currency futures- ppt prensentation

7/30/2019 Currency Futures- Ppt Prensentation

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Name - KARAN NAHAR

Roll No. - 682Room No. - 34

Semester VI

Project Presentation


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INTRODUCTION

FEATURES AND TECHNICAL TERMINOLOGY

HEDGING

CASE STUDY

CONCLUSION


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Currency Futures is a type ofDerivative Instrument


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Derivative Instrument:

Derivatives are financial contracts whosevalue/price is dependent on the behavior ofthe price of one or more basic underlying

assets.

Financial derivatives are those assetswhose values are determined by the valueof some other assets, called as theunderlying assets.


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Derivative Instrument:

Several types of Derivative Contracts like

Forwards

Futures

SwapsOptions, etc.


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Futures:

A futures contract is a standardizedcontract, traded on an exchange, to buy orsell a certain underlying asset or aninstrument at a certain date in the future,at a specified price.


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Futures:

When the underlying asset is a commodity,e.g. Oil or Wheat, the contract is termed acommodity futures contract.

When the underlying asset is an foreigncurrency exchange rate, the contract istermed a currency futurescontract


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Currency Futures:

It is a type of standardized futurescontract, traded on a exchange, to buy orsell a certain underlying asset or aninstrument at a certain date in the future,at a specified price, the underlying asset

being the foreign currency exchange rate.


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Currency Futures:

In other words, it is a contract toexchange one currency for anothercurrency at a specified date and a specifiedrate in the future.


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Standardized Forward Contracts

Underlying asset is the Currency Exchange Rate

Traded on an exchange

Daily Marked-to-Market Feature (M to M)

Stringent Margin Requirements

High Liquidity

Heavy Regulations

Virtually no counter-party default risk


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Long Position (F+)

Contract to Buy Upside Betting

Buyer thinks theprices will rise in

future

Short Position (F-)

Contract to Sell Downside Betting

Seller thinks thatprices will fall in

future


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When a firm is affected by Exchange RateChanges, it is said to be facing ForeignExchange Exposure.

Most important type of Foreign ExchangeExposure is Transaction Exposure.

It arises when a firm has known amount ofFC payable/receivable, the HC equivalentof which is not known.


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A Transaction Exposure can be hedged viaCurrency Futures.

The Steps to be followed are:


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US Company -

Receivable

Afraid of Falling

Futures $ Futures

SELL BUY

US Company -

Payable

Afraid of Rising

Futures $ Futures

BUY SELL


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No. of Contracts = FC Exposure/Lot Size

For Example, suppose a US Firm has125,000 Receivable 3 months from now.Standard size of 1 contract is 12,500.

No. of Contracts = 125,000/12,500

= 10 Contracts


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The Settlement on the date of Exposure takes 2 forms:

1. Profit/Loss arising on squaring off Futures

2. Settling the Payable/Receivable in the Spot Market

Finally after these 2 settlements, we determine whetherwe have been able to hedge ourselves or not.

Hence, Futures is considered as an IMPERFECT HEDGE.


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Company Name: McLeod Russel India Ltd. (MRIL)

Company Profile: Worlds Largest Tea Manufacturerand Exporter. Being an Exporter, it has large amounts

of FC Receivable.

The Company uses Currency Futures to speculate andhedge on its Foreign Currency Receivable.


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Scenario: On 10/01/2011, MRIL exported 80,000 Kgsof Tea to Swansea Tea Limited in USA. It had $700,000receivable on 10/04/2011. The spot rate prevailing inthe market on 10/01/2011 was INR 45.3818/$. Thedollar futures maturing in April end are trading at INR45.5300/$.

On 10/04/2011 the spot rate prevailing in the marketis INR 44.0747/$ whereas the dollars futures quote atINR 45.0400/$. The standard size of one futurescontact is INR 250,000.


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If Company goes for Futures Cover:

Since the company is afraid of $ falling, it should sell$ Futures @ INR 45.5300 / $ [F-].

This is basically a downside betting.

The company has to short- sell 135 Contracts.

Now when 10/04/11 arrives, it has made a gain onFutures selling.

The gain = (45.5300-45.0400)*135*250000

= INR 16,537,500.

Moreover it will sell $740,000 spot @ INR 44.0747 / $getting INR 32,615,278.

Thus overall receipt on 10/04/11 = INR 49,152,778.


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If Company does not go for Futures Cover:

The Co. would have have to sell $740,000 spot @ INR

44.0747/$ getting INR 32,615,278.

Hence, MRILs overall gain as a result of entering intofutures contract = INR 16,537,500.

Thus, Currency Futures helps a company to hedgeagainst currency exchange fluctuations.


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currency futures- ppt prensentation

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