A Study of Currency Derivatives in India

Group Members: Priyanka Agrawal 206 Dheeraj Amarnani 208 Nikunj Bafna 209 Sanket Gala 233 Rohit Jain 243

An Overview:
Foreign exchange rates, like any other asset class move depending on various factors, like demand supply, interest rate parity, trade and capital flows, speculators taking positions, clients hedging risk arising from their trade and capital flows etc. Based on the evolving needs of the market place, NSE introduced trading in exchange traded Currency Derivatives contracts on August 29, 2008. NSE launched USDINR contracts in currency derivatives segment. The product had an impressive debut and has shown consistent growth since inception. Within the span of a year and half the volume crossed the mark of USD 4.3 billion. In the context of growing integration of the Indian economy with the rest of the world and a continuous demand for currency derivatives in other currencies, Securities Exchange Board of India and Reserve Bank of India have permitted trading in futures contracts on new currency pairs. NSE therefore now introduces trading in currency futures based on Euro(EUR)-INR, Pound Sterling(GBP) - INR and Japanese Yen (JPY) - INR exchange rates in addition to the existing USDINR contracts. Currency futures trading will be of interest to those who wish to: 1. Invest: Take a view on USD/INR appreciating or depreciating over a specified time frame. Eg. If you expect oil prices to rise and impact Indias import bill, you would buy USD/INR with a view to INR depreciating. Alternately, if you believed that strong exports from the IT sector, combined with strong FII flows will translate to INR appreciation you would sell USD/INR 2. Hedge: If you are an importer and you have USD payments to make at a future date. You can hedge your foreign exchange exposure by buying USD/INR and fixing your payout rate today. You would hedge if you were of the view that USDINR would depreciate. 3. Arbitrage: Trading in futures allows you to trade in interest rates implied by the foreign exchange market. 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 a currency futures contract, the underlying instrument is a foreign exchange rate. What are Spot & 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 these two is that a forward price reflects the interest rate deferential 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 specified time. Forwards V/s Futures? Futures are standardized forward contracts traded on an exchange. Forwards trade in the OTC market and are customized. 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 & anonymity while trading.

Growth of Currency Derivatives in India since its inception:

Year Currency Futures No. of contracts Turnover (Cr.) (Rs. Cr) 55.27 70.14 71.22 37.86 3.27 30,42,270 33,78,488 32,79,002 17,82,608 1,62,272 Currency Options No. of contracts Turnover (Cr.) (Rs. Cr) 21.57 27.20 3.74 11,85,076 12,96,500 1,70,785 Total No. of contracts (Cr.) 76.84 97.33 74.96 37.86 3.27 Turnover (Rs. Cr) 42,27,346 46,74,989 34,49,787 17,82,608 1,62,272 Average Daily Turnover (Rs. Cr) 20,927.46 19,479.12 13,854.57 7,427.53 1,167.43

2012-13 2011-12 2010-11 2009-10 2008-09

Research Methodology Techniques Questions: 1) What is the exposure of currency derivatives in the country? 2) Why do people trade in Currency derivatives? Hedging? Speculation? Liquidity? Asset Class? Arbitrage? 3) What do you think about currency derivatives in terms of riskiness? 4) What do you think about currency derivatives in terms of its profitability? 5) What is the general publics perception of currency derivatives? 6) What according to you is the exposure or participation of retail investors in the currency derivatives market in India today? 7) Do you think steps are being taken by the regulators to create awareness about currency derivatives in India? If yes, then what kind of steps are being taken? 8) What factors do you think influence currency rates in the economy? 9) *As an investor, what would be the most influential factor that would drive you to invest? 10) What is the scope of currency derivatives in the future in India? 11) What percentage of your corpus would you set aside for trading in currencies?

Variables used in Research Independent Variables: Corpus, Risk, Health of Economy, Awareness & Knowledge, Margin Dependent Variables: Volume of Trade Hypothesis Ho: People do not trade in currency derivatives because of lack of corpus H1: People trade in currency derivatives because they have enough corpus available

Ho: People do not trade in currency derivatives because they perceive it to be risky H1: People trade in currency derivatives because they consider it safe

Ho: People do not trade in currency derivatives when the economy is going through a downturn

H1: People trade in currency derivatives when the economy is going through a downturn

Ho: People do not trade in currency derivatives because they do not have sufficient knowledge H1: People trade even if they do not have sufficient knowledge

Ho: People do not trade in currency derivatives because the margin facilities are not favourable H1: People trade in currency derivatives even if the margin facilities are not favourable