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INDEX

• Euro, Pound & Yen• Quotation &

Conversion • Contract

Specifications• Cross Currency Market • Types of Cross

Currency • Benefits of Cross

Currency• Algebra of Cross

Currency• Cross Currency Rates• Exercises

• Indian Cross Currency Market• Correlation Matrix• Volatility • Trending• Strategies

• The name euro was officially adopted on 16 December 1995. The euro was introduced to world financial markets as an accounting currency on 1 January 1999, replacing the former European Currency Unit (ECU) at a ratio of 1:1. Euro coins and banknotes entered circulation on 1 January 2002.

• The euro (€) is the official currency of the European Union, and is currently in use in 16 of the 27 Member States

• Since its introduction, the euro has been the second most widely-held international reserve currency after the U.S. dollar. The share of the euro as a reserve currency has increased from 17.9% in 1999 to 26.5% in 2008.As of October 2009, with more than €790 billion in circulation.

EURO

• The GBP currency was introduced as paper money in 1694, with the establishment of the Bank of England.

• The pound sterling of the United Kingdom was originally the value of one Troy pound of sterling silver, hence the name: Pound Sterling.

• The Pound Sterling is the currency of the United Kingdom. The GBP currency is the world's oldest currency that is still in use. It is the fourth most-traded currency in the foreign exchange market after the Euro, US dollar and Japanese yen. The Pound Sterling is the third-largest reserve currency, after the US dollar and the Euro.

POUND

The yen  (sign: ¥; code: JPY) is the currency of Japan. It is the third most-traded currency in the foreign exchange market after United States dollar and the euro.

It is also widely used as a reserve currency after the U.S. dollar, the euro and the pound sterling. As is common when counting in East Asia, large quantities of yen are often counted in multiples of 10,000 in the same way as values in Western countries are often quoted in thousands.

YEN

Quotation & Conversion

IN-DIRECT QUOTES :

“Price of one Unit of Foreign Currency in terms of Domestic Currency”

e.g. USD/INR = 45.7700 / 45.7725

Buy One USD at 45.7700 Sell One USD at 45.7725 Spread 0.0025

In the international market, almost all currencies are quoted indirectly.

DIRECT QUOTES :

“Price of one Unit of Domestic Currency in terms of Foreign Currency”

e.g. INRUSD = 0.0218 / 0.0219

Buy One Rupee at 0.0218 Sell One Rupee at 0.0219Spread 0.0001

Five Currencies are quoted in Direct Terms

• Pound Sterling• Euro• Australian Dollar• New Zealand Dollar• Irish Punt

9

Conversion of two way quotes

Bid (INR/USD) = 1/Ask (USD/INR ) Ask (INR/USD) = 1/Bid (USD/INR )

Take the inverse of each rate (bid and ask) and switch them around.

Ex : USD/INR 45.75 – 45.80 INR/USD 1/45.80 1/ 45.75

0.0218 - 0.0219

Appreciation & Depreciation of Currencies

• The current exchange, (USD/INR) = 45.75, in 1 month INR/USD = 0.0219

• Has the US dollar appreciated or depreciated?

• By what % has the exchange rate changed?

• Convert INR/USD = 0.0219 to USD/INR = 1/ INR/USD = 45.80

• Now we see that US dollar has appreciated.

• The % change per month is:

%10.045.75

45.75 - 45.80

Cross Currency Market

Cross currency trading refers to forex transactions that do not include the US dollar (USD). A cross rate refers to a currency pair that excludes the US dollar. An example of a cross rate is GBP/INR, in which the two currencies being traded are the British Pound and Indian Rupee.

Types of Cross Currency pairsHistorically, forex transactions had to involve the US dollar. When two non-USD currencies had to be traded, the trader was required to first convert the currency he/she was holding into US dollars and then convert US dollars into the desired currency. Cross currency trading bypasses this step.

There are two types of Cross Currency pairs.

1. Pairs involving the Euro as the reference currency, such as Euro/Japanese Yen (EUR/JPY), Euro/Swiss Francs (EUR/CHF) and Euro/British Pound (EUR/GBP). Cross rates that involve the Euro are known as Euro crosses.

2. Pairs that involve neither the Euro nor the US dollar, such as British pound /Indian Rupee (GBP/INR) and Japanese Yen /British pound /Indian Rupee (JPY/INR). These are called cross currency pairs or cross rates.

Benefits of Cross Currency

Cross currency pairs simplify forex trading. A trader can directly convert one currency into another, without first converting money into US dollars. This saves time and avoids unnecessary hassles.

Advantages of cross currency trading are:

1. Price fluctuations in cross currency pairs are usually lower than in pairs involving the US dollar. Cross currency pairs are, thus, suitable for traders who are new to the forex market.

2. Cross currency pairs can be used to diversify the portfolio.

3. Cross currency trading offers high profit potential.

EXAMPLE

• Identify the two underlying rates for the required cross rate. For example if the cross rate is JPY/INR the two required rates are USD/INR and USD/JPY

• For each underlying rate get the spot price and the swap points for the required forward period as inputs

• Ensure that the forward value dates for each underlying rate is the same as that for the cross rate

• Derive the forward outright price for each underlying rate

Volatility In Cross Currencies

Average Daily Volatility (in %) Spot Rates

Start Date End Date Period USDINR GBPINR EURINR JPYINR

Apr-09 Oct-09 6 M 0.61% 0.80% 0.61% 1.06%

Oct-08 Oct-09 1 Yr 0.74% 1.12% 0.86% 1.34%

Oct-07 Oct-09 2 Yr 0.63% 0.98% 0.85% 1.24%

Oct-06 Oct-09 3 Yr 0.56% 0.85% 0.74% 1.11%

Oct-05 Oct-09 4 Yr 0.50% 0.77% 0.68% 0.99%

Average Daily Volatility (in %) Spot Rates

Start Date End Date Period USDINR GBPINR EURINR JPYINR

Apr-09 Oct-09 6 M 0.61% 0.80% 0.61% 1.06%

Oct-08 Oct-09 1 Yr 0.74% 1.12% 0.86% 1.34%

Oct-07 Oct-09 2 Yr 0.63% 0.98% 0.85% 1.24%

Oct-06 Oct-09 3 Yr 0.56% 0.85% 0.74% 1.11%

Oct-05 Oct-09 4 Yr 0.50% 0.77% 0.68% 0.99%

-51.441

12.1364

18.6258

-12.3

LOW

79.36%25.473619.662419.7770USDINR / EURINR

CURRENCY PAIRS LAST MEAN HIGH CORRELATION

GBPINR / EURINR -9.1883 -8.3003 -3.0251 80.38%

USDINR / GBPINR 28.5725 31.7038 43.2575 80.35%

USDINR / JPYINR -45.111 -47.783 -44.839 -59.70%

Spreads Crosses

Jobbing

WATCHING CONSIDERING CONVERTED VALUE

Vs

MCX-SX VALUE

EURUSDUSDINR EURINR EURINR

GBPUSD USDINR GBPINR GBPINR

USDJPY USDINR JPYINR JPYINR

GLOBAL PAIR

DOMESTIC PAIR

SP. SPREAD CONTRACT FORMULA

DERIVING PAIR

MCX-SX CONTRAC

T

A B C D E = (A*D) F

GBPUSD (MAR

CH)USDINR (JAN) JANMARCH B+C

GBPINR (MARCH) GBPINR

1.6186 45.75 0.20 45.95 74.3747 74.2500

GLOBAL PAIR

DOMESTICPAIR

SP. SPREAD CONTRACT FORMULA

DERIVING PAIR

MCX-SX CONTRACT

T

A B C D E = (D / A) F

USDJPY (MARCH)

USDINR (JAN) JANMARCH B+C

JPYINR (MARCH)

JPYINR

91.04 45.75 0.20 45.95 0.5047 0.502

• SEBI CIRCULAR

Currency Futures on Additional Currency Pairs

SEBI/DNPD/Cir- 52 /2010January 19, 2010

• CONTRACT SPECIFICATION

Thank youTechnical Analysis Team

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