currency derivatives vijay
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Managing
Foreign Exchange Risk via
CURRENCY DERIVATIVES
Prepared By:Vijay Damasiya
(09022)
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Marwadi Shares & FinanceMarwadi Shares & Finance
LimitedLimited Gujarat based financial service group. 70 branches, 475+ channel partners.
5th ranked broking house in India.
CompanyCompany
MISSION & VISIONMISSION & VISION"To be a world-class financial services provider by
arranging all conceivable financial services under one-
roof at affordable costs through cost effective delivery
systems, and achieve organic growth in business by
adding newer lines of business.
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ContCont....
MembershipMembership Equity & Derivatives:
NSE, BSE,
MCX (MCX-SX),
SKSE
Commodities:
NCDEX, MCX
Depository:
NSDL, CDSL
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R
AJ
K
O
T
HQ
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ContCont....
Services:Services:
Equity & DerivativesEquity & Derivatives
CommodityCommodity
IPOIPO
Mutual FundsMutual Funds
ResearchResearchPMSPMS
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IndustryIndustry
1971 fixed foreign
exchange rates
The Chicago
Mercantile Exchange
(CME) created FX
futures in 1972
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Development in IndiaDevelopment in India
RBI & SEBI committee to introduce guideline
for introduction of exchange traded currencyfutures.
On 29th august 2008 trading of currency futures
has been started at NSE. Afterwards BSE & MCX-SX also came with
currency futures
Presently, USE started mock trading of currency
futures.
RBI & SEBI had given some clues related to
introduction of currency options also.
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ObjectivesObjectives
Primary objectives:Primary objectives:
To study the basic concept of currency future.
To study exchange traded currency future.
To analyze different currency derivatives
products.
Secondary objective:Secondary objective:
To know how the currency futures are usedas risk management tool.
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MethodologyMethodology
To achieve my objectives:
Currency Derivatives
Types of derivatives used at exchanges in
currency segment.
Tried to understand with the help of some
examples of importers & exporters.
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What is Derivatives?What is Derivatives?
A derivative security is a financial contract
whose value is derived from the value of
something else, such as a stock price, a
commodity price, an exchange rate, aninterest rate, or even an index of prices.
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Types of Financial DerivativesTypes of Financial Derivatives
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Trading of Financial DerivativesTrading of Financial Derivatives
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What is Currency Future?What is Currency Future?
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 an exchange
rate, the contract is termed a currency
futures contract.
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Utility of Currency FutureUtility of Currency Future
For the import and export needs ofcompanies and individuals (Hedging)
For direct foreign investment (MNCs)
To profit from the short-term fluctuations in
exchange rates (Speculators)
To purchase foreign financial instruments
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Parties Involved in Trading of CurrencyParties Involved in Trading of Currency
FutureFuture
Exporters
Importers
Investors
MNCs
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Base Currency & Term CurrencyBase Currency & Term Currency
In foreign exchange markets, the basecurrency is the first currency in a currency
pair. The second currency is called as the
terms currency.
Ex:
Dollar-Rupee (USD-INR), tells that the
Dollar is being quoted in terms of the Rupee.
The Dollar is the base currency and the
Rupee is the terms currency.
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Example: How to Hedge?Example: How to Hedge?
Suppose an edible oil importerwants to import edible oil worth USD
100,000 and places his import order on June 17, 2010, with the deliverydate being 4 months ahead. At the time of placing the contract one USD
is worth Rs 46.50 in the spot market. But, suppose the Indian Rupee
depreciates to INR 46.75 per USD when the payment is due in October
2010, the value of the payment for the importer goes up to
Rs.4,675,000, rather than Rs 4,650,000. The hedging strategy for the
importer, thus, would be:
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Current Spot Rate (17th June '10) 46.5000
Buy 100 USD - INR Oct '10 Contracts on 17th June 10 (1000 x 46.5500) x 100 (The Oct '10 contract is trading
at 46.5500 on 17th June, '10)
Sell 100 USD - INR Oct '10 Contracts in Oct '10 Profit/Loss 46.75001000 x (46.75 46.55) x 100 = 20,000
Purchases in spot market @ 46.75 Total cost of hedged
transaction
46.75 x 100,000
100,000 x 46.75 20,000 = Rs 4,655,000
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ExEx:: 11:: ImporterImporter
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ExEx:: 22:: ExporterExporter
A Jeweller of Rajkot who is exporting gold jewellery worth
USD 50,000, wants protection against possible IndianRupee appreciation in Dec 10, i.e. when he receives his
payment. He wants to lock-in the exchange rate for the
above transaction. His strategy would be:
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One USD - INR contract size USD 1,000
Sell 50 USD - INR Dec '10 Contracts (17th June'10) 47.2925
Buy 50 USD - INR Dec '10 Contracts in Dec '10 47.1025
Sell USD 50,000 in spot market @ 47.1025 in Dec '10 (Assume that initially Indian rupee depreciated ,
but later appreciated to 47.1025 per USD as foreseen by the exporter by end of Dec '10)
Profit/Loss from futures (Dec '10 contract) 50 * 1000 *(47.2925 47.1025)
= 0.19 *50 * 1000
= Rs 9,500
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Advantages of Currency FuturesAdvantages of Currency Futures
Low Transaction CostLow Transaction Cost::
Transparency:Transparency: Verify trade details
Affordability:Affordability:
Margins are very low and the contract size is
very small.
No Middlemen:No Middlemen:
Directly on the exchange platform.
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ConclusionConclusion
The purpose of currency hedging isnt to
generate gains. The purpose should be tomitigate risk.
A hedging strategy should minimize the risksyour company is exposed to.
Much restrictions are there from authorities,so larger importers & exporters has
continued to deal in OTC.
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SuggestionSuggestion
SEBI BI t r urr ri ti ( t Exchanges) except currency
futures. ccor ing to the Indian financial
growth now its necessary to introduce othercurrency deri ati es products in Exchange
traded currency deri ati es segment.
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BibliographyBibliography
Websites:Websites:
www.mcx-sx.com www.rbi.org.in
www.economywatch.com
www.nseindia.com
www.commodityonline.com
www.indiaaprwire.com
Other sources:Other sources:
NCFM & NICM: Currency Future Module
Currency Derivatives: A Beginners Module curriculum
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ThankThank
You!!!You!!!
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