CURRENCY FUTURES

1) What is a currency futures contract?
A futures contract is a standardized exchange traded contract, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. In the case of a currency futures contract, the underlying instrument is a foreign exchange rate.

2) What are Spot and Forward FX rates?
The Spot exchange rate refers to the current exchange rate. The Forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date. The main difference between FX spot and forwards price is that a forward price reflects the interest rate differential of the respective currencies for the specified future date.
Forward Price = Spot Price +/- Forward Points
Forward points combine the benefit or disadvantage of holding the specific currency for the specific time.

3) Forward v/s Futures?
Futures are standardized forward contracts traded on an exchange. Forwards trade in the OTC market and are customized. Further, forwards are bilateral agreements between two counterparties whereas futures settlements are guaranteed by the exchange clearing house. In addition futures provide transparency in pricing, liquidity and anonymity while trading.

4) How do I start trading Currency Futures?
Currency Futures can be bought and sold through the trading members of National Stock Exchange. To open an account with a NSE trading member you will be required to complete the formalities which include signing of member constituent agreement, constituent registration form and a risk disclosure document. The trading member will allot you a unique client identification number.
To begin trading, you will be required to deposit cash or collateral with your trading member as may be stipulated by them.

5) How will a Currency Futures contract finally settle?
Contract Expiration Date for each contract shall be the last working day of the month (excluding Saturdays). The Last Trading Day for each contract shall be two working days prior to the Contract Expiration Date. The settlement will be fixed based on the Reserve Bank of India Reference Rate at 12.00 noon on the Last Trading Day. All contracts will net settle in INR. Currency futures trading will be of interest to those who wish to

Invest:Take a view on USDINR appreciating or depreciating over a specified time frame. For e.g. if you expect oil prices to rise and impact India’s import bill, you would buy USDINR with a view to INR depreciating. Alternatively, if you believed that strong exports from the IT sector, combined with strong FII flows will translate to INR appreciation you would sell USDINR.

Hedge: If you are an importer, and have USD payments to make at a future date. You can hedge/crystallize your foreign exchange exposure by buying USDINR and fixing your pay out rate today. You would hedge if you were of the view that USDINR was going to depreciate.

Arbitrage: Trading in futures allows you to trade in interest rates implied by the foreign exchange market.

Foreign Exchange which to date has been an asset class only banks and corporates with currency exposure were allowed to trade has finally been made available and easily accessible to all Resident Indians. In the context of growing integration of the Indian economy with the rest of the world and a continuous move towards capital account liberalization, Securities Exchange Board of India and Reserve Bank of India have permitted trading in Currency Futures based on the USDINR exchange rate.

The National Stock Exchange (NSE) group which has brought you trading in equities, interest rates and commodities brings you trading in Currency Futures. The screen based trading system with more than 1,30,000 trading terminals across the country shall now provide you a new segment on Currency Derivatives.

            Product Specifications

Underlying

USD-INR

Trading Hours (Monday to Friday)

9.00 am to 5.00 pm

Contract Size

USD 1000

Tick Size

0.25 paise or INR 0.0025

Trading Period

Maximum expiration period of 12 months

Contract Months

12 near calendar months

Contract Expirations Date

Last working day of the month (subject to holiday calendar)

Last Trading Day

Two working days prior to Contract Expiration Date











From 1st Feb 2010

·                     GBP-INR

Contract Specifications for Pound Sterling-INR

Symbol

GBPINR

Instrument Type

FUTCUR

Unit of trading

1 (1 unit denotes 1000 POUND STERLING)

Underlying

POUND STERLING

Quotation/Price Quote

Rs. per GBP

Tick size

0.25 paise or INR 0.0025

Trading hours

Monday to Friday
9:00 a.m. to 5:00 p.m.

Contract trading cycle

12 month trading cycle.

Settlement price

Exchange rate published by the Reserve Bank in its Press Release captioned RBI Reference Rate for US$ and Euro.

Last trading day

Two working days prior to the last business day of the expiry month at 12 noon.

Final settlement day

Last working day (excluding Saturdays) of the expiry month.
The last working day will be the same as that for Interbank Settlements in Mumbai.

Base price

Theoretical price on the 1st day of the contract. On all other days, DSP of the contract

Price operating range

Tenure upto 6 months

Tenure greater than 6 months

+/-3 % of base price

+/- 5% of base price

Position limits

Clients

Trading Members

Banks

Higher of 6% of total open interest or GBP 5 million

Higher of 15% of the total open interest or GBP 25 million

Higher of 15% of the total open interest or GBP 50 million

Minimum initial margin

3.2% on first day & 2% thereafter

Extreme loss margin

0.5% of MTM value of gross open positions.

Calendar spreads

Rs.1500/- for a spread of 1 month, 1800/- for a spread of 2 months, Rs.2000/- for a spread of 3 months or more

Settlement

Daily settlement : T + 1
Final settlement : T + 2

Mode of settlement

Cash settled in Indian Rupees

Daily settlement price (DSP)

DSP shall be calculated on the basis of the last half an hour weighted average price of such contract or such other price as may be decided by the relevant authority from time to time.

Final settlement price (FSP)

Exchange rate published by the Reserve Bank in its Press Release captioned RBI Reference Rate for US$ and Euro.

Euro-INR

Contract Specifications for Euro-INR

Symbol

EURINR

Instrument Type

FUTCUR

Unit of trading

1 (1 unit denotes 1000 EURO)

Underlying

EURO

Quotation/Price Quote

Rs. per EUR

Tick size

0.25 paise or INR 0.0025

Trading hours

Monday to Friday
9:00 a.m. to 5:00 p.m.

Contract trading cycle

12 month trading cycle.

Settlement price

RBI Reference Rate on the date of expiry

Last trading day

Two working days prior to the last business day of the expiry month at 12 noon.

Final settlement day

Last working day (excluding Saturdays) of the expiry month.
The last working day will be the same as that for Interbank Settlements in Mumbai.

Base price

Theoretical price on the 1st day of the contract. On all other days, DSP of the contract

Price operating range

Tenure upto 6 months

Tenure greater than 6 months

+/-3 % of base price

+/- 5% of base price

Position limits

Clients

Trading Members

Banks

Higher of 6% of total open interest or EUR 5 million

Higher of 15% of the total open interest or EUR 25 million

Higher of 15% of the total open interest or EUR 50 million

Minimum initial margin

2.8% on First day & 2% thereafter

Extreme loss margin

0.3% of MTM value of gross open positions.

Calendar spreads

Rs.700/- for a spread of 1 month, 1000/- for a spread of 2 months, Rs.1500/- for a spread of 3 months or more

Settlement

Daily settlement : T + 1
Final settlement : T + 2

Mode of settlement

Cash settled in Indian Rupees

Daily settlement price (DSP)

DSP shall be calculated on the basis of the last half an hour weighted average price of such contract or such other price as may be decided by the relevant authority from time to time.

Final settlement price (FSP)

RBI reference rate

Japanese Yen-INR

Contract Specifications for Japanese Yen-INR

Symbol

JPYINR

Instrument Type

FUTCUR

Unit of trading

1 (1 unit denotes 100000 YEN)

Underlying

JPY

Quotation/Price Quote

Rs per 100 YEN

Tick size

0.25 paise or INR 0.0025

Trading hours

Monday to Friday
9:00 a.m. to 5:00 p.m.

Contract trading cycle

12 month trading cycle.

Settlement price

Exchange rate published by the Reserve Bank in its Press Release captioned RBI Reference Rate for US$ and Euro.

Last trading day

Two working days prior to the last business day of the expiry month at 12 noon.

Final settlement day

Last working day (excluding Saturdays) of the expiry month.
The last working day will be the same as that for Interbank Settlements in Mumbai.

Base price

Theoretical price on the 1st day of the contract. On all other days, DSP of the contract

Price operating range

Tenure upto 6 months

Tenure greater than 6 months

+/-3 % of base price

+/- 5% of base price

Position limits

Clients

Trading Members

Banks

Higher of 6% of total open interest or JPY 200 million

Higher of 15% of the total open interest or JPY 1000 million

Higher of 15% of the total open interest or JPY 2000 million

Minimum initial margin

4.50% on first day & 2.30% thereafter

Extreme loss margin

0.7% of MTM value of gross open positions.

Calendar spreads

Rs. 600 for a spread of 1 month; Rs 1000 for a spread of 2 months and Rs 1500 for a spread of 3 months or more

Settlement

Daily settlement : T + 1
Final settlement : T + 2

Mode of settlement

Cash settled in Indian Rupees

Daily settlement price (DSP)

DSP shall be calculated on the basis of the last half an hour weighted average price of such contract or such other price as may be decided by the relevant authority from time to time.

Final settlement price (FSP)

Exchange rate published by the Reserve Bank in its Press Release captioned RBI Reference Rate for US$ and Euro.

 

 

HEDGING - PRACTICAL ILLUSTRATION
EXPORT:
• An Exporter has confirmed an order for his goods and is likely to receive the payment USD 100000/- in February 2009
• He should take a position of SELL USD/INR 100000/- in futures market @ prevailing rate of February 2009 contract
• In February 2009 when he receives the actual payment he should get it converted in the bank @ spot rate and at the same time should square up his position (BUY USD/INR 100000/-) Futures market @ prevailing rate of February 2009.

IMPORT:
An Importer has confirmed an order for his goods and is likely to make the payment USD 100000/- in February 2009
He should take a position of BUY USD/INR 100000/- in futures market @ prevailing rate of February 2009 contract
In February 2009 on the due date he should make the actual payment from the bank @ spot rate and at the same time should square up his position (SELL USD/INR) in Futures market @ prevailing rate of February 2009.

BENEFITS FOR SMEs
Arbitrage opportunity between forwards (OTC) and futures
Extremely low transaction cost
Price transparency – Live future prices for entire calendar year which are market discovered, can be viewed on the exchange provided online terminal during market hours
Direct transaction execution through online terminal
Direct online back office for viewing – Ledger, margins and contract notes
Excellent research support – Daily Currency call via email and intraday messages
No underlying required

o Sell in futures @ 48.70 levels (1 month)
o Buy in forward @ 48.50 + 9 paisa premium = 48.59(1month)
o Net Gain = 49.70-48.59 = 0.11
o i.e. Approx 11 Paisa arbitrage
o Arbitrage will be realized at the expiry of the contract.

TRADE RELATED:
Initial Margin of 3% to 5% and Mark To Market Margin on daily basis
Online Terminal – Free of Cost
Back up facility of putting Offline trades also available
Research & Advisory: Daily Currency call via E-mail
Arbitrage can potentially exist between Currency Futures, OTC Forwards and Non Deliverable
Forward Contracts traded offshore.
Arbitrage can be executed by an entity having exposure to any two of the above mentioned markets.

o Sell in futures @ 48.70 levels (1 month)
o Buy in forward @ 48.50 + 9 paisa premium = 48.59(1month)
o Net Gain = 49.70-48.59 = 0.11
o i.e. Approx 11 Paisa arbitrage
o Arbitrage will be realized at the expiry of the contract.

HEDGING-Income from Abroad
Illustration:
Suppose Any person receives money from abroad regularly, his monthly rupee income is at risk.
Suppose if he/she expects $ 3000 per month.
At rate of Rs. 50.00 it will be Rs. 1,50,000. But if the dollar fell to Rs 47.00 his/her income will drop to Rs. 1,41,000.
It means the loss of Rs. 9,000.
To the solution he/she can sell $ 3000(or vary from the amount he/she expects) every month for next 12 months in Currency Futures.
Every time he/she encash dollar, can liquidate or de-hedge the position in Currency Futures market. In this way he/she can get the price locked for the whole year whether the domestic Currency Appreciates or Depreciates.
If the Domestic Currency Appreciates he/she can gain from Currency Futures and if it Depreciates he/she can gain from encashing the dollar at upper level.

OPERATIONS FLOW
POST TRADE :
Online Back office access for viewing
1. Margin
2. Ledger
3. Trade Confirmation
4.Contract Notes: Physical contract notes will be delivered and option of E - contract notes also available

Cost of opening a trading account Rs 100/-

For details call 9898271744 or email: imexforex@gmail.com