreadof 2 months, Rs800 for a spread
of 3 months
Rs.700 for spreadof 1 monthRs.1000 for
spread of 2months
Rs.1500 forspread of 3
months or more
Rs.1500 forspread of 1
monthRs.1800 for
spread of 2months
Rs.2000 forspread of 3months or
more
Rs.600 for spreadof 1 monthRs.1000 for
spread of 2months
Rs.1500 forspread of 3
months or more
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Position Limits
USD-INR EURO-INR GBP-INR JPY-INR
Client Level
6% of theOpen Interestor
USD 10 Millionwhichever ishigher
6% of the OpenInterest or
EUR 5 Millionwhichever ishigher
6% of the OpenInterest or
GBP 5 Millionwhichever ishigher
6% of the OpenInterest or
JPY 200 Millionwhichever ishigher
Non-Bank TradingMember Level
15% of theOpen Interestor USD 50Millionwhichever ishigher
15% of theOpen Interest orEUR 25 Millionwhichever ishigher
15% of theOpen Interest orGBP 25 Millionwhichever ishigher
15% of theOpen Interest orJPY 1000 Millionwhichever ishigher
Bank
15% of theOpen Interestor USD 100Millionwhichever ishigher
15% of theOpen Interest orEUR 50 Millionwhichever ishigher
15% of theOpen Interest orGBP 50 Millionwhichever ishigher
15% of theOpen Interest orJPY 2000 Millionwhichever ishigher
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Product specifications - Collaterals
Margins / collaterals
Based on previous day volatility.
Released once trade is unwound or the contract matures.
Forms of collaterals
Cash, bank guarantees, fixed deposits, GOI bonds, approved equities /mutual fund units.
Releasing collaterals
Cash next day in the bank a/c, FD and BG same day.
Approved securities to custodians on same day.
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Product specifications settlement
Daily settlement Closing price of each contract last 30 minutes weighted average.
T + 1.
Through your clearing member.
Paid or received in cash.
Final settlement
RBI fixing price at 12 noon on last trading day.
Net settled in cash.
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Trade explanation 1
Trade date (7 April):
USDINR 27 April contract: 44.4000Current Spot rate: 44.2500
Buy 100 April contracts: Value Rs. 44,40,000 (USD 1000 *100* 44.40)
Hold contract to expiry: RBI fixing rate on 27 April 11 45.0000
Futures return: Profit, Rupees 60,000 (45,00,000 44,40,000)
Margins:
Approx. 4.00%: Rs 1,77,600
Funding @ 12%: Rs 1780 (if margins paid in cash)
Net return: Rs. 58,220Margins (collateral) can be paid in FDs, Bank Guarantees, ApprovedSecurities
Daily Mark to Market will be received / paid in Cash
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OTC and Currency futures
OTC Market Currency Futures
Pricetransparency
Low; bilateral contractswith banks
High; online real timescreen
Liquidity Subject to credit limits Margins equate allparticipants
Settlement Full notional, unlesscancelled
Net settled in INR
Credit Exposure Exposure to yourcounterparty (bank)
Clearing corporationguarantees all trades
Execution Only by AuthorizedDealer 700+ trading members,including banks
Margins / MTM Nil Margins and MTM aremandatory
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Hedging
What is a hedge
A position established in one market in an attempt
to offset exposure to the price risk of an equal but
opposite obligation in another market
Why hedge
Costs & Revenues in different currencies
Time differences in costs and revenues
Evaluating impact on net returns (profits)
Risk management is important
Not doing anything is also taking a RISK
Understanding your risk profile and appetite to
take risks, determines your risk management policy
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Scenario 1
Indian Co. sold a Raw Material to USA based Co. for 10,00,000 USD with an expected
remittance in Eight month.
When you enter into sell transaction of 10,00,000 USD/INR, Meaning you Sold 10,00,000
USD by buying 4,79,80,000 INR.
Sold 1000 contracts of December 2011 maturity on NSE
On 28 December 2011, the contract will expire and the payment trade needs to be executed
Sold USD 10,00,000 to a bank at RBI fixing rate on 28 December 2011.Banks may charge
some spread over fixing rate
Ensuring RBI fixing rate on Payment and Contract fixing, will help to crystallize the rate
contracted on the exchange
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If USD will be 49.00
The above computation ignores Margin & Mark to Market Loss/Profit.
Today
Sell 1000 Contracts Dec,2011 47.98
Expected Remittance = 1000*1000*47.98 4,79,80,000
On 28 Dec ,2011
RBI fixing rate 49.00
Sold USD 10,00,000 to the bank = 10,00,000*49.00 4,90,00,000
Loss on Dec,11 Contract = 1000*1000*(49.00 -47.98) 10,20,000
Total INR Receipt = 4,90,00,000 - 10,20,000 4,79,80,000
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If USD will be 46.00
The above computation ignores Margin & Mark to Market Loss/Profit.
Today
Sell 1000 Contracts Dec,2011 47.98
Expected Remittance = 1000*1000*47.98 4,79,80,000
On 28 Dec ,2011
RBI fixing rate 46.00
Sold USD 10,00,000 to the bank = 10,00,000*46.00 4,60,00,000
Profit on Dec,11 Contract = 1000*1000*(47.98 -46.00) 19,80,000
Total INR Receipt = 4,60,00,000 + 19,80,000 4,79,80,000
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CURRENCY OPTIONS
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An option is a contract which gives the right, but not the obligation, to buy
or sell the underlying at a stated date and at a stated price
Gives the rightto buy
CALL
Gives the rightto sell
PUT
Options
European
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Definition of Options
A Currency Option is a Financial Contract which gives the BUYER (Holder) theRIGHT, but not the Obligation, to exchange a specified amount of currency versusanother at a specified rate on, or up to, a specified date.
The SELLER (or Writer) of the Currency Option contract has the OBLIGATIONto deliver the specified amount of currency at the specified rate on the specifieddate.
Options offer Flexibility to not lock in rates.
Benefits over Forwards
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Classification of Options
Type
Exercise style
Settlement
Underlying
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Call Options
Buy
Sell
Long Call
Right to buy theunderlying at strike
price
Short CallObligation to sell
the underlying at
strike price
Benefit if theunderlying rises.
Profits substantial
Lose if the underlying issteady/ falling.
Loss limited to Premium
Lose if the underlying rises.Loss substantial
Benefit if theunderlying is steady/
falling. Profit limited to
Premium
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Put Options
Buy
Sell
Long PutRight to sell the
underlying at strike
price
Short PutObligation to Buy
the underlying at
strike price
Benefit if theunderlying falls. Profits
substantial
Lose if the underlying issteady/ rising.
Loss limited to Premium
Lose if the underlying falls.Loss substantial
Benefit if theunderlying is steady/
rising. Profit limited to
Premium
Cl ifi i f O i ( d)
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Classification of Options (contd)
American
Exercised any time prior to expiration
European Generally exercised on expiration date
Expiration date:Date after which the option has no value.
Cl ifi ti f O ti ( td)
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Classification of Options (contd)
Cash settled
Settled by the difference between the strikeprice and the determined value of theunderlying.
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Relationship between underlying and option
In the money
At the money
Out of the money
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Strikes - Call, an example
USDINR strike for 1ST
Month December Spot :
46.50
Strike Prices:OTM: Calls: 47.00, 47.50
Strike price > SpotATM: Calls: 46.50
Strike price = spotITM: Calls: 46.00, 45.50
Strike price < spot
47.50
47.00
46.50
46.00
45.50
IN
R
pe
r
US
D
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Strikes - Put, an example
USDINR strike for 1st
Month December Spot :
46.50
Strike Prices:ITM: Puts : 47.00, 47.50
Strike price > SpotATM: Calls: 46.50
Strike price = spotOTM: Puts : 46.00, 45.50
Strike price < spot
47.50
47.00
46.50
46.00
45.50
IN
R
pe
r
US
D
C O ti
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Currency Options
36
Category Description
Type of Option Premium Styled European Call and Put Options
Trading Hours9:00 am to 5:00 pm
(Monday to Friday on all business day)
Permitted Lot Size One lot denotes $ 1000
Contracts AvailableThree serial monthly contracts followed by three quarterlycontracts of the cycle March/June/September/December
Last Trading Day Two business days prior to last business day of the month
Final Settlement Day Last working day of the contract month (Excluding Saturdays)
Settlement INR cash settled at RBI reference rate
Holiday Calendar Mumbai-Interbank
Benefits of Currency Options
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Benefits of Currency Options
Allows you to buy protection from currency
strengthening or weakening to hedge your FX risk Allows you to protect your downside without
necessarily giving up upside
Allows you to structure a set of bought and soldoptions to suit your risk profile and/or view
Allows you to earn premium by writing options, albeitwith unlimited downside
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Have a underlying FX risk by way of
Imports
USD loans
Exports
Indirect imports (Billing in INR but linked to USD exchange rate)
Service contract receivables/payables in foreign currency
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Option - an example
$ 1 Mio : Notional or principal.
Call : Right to buyunderlying.(Importer)
45.30 : Spot rate on Dec 1, 2010
45.50 : 29 Dec Futures.
Rs.45.50 : Strike price(ATMF). Rs.0.50 : Option premium.
Dec 29, 2010 : Expiration date(Outward date).
Option an example (Cont)
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Option - an example (Cont)
Of 1 Dec 2010 Buy 1 Mio Call Options : 1000*1000*0.50=5, 00,000 INR.
Once Trade Gets Executed Margin reversed to Clients A/C
Total Payment : 5, 00,000=5,00,000 INR
Break Even : 45.5000+0.5000=46.0000
On 29 Dec 2010 Spot : 47.00
Payoff On exercise date 29.12.2010 :47.00-46.00=1.00 INR(1000*1000*1.00=10, 00,000 INR)
Net Payoff On exercise date 29.12.2010 :10,00,000-5,00,000=10,00,000
(Charges Excluding Brokerage and SEBI &Stamp Duty)
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How can an exportermanage risk of rate of USD receivable ?
Sell the future
Buy a $ Put
Sell a $ Call
Buy a $ Put spread
Buy a $ Put and sell a $ Call
Collar
{Examples and payoffs of each strategy to be done in detail}
For exporter : Sell Future
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For exporter : Sell Future
View : Bearish on USD
Strategy : Sell future
Risk: Unlimited Reward : Unlimited
Breakeven : Future price
Profit, when: USD-INR goes down
Max loss, when: USD-INR goes up
Example: Sell 1 Future*
USD/INR Spot Price (`) 46.46
*Lot size1 Contract
= 1000
USD
Future Price (`) 46.00
Break Even (`) 46.00
USD/ INR on
expiry (`)Net Pay-off
(`)
45.00 100045.50 500
46.00 0
46.50 -500
47.00 -1000
-2200
-1700
-1200
-700
-200
300
800
1300
1800
43.
00
43.
50
44.
00
44.
50
45.
00
45.
50
46.
00
46.
50
47.
00
47.
50
48.
00
48.
50
49.
00
49.
50
50.
00
Net Pay-offProfit (`
Loss (` )
USD/INR
For exporter : Buy Put
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For exporter : Buy Put
View : Bearish on USD
Strategy : Buy put option
Risk: Limited to premium
Reward : Unlimited
Breakeven :Strike Price Premium
Profit, when: USD-INR goes down andoption exercised
Max loss, when: USD-INR goes up andoption not exercised
Example: Buy 1 Put Option*
USD/INR Spot Price (`) 46.46
*Lot size
1 Contract =
1000 USD
Strike Price (`) 46.00
Premium (`) 0.20
Break Even (`) 45.80
USD/
INR on
expiry (`)
Premium
Pay-off(`)
Exercis
e Pay-
off(`)
Net
Pay-off(`)
45.00 -200 1000 800
45.50 -200 500 300
45.80 -200 200 0
46.00 -200 0 -200
46.50 -200 0 -200
-900
-600
-300
0
300
600
900
44.
00
44.
50
45.
00
45.
50
46.
00
46.
50
47.
00
47.
50
Net Pay-offProfit (`
Loss (` )
USD/INR
For exporter : Short Call
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For exporter : Short Call View : Very bearish on USD
Strategy : Sell Call option
Risk: Unlimited Reward : Limited to premium
Breakeven :Strike Price + Premium
Max Profits, when: USD-INR goesdown and option not exercised
Loss, when: USD-INR goes up andoption exercised
Example: Sell 1 Call Option*
USD/INR Spot Price (`) 46.46
*Lot size
1 Contract
= 1000
USD
Strike Price (`) 47.00
Premium (`) 0.33
Break Even (`) 47.33
USD/
INR on
expiry (`)
Premiu
m Pay-
off(`)
Exercise
Pay-off(`)
Net Pay-
off(`)
46.50 330 0 33047.00 330 0 330
47.33 330 -330 0
48.00 330 -1000 -670
48.50 330 -1500 -1170
-900
-600
-300
0
300
600
900
45.
00
45.
50
46.
00
46.
50
47.
00
47.
50
48.
00
48.
50
49.
00
49.
50
50.
00
Net Pay-offProfit (`
Loss (` )
USD/INR
For exporter : Put Spread
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For exporter : Put Spread View : Moderately Bearish on USD Strategy : Buy ITM Put and sell OTM Put option
to reduce cost and breakeven of ITM Put Risk: Limited to net premium paid
Reward : Limited to the difference between thetwo strikes minus net premium paid
Breakeven :Strike price of long Put -Netpremium paid
Max profit, when: USD-INR goes down and bothoptions exercised
Max loss, when: USD-INR goes up and bothoptions unexercised
Example: Buy 1 ITM Put Option and Sell 1 OTM Put
Option*
USD/INR Spot Price (`) 46.46
*Lot size1 Contract
= 1000
USD
Buy ITM Put Strike Price (`) 46.50
Put Premium (`) 0.38
Sell OTM Put Strike Price(`) 45.50
Put Premium (`) 0.09
Break Even (`) 46.21
USD/
INR on
expiry
(`)
Pay-off
from ITM
Put
purchased(`)
Pay-off
from
OTM
Put sold(`)
Net
Pay-off(`)
45.00 1120 -410 710
45.50 620 90 710
46.00 120 90 210
46.21 -90 90 0
47.00 -380 90 -290
47.50 -380 90 -290
-1500
-1000
-500
0
500
1000
1500
43.
00
43.
50
44.
00
44.
50
45.
00
45.
50
46.
00
46.
50
47.
00
47.
50
48.
00
48.
50
49.
00
49.
50
50.
00
Pay-off from Put purchased
Pay-off from Put sold
Net Pay-off
Loss (` )
Profit (`
USD/INR
For exporter : Buy Put Sell Call
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For exporter : Buy Put, Sell Call
View : Bearish on USD Strategy : Buy Put and sell Call option to
reduce cost and breakeven of Put
Risk: Unlimited Reward : Unlimited Breakeven :Strike price of long Put -Net
premium paid Max profit, when: USD-INR goes down and
put option is exercised
Max loss, when: USD-INR goes up and calloptions is exercised
Example: Buy 1 Put Option and Sell 1 Call Option*
USD/INR Spot Price (`) 46.46
*Lot size1 Contract
= 1000
USD
Buy Put Strike Price (`) 46.00
Put Premium (`) 0.25
Sell Call Strike Price(`) 47.50
Call Premium (`) 0.12
Break Even (`) 45.87
USD/
INR on
expiry
(`)
Pay-off
from Put
purchase
d (`)
Pay-off
from
Call sold
(`)
Net
Pay-off(`)
44.50 1250 120 1370
45.00 750 120 870
45.87 -120 120 0
46.50 -250 120 -130
48.00 -250 -380 -630
48.50 -250 -880 -1130
-1000
-700
-400
-100
200
500
800
45.
00
45.
50
46.
00
46.
50
47.
00
47.
50
48.
00
48.
50
Pay off from Put purchased
Pay-off from Call sold
Net Pay-off
Profit `
Loss (` )
USD/INR
For exporter : Collar
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For exporter : Collar View : Conservatively bearish
Strategy : Sell Future, buy Call to insuredownside, sell Put option to partly finance
Call Risk: Limited
Reward : Limited
Breakeven :Purchase price of futures Netpremium paid
Max profit, when: USD-INR goes down andput option exercised
Max loss, when: USD-INR goes up and calloption exercised
USD/
INR on
expiry (`)
Pay-off
from
Futures
sold (`)
Pay-off
from Call
purchase
d (`)
Pay-
off
from
Put
sold
(`)
Net
Pay-off
(`)
44.50 2500 -80 -460 1960
45.00 2000 -80 40 1960
46.50 500 -80 40 460
46.96 40 -80 40 0
47.50 -500 -80 40 -54048.00 -1000 -80 40 -1040
48.50 -1500 420 40 -1040
Example: Sell 1 Future and 1 put Option Contract
and Buy 1 Call Option Contract*
USD/INR Future Price (`) 47.00
*Lot size
1 Contract =
1000 USD
Put Strike Price (`) 45.00
Put Premium (`) 0.04
Call Strike Price (`) 48.00
Call Premium (`) 0.08
Breakeven (`) 46.96-2200
-1700
-1200
-700
-200
300
800
1300
1800
43.
00
43.
50
44.
00
44.
50
45.
00
45.
50
46.
00
46.
50
47.
00
47.
50
48.
00
48.
50
49.
00
49.
50
50.
00
Pay-off from Future sold
Pay-off from Call purchased
Pay-off from Put soldNet Pay-off
Profit (`
Loss (` )
USD/INR
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How can an importermanage risk of rate of USD payable ?
Buy the future
Buy a $ Call
Sell a $ Put
Buy a $ Call spread
Buy a $ Call and sell a $ Put
Collar
{Examples and payoffs of each strategy to be done in detail}
For importer : Buy Future
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For importer : Buy Future View : Bullish on USD
Strategy : Buy future
Risk: Unlimited Reward : Unlimited
Breakeven : Future price
Profit, when: USD-INR goes up
Max loss, when: USD-INR goes down
Example: Buy 1 Future*
USD/INR Spot Price (`) 46.46
*Lot size
1 Contract
= 1000
USD
Future Price (`) 46.00
Break Even (`) 46.00
USD/ INR on
expiry (`)Net Pay-off
(`)
45.00 -1000
45.50 -500
46.00 0
46.50 500
47.00 1000
-2200
-1700
-1200
-700
-200
300
800
1300
1800
43.
00
43.
50
44.
00
44.
50
45.
00
45.
50
46.
00
46.
50
47.
00
47.
50
48.
00
48.
50
49.
00
49.
50
50.
00
Net Pay-offProfit (`
Loss (` )
USD/INR
For importer : Long Call
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For importer : Long Call
View : Very bullish on USD Strategy : Buy call option
Risk: Limited to premium Reward : Unlimited Breakeven :Strike price + Premium Profit, when: USD/INR goes up and
option exercised Loss, when: USD/INR does not go up
and option expires unexercised
Example: Buy 1 Call Option*
USD/INR Spot Price (`) 46.46
*Lot size
1 Contract
= 1000
USD
Strike Price (`) 47.00
Premium (`) 0.33
Break Even (`) 47.33
USD/ INR
on expiry (`)
Premium
Pay-off(`)
Exercise
Pay-off(`)
Net Pay-
off(`)
46.50 -330 0 -330
47.00 -330 0 -330
47.33 -330 330 0
48.00 -330 1000 670
48.50 -330 1500 1170
-900
-600
-300
0
300
600
900
45.
00
45.
50
46.
00
46.
50
47.
00
47.
50
48.
00
48.
50
49.
00
49.
50
50.
00
Net Pay-offProfit (`
Loss (` )
USD/INR
For importer : Short Put
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For importer : Short Put
View : Bullish on USD
Strategy : Sell put option
Risk: Unlimited Reward : Limited to premium
Breakeven :Strike price Premium
Profit, when: USD-INR does not godown and option expires unexercised
Loss, when: USD-INR goes down andoption exercised
Example: Sell 1 Put Option*
USD/INR Spot Price (`) 46.46
*Lot size
1 Contract
= 1000
USD
Strike Price (`) 46.00
Premium (`) 0.20
Break Even (`) 45.80
USD/
INR on
expiry (`)
Premiu
m Pay-
off(`)
Exercise
Pay-off(`)
Net Pay-
off(`)
45.00 200 -1000 -800
45.50 200 -500 -300
45.80 200 -200 0
46.00 200 0 200
46.50 200 0 200
-900
-600
-300
0
300
600
900
44.
00
44.
50
45.
00
45.
50
46.
00
46.
50
47.
00
47.
50
Net Pay-offProfit (`
Loss (` )
USD/INR
For importer : Call Spread
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For importer : Call Spread View : Moderately bullish on USD
Strategy : Buying ITM Call and selling OTMcall thereby reducing cost and breakeven of
ITM call
Risk: Limited to net premium paid
Reward : Limited to the difference betweenthe two strikes minus net premium paid
Breakeven :Strike price of purchased call +
Net premium paid Max profit, when: both options exercised
Max loss, when: both options unexercised
Example: Buy 1 ITM Call Option and Sell 1 OTM
Call Option *
USD/INR Spot Price (`) 46.46*Lot size
1 Contract
= 1000
USD
ITM Call Strike Price (`) 46.00
Call Premium (`) 0.88
OTM Call Strike Price(`) 47.00
Call Premium (`) 0.33
Break Even (`) 46.55
USD/
INR on
expiry (`)
Pay-off
from ITM
Call
purchased(`)
Pay-off
from OTM
Call sold (`)
Net
Pay-
off(`)
44.50 -880 330 -550
45.50 -880 330 -550
46.55 -330 330 0
47.50 620 -170 450
48.50 1620 -1170 450
49.00 2120 -1670 450
-1500
-1000
-500
0
500
1000
1500
43.
00
43.
50
44.
00
44.
50
45.
00
45.
50
46.
00
46.
50
47.
00
47.
50
48.
00
48.
50
49.
00
49.
50
50.
00
Pay-off from ITM Call purchased
Pay-off from OTM Call sold
Net Pay-off
Loss (` )
Profit (`
USD/INR
For importer : Buy Call, Sell Put
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For importer : Buy Call, Sell Put View : Bullish on USD Strategy : Buy Call and sell Put option to
reduce cost and breakeven of Call
Risk: Unlimited Reward : Unlimited Breakeven :Strike price of long Call + Net
premium paid Max profit, when: USD-INR goes up and call
option is exercised
Max loss, when: USD-INR goes down and putoptions is exercised
Example: Buy 1 Call Option and Sell 1 Put Option*
USD/INR Spot Price (`) 46.46
*Lot size
1 Contract
= 1000
USD
Buy Call Strike Price (`) 47.00
Call Premium (`) 0.33
Sell Put Strike Price(`) 45.50
Put Premium (`) 0.09
Break Even (`) 47.24
USD/
INR on
expiry
(`)
Pay-off
from Call
purchased
(`)
Pay-off
from Put
sold (`)
Net
Pay-off(`)
45.00 -330 -410 -740
46.00 -330 90 -240
47.00 -330 90 -240
47.24 -90 90 0
47.50 170 90 26048.00 670 90 760
-1000
-700
-400
-100
200
500
800
44.
50
45.
00
45.
50
46.
00
46.
50
47.
00
47.
50
48.
00
Pay-off from Call purchased
Pay off from Put sold
Net Pay-off
Profit (`
Loss (` )
USD/INR
For importer : Collar
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For importer : Collar View : Conservatively bullish
Strategy : Buy futures, buy put to insuredownside, sell call option to partly finance
put Risk: Limited
Reward : Limited
Breakeven :Purchase price of futuresCall premium + Put premium
Max profit, when: USD-INR goes up and
call option exercised Max loss, when: USD-INR goes down
and put option exercised
USD/ INR
on expiry
(`)
Pay-off
from
Futures
purchased
(`)
Pay-off
from Put
purchased
(`)
Pay-off
from
Call
sold (`)
Net
Pay-off
(`)
45.00 -2000 800 80 -1120
45.50 -1500 300 80 -1120
47.12 120 -200 80 0
47.50 500 -200 80 380
48.00 1000 -200 80 880
48.50 1500 -200 -420 880
Example: Buy 1 Future and 1Put Option Contract
and Sell 1 Call Option Contract*
USD/INR Future Price (`) 47.00
*Lot size
1 Contract =
1000 USD
Put Strike Price (`) 46.00
Put Premium (`) 0.20
Call Strike Price (`) 48.00
Call Premium (`) 0.08
Breakeven (`) 47.12
-1500
-1000
-500
0
500
1000
1500
43.
00
43.
50
44.
00
44.
50
45.
00
45.
50
46.
00
46.
50
47.
00
47.
50
48.
00
48.
50
49.
00
49.
50
50.
00
Pay-off from Future purchased
Pay-off from Put purchased
Pay-off from Call sold
Net Pay-offProfit (`
Loss (` )
USD/INR
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Why National Stock Exchange
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5656
Pioneer of online trading in India
Access to investors from over 150,000 terminals, 1400 locations
NSCCL first Clearing Corporation in India; first to provide settlement
guarantee, rated CCR - AAA by CRISIL
NSDLFirst depository dematerialization
3rd largest exchange - cash market
Largest exchange in the world - stock futures
One of the top global derivatives exchanges
First in India to introduce DMA (Direct Market Access)
First in the world to setup and operate STP central HUB
Innovation, invention and world class infrastructure
First to launchCurrency Derivatives.
Why National Stock Exchange
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5757