CURRENCY

FUTURES

Foreign Exchange Market

• Largest Financial market

• 24-hr market

• Average daily trade – over US $ 3.5 trillion

Foreign Exchange Market

• Most widely traded currency – Dollar– Investment currency in capital markets–Reserve currency of Central Banks–Transaction currency in many commodity

markets– Invoice currency for many contracts

Foreign Exchange Market

• Participants

– Central Banks– Commercial Banks– Hedge Funds– Commercial companies– Investment management firms– Retail FX brokers– INDIVIDUALS

Foreign Exchange Market

• Main Instruments

–Spot–Outright forwards–Swaps

• Interest Rate Swaps• Currency Swaps

– OTC Currency Options– Exchange Traded Currency Futures

Factors affecting USD/INR Rates

• Supply and Demand Forces• Dollar against major currencies like Euro, Pound, Yen• Global Asian Stock markets• Indian Stock markets• Economic factors

– Government budget deficits– Interest rates– Inflation– Fiscal and Monetary Policy

Market activity

• Hedging– Banks– Importers & Exporters– Corporate

• Trading/ Speculation– View on appreciation or depreciation of USD/INR

• Arbitrage– Inter market (OTC forwards and NSE - futures)– Inter exchange ( NSE and MCX-SX, NSE and DGCX)

OTC Market

Interbank Market - Average daily turnover in Global FX market- over $3.5 trillion

Forward Contracts– Customized Contracts

• High Spreads

– Access restricted to participants with underlying positions– Physical Settlement– Low Accessibility– Counterparty Risk

A new and better alternative for trading FX

USD/ INR cash settled futures market at NSE • Access to all Indians • Transparent online trading platform • No requirement for underlying position• Low Margins Anonymous order matching facility• Robust settlement systems with counterparty guarantee• Low Bid – Offer Spreads

• Euro, Yen and Sterling v/s Rupee futures to be added soon to the Currency Derivatives Segment (RBI has already given permission)

Exchange based trading volumes

• Average Daily Volumes– Oct'09 $ 1613.40 Million

– Sept'09 $1171.15 Million

– Jun'09 $ 714.75 Million

– Apr'09 $ 490.72 Million

Contract Specifications

FX Volatility Is The Reality

Trading / Speculation

Expectation that dollar will strengthen against the rupee• Buy 10 November futures @ 46.60

– Cash outflow of margin @ 5 % - Rs 23,300

• Book Potential Profit / Loss• Sell November futures @ 46.75 to book profit of – Rs 1,500 on an

investment of Rs 23,300

• What if my view is completely wrong ?– Sell futures @ 46.30 and book a loss of – Rs 3000

Stop Loss Trigger at a movement of 10 paise per $ against the view – to prevent excess losses

RETURN of 6.43 % INTRA-DAY

Protecting Earnings of Underlying

Hedge the FX exposure

– Exporter : IT, Electronics & Hardware, Jewelery, Auto Ancillaries, Textiles, Chemicals, Food & Beverages

– Importer : Oil and Gas , Gems and Jewelery

– Investors : Institutions investing abroad

– Borrowers : ECB's and FCCB's

– Individuals : Students studying abroad

Hedging Example - Importer

• If an Oil Importer wants to import Crude Oil, worth $1 million on June 3, 2009 with delivery and payment dates being three months ahead, in Sept 2009.

Spot Rate on 3rd June 09 INR 46.74 per USD

Amt payable as on 3rd June 09 Rs 4,67,40,000 (46.74 * 1000000)

Buy 3 month futures contract

Futures Price = Spot + Cost of Carry USD 47.05 (46.74+0.31)

Futures Price in INR Rs 4,70,50,000

Spot Rate on 3rd September 09 INR 49.20 per USD

If not hedged payment would Rs 4,92,00,000

Saving due to hedging Rs 21,50,000

Hedging Example – Exporter

• Exporter earning USD 1,000,000 for DEC 09, expecting remittance on 25 DEC 2009

Spot Rate on 30th OCT 09 INR 47.02 per dollar

Sell 1000 USDINR contracts DEC 09Futures Price = Spot+ Cost of Carry

INR 47.20 per USD (47.02+0.18)

Futures Price in INR Rs 4,72,00,000

Spot Rate on 28 DEC 09 INR 46.50 per USD

If not hedged receipt would be Rs 4,65,00,000

Saving due to hedging Rs 7,00,000

Costs

• Deposit

Upfront Margin – 5% of the contract amount

• Charges

Brokerage – 0.04 % of the contract value

• Government Taxes and DutyService Tax – 10 % of Brokerage

STT (only on sell) – Nil ( as of now)

Transaction Tax – Nil ( as of now)

Stamp Duty – 0.002 %

Margins

Margins / collaterals

To be deposited pre – trade Released once trade is unwound or the contract matures

• Forms of collaterals (*)

Cash Bank guarantees Fixed deposits, GOI bonds Approved equities / mutual fund units

( * )- Check with Head office

Margins

Providing collaterals

Cash through CIM (debited from clearing bank account) FD and BG from approved banks GOI bonds through National Securities Clearing

Corporation Ltd (NSCCL) Approved securities

• Releasing collaterals

Cash – next day in the bank a/c, FD and BG same day Approved securities to custodians on same day

2121

Thank you