Currency Derivatives

Knowledge Series I

What is Currency Exchange Rate?

Currency is the monetary unit for economic transaction within a country. Rupee is Indian Currency, $ is currency of USA. In global economy, nations carry out economic transactions with each other like exports, imports, investment in foreign country, loan / advances to another country or economic aid to other country. When this happens currency of one country needs to get converted to another countries currency. The rate at which this conversion happens is called Currency Rate / Exchange Rate/ Forex Rate. For Example if 1 US $ can be converted to 55 Indian Rupees. Hence $ conversion rate for Indian Rupee is 55. 1 $ = 55 INR (Indian national rupee)

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What are Currency Derivatives?

Derivatives
Futures Fixed Lot Size, Fixed Expiry Date, Margin Requirement, Daily MTM, Price based on underlying asset. Options- Right to Buyers/ Obligation for Sellers, Buy Call Teji, Buy Put-Mandi, Premium paid/ received, Selling of options requires margin .

Each Derivative has an underlying asset.

Ex. Nifty Futures : Nifty Spot Rate is underlying asset Cipla Options: Cipla Shares cash market rate is underlying asset.

Any derivative Futures / Options where underlying asset is Currency exchange rate is called Currency. In India Currency Derivatives was allowed in August 2008. Currency Derivatives trading is allowed on NSE, MCX-SX. NSE has Futures and Options, MCX-SX has Futures Only.

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Currency Derivatives Currency Derivatives trading was permitted by RBI and it is regulated by SEBI and RBI. While NSE provides Futures and Options both instruments, MCX-SX provides only Futures. At Reliance Securities we primarily provide trading on NSE. Who can trade in Currency Derivatives Any Individual Indian Resident, HUF, Corporate House (Non Individual) Can trade Currency Derivatives.

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What factors affect Currency Rates?

Value of a currency / Currency rate typically represents that country's economic strength or weakness. If economy is strong, Currency Rate appreciates.
For example if GDP growth of India reaches to 9% in a particular quarter, it means economy is doing good and Rupee appreciates against other currency. Before GDP data announcement USD / INR exchange Rate was
1$ = 55 Rupees

Post GDP data announcement USD / INR exchange rate becomes

1$ = 54 Rupees .. i.e. Rupee appreciates because of Good Economy.

All the factors that affect economy , affects Currency Exchange rate and hence Currency Derivatives. Lets see major factors that affect Currency Derivatives..

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What factors affect Currency Rates? Economic Data of India : GDP, IIP, Inflation. RBI regulated Data : Repo / Reverse Repo Rate, CRR Current (Export Import) and Capital Account Deficit (Govt. Revenue Govt. Spending) EUR USD exchange Rate US Inflation and Interest Rates SENSEX/NIFTY movement > FII inflow/ outflow
High FDI inflow >> INR Appreciates High FDI outflow >> INR Depreciates

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Why to trade Currency Derivatives?

Currency derivatives market is worlds biggest market (by turnover value when compared to equity and commodities) A new avenue to diversify portfolio Currency trading is related to global markets and macro economic conditions hence there is no threat/chance of market manipulation Very high liquidity and good market depth. Low Margins (Approx 3.5% Vs. 10% in Nifty Vs. 7% in Gold) Low Annualized Volatility = Low Risk (when compared to other asset classes like equities and commodities) Intraday trading products available on trading platforms. Currency trading has lower transaction cost (Viz. Exchange Transaction Charges) as compared to other asset classes (Viz. Equities and Commodities). Stable Returns if traded with discipline.

Ltd.

Why to trade Currency Derivatives Corporate/ SME

Excellent market to hedge Currency Price Risk for Exporters and Importers No restrictions on trading direction or trade / position value (While there are trading direction and position value restrictions on OTC market) Efficient and Cost effective price for Hedging for all size of Clients. No documentation to be furnished to take position in Currency Derivatives. Profit and Loss in Currency Trading account will be considered as Business Profit and Loss and can be adjusted / carried in books for five years.

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Currency Derivatives - Futures

Currency futures underlying asset is Spot Currency Rate. Currency Derivatives has four Pairs of Currency.
USDINR ( US $ - INR)
EURINR (European - INR) GBPINR (British - INR) JPYINR (Japanese -INR)

Lot Size and Price Units

USDINR - $1000 INR/$ (Eg.Rs55 /$) EURINR - 1000 - INR/ (Eg. Rs 67/ ) GBPINR - 1000 INR/ (Eg. Rs 85 /) JPYINR - 100,000 INR/100 (Eg. Rs 69 / 100 )

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Minimum Price Movement (tic size) and Profit / Loss per tic.
For all four currency pair minimum tick size is Rs. 0.0025 For example USDINR July12 futures 55.0000 >Next Tick > 55.0025 Profit loss per tick = 1000 (Lot size) X 0.0025 = Rs.2.5 Profit loss per 1 paisa Movement
= 1000 (Lot Size) X 0.01 = Rs. 10

Profit loss per 1 Rupee Movement = 1000 (Lot Size) X 1.00= Rs. 1000

Futures Margin Requirement

USDINR 2.5% to 4% (Currently Rs.2000 per lot) EURINR- 2.5% to 4% (Currently Rs.1700 per lot)

No. of Contracts available

12 Months futures contract for each month
Ex. From July 2012, August 2012, Sept.2012.. To June 2013

Circuit Limit : 3%

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Currency Options
Currency Options are available for USDINR pair. Call option and Put option both are available. Lot size is of $1000. Option Price/Premium is quoted in Rs./$ terms(like in futures). Minimum Tick size and Profit /Loss
Example USDINR Call Strike 55.00 29 July Expiry Premium is 0.3525> Next tick > 0.3550 (0.0025 tic size) Profit loss per tick = 1000 (Lot size) X 0.0025 = Rs.2.5 Profit loss per 1 paisa Movement
= 1000 (Lot Size) X 0.01 = Rs. 10

Currency options can be bought /sold any time during trading hours, can be traded intraday also. Call and put strike prices are available at an interval of Rs.0.25 (55.00 > 55.25 >55.50 > 55.75 >56)

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