“HEDGING THROUGH CURRENCY FUTURES”

Presented by:-

Ambesh Kumar Srivastava

FT-08-616

PGDM 08-10

INTRODUCTION TO FOREX MARKET

24 hours open starting in New Zealand Monday morning and closing in Chicago Friday night – No gap up/down opening except on Monday morning.

Volume: 2.5 Trillion dollar Daily Turnover Global Market- Participants from all over the

world , trading at the same time No liquidity problem – no single participant

can run the price First and quick reaction to global events Vast range of derivative products—

attendant risks.

Forex Market – India

Spot

Forward/ OTC market

Futures

FACTORS AFFECTING DEMAND AND SUPPLY OF

CURRENCIESSupply Demand

Export Companies Import Companies

Foreign Investors Foreign Investors

Speculators Speculators

Central Bankers Central Bankers

Currency Futures-Introduction

It is a derivative instrumentDefinition is the same as currency

forwardForwards are traded over the counterFutures are traded in organised

exchanges (separate financial futures exchanges)

Futures are transacted through brokersTraded only in a limited number of

currencies

Currency

futures -

Kevin

Regulatory Framework

• RBI & SEBI All resident individuals permitted NRIs and FIIs not permitted Underlying exposure not necessary Only Dollar rupee trading permitted Settlement of currency futures-cash settled

in INR Commenced trading on Aug 29,’08 12 Months Contract at any point of time Near month most active Next three months more active Tight Bid-ask spreads

OTC vs. Futures

OTC Market/Forwards

Currency Futures

Accessibility Restricted entry Entry not restricted

Price

Transparency

Limited access Online high visibility

Underlying

exposure

Required Not required

Liquidity Depth not known Depth visible

Settlement Physical delivery Net Settled in INR

Agreements Customized Standard

Credit Exposure

Yes Mitigated through Clearing member

Contract specifications

Category DescriptionUnderlying Rate of

exchange

between 1 USD &

INR

Contract Size USD1000

Contract Months 12 near Calendar Months

Margin Requirement

Exchange – 3%

Recommended –

5%

Tick Size .25Paise or .0025INR

Settlement Cash settled in INR on relevant RBI reference rate

Particulars Time

Trading Hours 9:00 am to

5:00 pm

Near Month contract expiry on

12 Noon on 2days prior to last working day

Settlement

Daily MTM T+1

Final Settlement T+2(Last working day)

Rate RBI Ref Rate

Who can trade?

Speculators

Commodity Traders

Exporters/Importers

Corporates

Offshore Investors

Expenditure/Remittance in Foreign Currency

Speculators

New asset class for diversification

Concentration on one single scrip.

Relaxation of STT.

Small margin of 5% i.e. by paying Rs2500 you can trade up to $1000

Commodity players

Commodities like Crude & Gold quoted on MCX after converting into Rupee

A long Crude position results in losses with Rupee strengthening

Hedge in Currency Futures can undo the losses

Exporters/Importers

Exporters and importers can hedge their future payables and receivables starting with a meager amount of $1000.

No credit line required from their Banker as is the case with Forwards.

Hassle free process

Corporate

Borrowers, can hedge foreign currency (FCY) loans for interest and principal payments

Offshore Investor

Resident Indians can hedge their offshore investments through Currency Futures

TRADING and its LOGISTICS

Online & Offline trading facility on all the bourses

Regular updates on Dollar INR movement with calls to buy and sell

Special consultancy to Exporters, Importers & Corporates for their FOREX transactions

Receive education on the product through seminars/con-calls organized by NSE

Client’s Cash Margin from brokers can be used for all the segments – Equity, Commodity & Currency

“NOW” TRADING PORTAL BY NSE Buying and Selling of Future contracts Buying and Selling of spreads contracts Update of prices of all the 12 month

contracts Give snapshot of every months contracts

Bid/Ask, highs/lows, volume, etc. Keep track record of all the trades done and

the trader can see it on the order book Gives quote of the best open contracts Gives graphs and analysis of the day and

month trade

“REUTRS” Gives current Bid/Ask of different currencies Graphs and technical analysis of different

factors like NDF, Crude, exchanges, currencies, etc

Latest news update from different areas like Forex, political, social, economics, etc

Give bid/ask quote for currency contracts Give prices of different metals, and

agricultural commodities Give information of different currency

indexes Provide information of NDF, LIBOR,etc

HEDGING THROUGH CURRENCY FUTURES

Types of FX Hedgers using Futures

Long hedge:• Underlying position: short in the foreign currency• Hedging position: long in currency futures

Short hedge:• Underlying position: long in the foreign currency• Hedging position: short in currency futures

EXAMPLE 1: LONG FUTURES HEDGE EXPOSED TO THE RISK OF STRENGTHENING

USD

EXAMPLE 2: SHORT FUTURES HEDGE EXPOSED TO THE RISK OF WEAKENING USD

EXAMPLE 3: RETAIL HEDGING – LONG FUTURES HEDGE EXPOSED TO THE RISK OF A

STRONGER USD

EXAMPLE 4: RETAIL HEDGING – REMOVE FOREX RISK WHILE INVESTING ABROAD

FUNDAMENTAL ANALYSIS OF RUPEE

INR & CRUDE

o One school of thought espouses that since crude is denominated in dollars, when oil prices rise, the demand of USD increases and hence Euro/INR will depreciate. This is seen from the above graph.

o The second school of thought states that the demand for crude oil increases when the economy is doing well. At times like these investors will remove money from low yielding currencies (like the USD) and invest them in higher yielding currencies (like the INR).

INR & STOCK MARKET The continues upward moment of

Sensex result to an upward moment in the price of the Rupee (INR) and made it stronger in the comparison of US Dollar.

Both show a proportionate relationship moment any of these two elements will result the same directional moment in the other factor.

More and more people start investing in the companies stocks result huge amount of capital inflow from the global investors which will rise the demand of rupee in the county’s exchange market.

INR & USD

On the basis of dollars value with other currencies there is a dollar index which is prepared.

This index is calculated by factoring in the exchange rates of six major world currencies: The euro, Japanese yen, Canadian dollar, British pound, Swedish kroner and Swiss franc.

When the dollar index goes up rupee falls and when the rupees appreciates the dollar index comes down.

INR & EUROo When euro is stronger position

we can also see that rupee is showing recovery sign against its base currency which is dollar.

o Dollar being the common in both currency pair makes them interrelated to each another.

o Euro and rupee both are high yielding currency so if there is a flow in market towards high yielding currency from low yielding currency like dollar the demand of that currency increase and we see and the similar kind of moment in both currency pairs.

Awaited delicacies

Options

FIIs / NRIs

Position Limits

Other currency pairs - Euro, Yen & Sterling

THANK YOU

AS IF……