SlideShare a Scribd company logo
Internal Guide Certificate
Prof. ……………………….
Professor/ Asst. Professor / Lecturer
IBCS, SOA University
Certificate
This is to certify that Mr. Debashish paikray having regd
No…1361333072 has done this research project work on “STOCK
AND CURRENCY DERIVATIVES MARKET IN INDIA:- EVOLUTION,
TRADING MECHANISM AND FUTURE PROSPECTS.” and submitted
the report in partial fulfilment for the degree of Master of Business
Administration to IBCS, SOA University, Bhubaneswar under my
supervision and guidance. His report is the record of original work
done by him. To the best of my knowledge, no part of the content of
this report has been submitted for any degree by him or anybody
else to any other University or Institution.
Date : - / / 2010 (Prof………………….)
Place : - Bhubaneswar Project Guide
Declaration
I, Mr. Debashish paikray, hereby declare that the project report submitted by me
entitled “STOCK AND CURRENCY DERIVATIVES MARKET IN INDIA:- EVOLUTION,
TRADING MECHANISM AND FUTURE PROSPECTS ” in the partial fulfilment for the
degree of Master of Business Administration to IBCS, SOA University, Bhubaneswar, is
the record of original work done by me. No part of the content of this report has been
submitted to any institution / university for the award of any other degree. Previous
works in this field have been duly acknowledged as and when they have been referred.
Date : - / /2014
Place : - Bhubaneswar (Name & Signature of the Student)
ACKNOWLEDGEMENT
I am grateful to all those who help me directly or indirectly to
prepare this report. I believe that my research work will help the
organisation to improve their strategic in future days.
This kind of project work is definitely very hart to
prepare, may be starching a period of time. Whenever a person is
helped and cooperate by other, his/her bound to pay obligation
to them. I cannot in full measure; reciprocate the kindness shown
and contribution made by various individual in this period.
I would like to extend of my parents, family, friends, and
my guide Mr. Ramchandra Mohapatra for their fatigable care,
keen interest and valuable suggestions enabled me to
accomplices my project work.
I am also thankful to those respondents of
Bhubaneshwar who shared their precious time and necessary
information during the survey.
Indeed this page of acknowledgement shall never be
able to touch the horizon of generosity of all those who tendered
help to me.
Place:Bhubaneswar
Date: DebashishPaikray
PREFACE
As a part of the MBA curriculum of Institute of dusiness arend computer studies
a unit of SOA university, I have been assigned to do my summer project entitled
“St Ock and currency derivative in india, :- evaltion, treding mechanism and future
prospects”under the faculty guidance of Prof. R.C. Mohapatra.
In the organizationunder the guidance of Mr. Padmashree Das, I have experience
in the derivativessector. I shall be amply awarded if the finding recommendations
and other study previous beneficial for the organization in augmenting its effects
towardsexcellence.
Place:Bhubaneswar
Date: DebashishPaikray
final sip
CHAPTER-1
INTRODUCTION
OVERVIEW
Fixed exchange rate was in existence under the Bretton Woods system. According to
Avadhani (2000), Financial derivatives came into the spotlight, when during the post-
1970 period, the US announced its decision to give up gold- dollar parity, the basic king
pin of the Bretton Wood System of fixed exchange rates. With the dismantling of this
system in 1971, exchange rates couldn’t be kept fixed. Interest rates became more
volatile due to high employment and inflation rates. Less developed countries like
India opened up their
economies and allowed prices to vary with market conditions. Price fluctuations made
it almost impossible for the corporate sector to estimate future production costs and
revenues. The derivatives provided an effective tool to the problem of risk and
uncertainty due to fluctuations in interest rates, exchange rates, stock market prices and
the other underlying assets. The derivative markets have become an integral part of
modern financial system in less than three decades of their emergence. This paper
describes the evolution of Indian
Derivatives market, trading mechanism in its various securities, the various unsolved
issues and the future prospects of the derivatives market.
DEFINITION OF DERIVATIVE
Section 2(ac) of Securities Contract Regulation Act (SCRA) 1956 defines Derivative as: a) “a
security derived from a debt instrument, share, loan whether secured or unsecured, risk
instrument or contract for differences or any other form of security; b) “a contract which
derives its value from the prices, or index of prices, of underlying securities”.
The International Monetary Fund (2001) defines derivatives as “financial
instruments that are linked to a specific financial instrument or indicator or commodity and
through which specific risks can be traded in financial markets in their own right. The value of a
financial derivative derives from the price of an underlying item, such as an asset or index. Unlike
debt securities, no principal is advanced to be repaid and no investment income accrues.”
Kinds of financial derivatives
Forward
Future
Option
Swap
Forward= forwards are the oldest of all the derivatives. A forward contract refers to an
agreement between two parties to exchange an agreed of an asset for cash at a certain date in
future at a predetermined price specified in that agreement. The promised asset may be currency,
commodity, instrument etc.
Future = a future contract is very similar to the forward contract in all respect excepting the
fact that it is completely a standardize one. Hence, it is rightly said that a future contract is nothing
but a standardize forward contract. It is legally enforceable and it is always traded on an
organized exchange.
Option = in the volatile environment, risk of heavy fluctuation in the prices of assets is very
heavy. Option is yet another tool to manage risk.
Swap = swap is yet another exciting trading instrument. Infect, it is a combination of forwards
by two counterparties. It is arranged to reap the benefits arising from the fluctuations in the
market. It may be in currency market or any other market.
F&O Derivatives
ICICI sicurity provide trading facility only on future and option in derivative segment. So we will
discuss detail on future and option.
Typesof future
 Commodity future= A commodity future is a future contract in commodities like
agricultural products, metals and minerals etc. In organized commodity future markets,
contracts are standardized with standard quantities. Of course this standard varies from
commodity to commodity. they also have fixed delivery dates in each month or a few
months in a year. In India commodity futures in agricultural products are popular.
Some well establish commodities exchanges are as follow.
 London Metal Exchange (LME)to deal in gold.
 ChicagoBoard of Trade (CBT)to deal in soyabean oil.
 New York cotton Exchange (NCE) to deal in cotton.
 Commodity Exchange New York (COMEX)to deal in agricultural
products
 International Petroleum Exchange (IPE) in London to deal in crude oil.
 Financial future= financial futures refer to a future contract in foreign exchange or
financial instrument like treasure bill, commercial paper, share market, stock index or
interest rate. It is an area where financial companies can play a dynamic role. financial
futures are very popular in western countries as hedging instrument to protect against
exchangeinterest rate fluctuations and for ensuring future interest on loan.
Some well establish financialfuture exchanges are as follow.
 International Monetary Market(IMM) to deal in US treasury bills, Euro
Dollar deposits, sterling etc.
 London International FinancialFuture
Exchange(LIFFE) to deal in Euro Dollar deposits.

 New York Future Exchange (NYFE)to deal in sterling, Eurodollar
deposit etc.
Typesof option
 Call option= A call option is one which gives the option holder the right to buy a
underlying asset (commodity, foreign exchange, stock, shares etc) at a predetermine price
called “exercise price” or strike price on before a specified date on future. In such a case, the
writer of a call option is under an obligation to sell the asset at a specified period, in case
the buyer exercise his option to buy.
 Put option=A put option is one which gives the option holder the right to sell an
underlying asset at a predetermine price on or before a specified date in future. It means
that the writer of a put option is under an obligation to buy the asset at the exercise price
provided the option holder exercise his option to sell.
 Double option= A double option is one which gives the option holder both the rights -
--- either to buy or to sell an underlying asset at a predetermined price on or before a
specified date in future.
final sip
final sip
CHAPTER-3
LITERATURE REVIEW
According to Greenspan (1997)“By far the most significanteventin finance during
the past decades has been the extraordinary developmentand expansion of financial
derivatives…” Avadhani(2000)stated that a derivative,an innovative financial
instrument, emerged to protect againstthe risks generated in the past, as the history
of financial markets is repleted with crises). Events like the collapse of the fixed
exchange rate system in 1971, the Black
Monday of October 1987, the steep fall in the Nikkei in 1989, the US bond debacle of
1994, occurred because of very high degree of volatility offinancial markets and
their unpredictability.Such disasters have become more frequent with increased
global integration
of markets. Sahoo(1997)opines “Derivatives products initiallyemerged, as hedging
devices againstfluctuation in commodity prices and the commodity-linked
derivatives remainedthe sole form of such products for many years. Marlowe (2000)
argues that the emergence of the derivative marketproducts most notably forwards,
futures and options can be traced back to the willingness ofrisk-averse economic
agents to guard themselves againstuncertainties arising out of fluctuations in asset
prices. It is generally stated thatregulation has an importantand critical role to
ensure the efficient and smooth functioning of the markets. Accordingto Sahoo
(1997)the legal frameworkfor derivatives trading is a critical partof overall
regulatory frameworkof derivative markets.
The purpose of regulation is to encourage the
efficiency and competition rather than Impeding it. Hathaway(1998)stated that,
while there is a perceived similarityof regulatory objective, there is no single
preferred model for regulation of derivative markets. Derivatives include a wide
range of financial contracts, including forwards,futures, swaps and options.
Forward contractis an agreementbetween two parties calling for deliveryof ,and
paymentfor, a specified quantity and quality of a commodity ata specified future
date. The price may be agreed upon in advance, or determined by formula atthe
time of deliveryor other point in time” (Web 2). Just like other instruments, itis
used to control and hedge currency exposure risk (e.g. forward contracts on USD or
EUR)or commodity prices (e.g. forward contracts on oil). Patwari and Bhargava
(2006)explain itin simple words and further add thatone of the parties to a forward
contract assumes a long position and agrees to buy the underlying assetata certain
future date for a certain price and the other agrees to short it. The specified price is
referred to as the deliveryprice. The parties to the contract mutually agree upon the
contract terms like deliveryprice and quantity. Web4 states that “A Futures
Contract is a standardizedcontract, traded on a futures exchange, to buy or sell a
certain underlyinginstrumentata certain date in the future, at a pre-set price. The
future date is called the delivery date or final settlement date. The pre-set price is
call the futures price. The price of the underlyingasseton the deliverydate is called
the settlementprice. The futures price, naturally, converges towards the settlement
price on the delivery date”.
CHAPTER-4
CORPORATE PROFILE
About Company:
ICICI Securities Ltd is an integrated securities firm offering a wide range of services
including investment banking, institutional broking, retail broking, private wealth
management, and financial product distribution.
ICICI Securities sees its role as 'Creating Informed Access to the Wealth of the Nation'
for its diversified set of clients that include corporates, financial institutions, high net-
worth individuals and retail investors.
Headquartered in Mumbai, ICICI Securities operates out of 66 cities and towns in India
and global offices in Singapore and New York.
ICICI Securities Inc., the stepdown wholly owned US subsidiary of the company is a
member of the Financial Industry Regulatory Authority (FINRA) / Securities Investors
Protection Corporation (SIPC). ICICI Securities Inc. activities include Dealing in
Securities and Corporate Advisory Services in the United States.
ICICI Securities Inc. is also registered with the Monetary Authority of Singapore (MAS)
and operates a branch office in Singapore.
ICICI Securities empowers over 2 million Indians to seamlessly access the capital
market with ICICIdirect.com, an award winning and pioneering online broking
platform. The platform not only offers convenient ways to invest in Equity,
Derivatives, Currency Futures, Mutual Funds but also other services
Fixed Deposits, Loans, Tax
Services, New Pension Systems and Insurance are available. ICICIdirect.com offers a
convenient and easy to use platform to invest in equity and various other financial
products using its unique 3-in-1 account which integrates customer's saving, trading
and demat accounts.
Apart from convenience, ICICIdirect.com also offers access to comprehensive research
information, stock picks and mutual fund recommendations among other offerings.
Tailored services and trading strategies are available to different types of customers;
long term investors, day traders, high-volume traders and derivatives traders to name
some.
ICICIdirect.com uses the most advanced commercially available 128-bit encryption
technology enabled Secure Socket Layer (SSL), to ensure that the information
transmitted between the client and ICICIdirect.com across the internet is safe and
cannot be accessed by any third party.
ICICIdirect.com is the first broker in India to introduce `Digitally Signed Contract Note'
to its customers. As a result, the process of generating contract notes has been
automated and the same would be instantly available to its customers in a safe and
secure manner through the website.
ABOUT THE ICICI GROUP
ICICI Bank was originally established in 1994 by ICICI Limited, an Indian financial
institution, and was its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank
was reduced to 46% through a public offering of shares in India in fiscal 1998, an equity
offering in the form of ADRs (American Depositary Receipts) listed on the NYSE in
fiscal 2000.
ICICI Bank's acquisition of Bank of Madura Limited in an all-stock amalgamation in
fiscal 2001, and secondary market sales by ICICI to institutional investors in fiscal 2001
and fiscal 2002. ICICI was formed in 1955 at the initiative of the World Bank, the
Government of India and representatives of Indian industry.
The principal objective was to create a development financial institution for providing
medium-term and long-term project financing to Indian businesses.
ICICI Bank is India's second-largest bank with total assets of Rs. 4,736.47 billion (US$ 93
billion) at March 31, 2012 and profit after tax Rs. 64.65 billion (US$ 1,271 million) for the
year ended March 31, 2012. ICICI Bank is also the no.1 private sector bank in India.
ICICI Bank offers a wide range of banking products and financial services to corporate
and retail customers through a variety of delivery channels and through its specialised
subsidiaries in the areas of investment banking, life and non-life insurance, venture
capital and asset management.
ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the
National Stock Exchange of India Limited and its American Depositary Receipts
(ADRs) are listed on the New York Stock Exchange (NYSE).
ICICIGROUP
 ICICI Prudential (Deals with Mutual Fund)
 Prudential ICICI (Deals with Life Insurance)
 ICICI Lombard (Deals with General Insurance)
 ICICI HFFD (Deals with Home Finance Fixed Deposit)
 ICICI Securities (Deals with Stock Market)
 ICICI Home Finance
About ICICI Securities Limited
ICICI Securities Ltd named its online division as ICICI direct.com and it is in to retail
broking. The business of the company overhauled in 2002. It acts as a discount
brokerage house to full service investment solution provider. It has specialized
research product for the all small investors and day traders.
ICICI Direct is one of the core products and group organisations of ICICI bank. ICICI
Direct offers range of financial services for the customer. It has been exclusively
incorporated for inviting investments from customers on shares and securities.
Introduction of Demat Account has stimulated ICICI to offer financial service directly
to the customers. Eventually, ICICI Direct Demat Account has been introduced and
linked with ICICI Direct, which facilitates the account holders and investors to trade
in share market, securities etc online.
For people who have not heard about Demat account, it is nothing but similar to a bank
account introduced for the purpose of online trading in the stock and financial market.
No fees or charge is levied for opening an ICICI Direct Demat Account. Neither the
customer need to visit the bank nor meet the representatives for having a Demat
account. The account can be opened just by filling the account opening form online.
Further, they need not be an existing customer of ICICI bank. However, for having
such account, PAN – Permanent Account Number is mandatory and through which
the online transactions are done.
Login ID and Login password are provided for the customers, similar to ICICI Net
banking. In addition, for purchase and sale of shares and securities or for confirming
the transfer of shares, specific passwords are provided for initiating the transaction and
confirming the same.
ICICI Direct Demat Account facilitates the investors to trade and invest in the
following:
 Equity funds
 Mutual Funds
 Shares and securities offered by companies
 Investment in savings plans and much more
It is not necessary that only the investors are allowed to trade using ICICI Direct Demat
Account. It is also extended for agents, brokers and sub brokers to deal with securities.
Trading with this account is absolutely free and does not involve any fee towards
registration or stamp duty.
CHAPTER-5
STOCK DEREVATIVES
Development of Derivatives Markets in India
Indian Derivatives markets have been in existence in one form or
the other for a long time. In the area of commodities, the Bombay Cotton Trade
Association started futures trading in 1875. In 1952, with the ban on cash settlement
and option trading by the Government of India, derivatives trading shifted to informal
forwards markets. In recent years, government policy has shifted in favor of an
increased role of market-based pricing and less suspicious derivatives trading. The first
step towards the introduction of financial derivatives trading in India was the
promulgation of the Securities Laws (Amendment) Ordinance, 1995. This
provided for withdrawal of prohibition on options in securities. In the last decade,
beginning the year 2000, ban on futures trading in many commodities was lifted out.
During the same period, National Electronic Commodity Exchanges were also set up.
Derivatives trading commenced in India in June 2000 after SEBI granted the final
approval to this effect in May 2001 on the recommendation of L. C Gupta committee.
Securities and Exchange Board of India (SEBI) permitted the derivative segments of
two stock exchanges, NSE and BSE, and their clearing house/corporation to commence
trading and settlement in approved derivatives contracts. Initially SEBI approved
trading in index futures contracts based on various stock market indices such as, S&P
CNX, Nifty and Sensex. Subsequently, index-based trading was permitted in options as
well as individual securities.
Participants in the derivative market:
Patwari and Bhargava (2006) stated that there are three broad categories of
participants in the derivative market. They are: Hedgers, Speculators and Arbitrageurs.
 Hedger is a trader who enters the derivative market to reduce a pre-existing
risk. In India, most derivatives users describe themselves as hedgers (Fitch
Ratings, 2004) and Indian laws generally require the use of derivatives for
hedging purposes only.
 Speculators= the next participant in the derivative market, buy and sell
derivatives to book the profit and not to reduce their risk. They wish to take a
position in the market by betting on future price movement of an asset.
Speculators are attracted to exchange traded derivative products because of
their high liquidity, high leverage, low impact cost, low transaction costand
default risk behavior. Futures and options both add to the potential gain and
losses of the speculative venture. It is the speculators who keep the market
going because they bear the risks, which no one else is willing to bear. The
third participant,
 Arbitrageur = is basically risk-averse and enters into the contracts,
having the potential to earn riskless profits. It is possible for an arbitrageur to have
riskless profits by buying in one market and simultaneously selling in another, when
markets are imperfect (long in one market and short in another market). Arbitrageurs
always look out for such price differences. Arbitrageurs fetch enormous liquidity to the
products which are exchanges traded. The liquidity in-turn results in better price
discovery, lesser market manipulation and lesser cost of transaction.
Derivatives Products Traded in Derivatives Segment of BSE
The Bombay Stock Exchange (BSE) created history on
June 9, 2000 when it launched trading in Sensex based futures contract for the first
time. It was then followed by trading in index options on June 1, 2001; in stock options
and single stock futures (31 stocks) on July 9, 2001 and November 9, 2002, respectively.
It permitted trading in the stocks of four leading companies namely; Satyam, State
Bank of India, Reliance Industries and TISCO (renamed now Tata Steel). Chhota (mini)
SENSEX7 was launched on January 1, 2008. With a small or 'mini' market lot of 5, it
allows for comparatively lower capital outlay, lower trading costs,
more precise hedging and flexible trading. Currency futures were introduced on
October 1, 2008 to enable participants to hedge their currency risks through trading in
the U.S. dollarrupee future platforms. Table 1 summarily specifies the derivative
products and their date of introduction on the BSE.
Table 1: Products Traded in Derivatives Segment of the BSE
Product Traded with underlying asset Introduction Date
1 Index Futures Sensex June 9,2000
2 Index Options Sensex June 1,2001
3 Individual Stock Option Concerned Company Stock July 9, 2001
4 Individual
Stock futures
Concerned Company Stock November 9,2002
5 Weekly Option 4 Stocks September 13,2004
6 Chhota (mini) SENSEX January 1, 2008
7 Currency Futures US Dollar Rupee October 1,2008
Source:International Journal of Marketing, Financial Services & Management Research
Derivatives Products Traded in Derivatives Segment of NSE
NSE started trading in index futures, based on
popular S&P CNX Index, on June 12, 2000 as its first derivatives product. Tradingin
index options was introduced on June 4, 2001. On November 9, 2001, Futures on
individual securities started.As stated by the Securities &
Exchange Board of India (SEBI), futures contracts are available on 233 securities.
Tradingin options on individual securities commenced w.e.f. July 2, 2001. The
options contracts, available on 233 securities, are of American style and cash settled.
Tradingin interestrate futures was started on 24 June 2003 butit was closed
subsequently due to pricing problem. The NSE achieved another landmark in
product introduction by launching Mini Index Futures & Options with a minimum
contract size of Rs 1 lac. NSE created history by launching currency futures contract
on US Dollar-Rupee on August 29, 2008 in Indian Derivativesmarket.Table 2
presents a description of the types of products traded at F& O segment of NSE.
Table 2: Products Traded in F&O Segment of NSE
Source:International Journal of Marketing, Financial Services & Management Research
S.no Product Traded with underlying asset Introduction Date
1 Index Futures S&P CNX Nifty June 12,2000
2 Index Options S&P CNX Nifty June 4,2001
3 Individual Stock Option Concerned Company Stock July 2, 200
4 Individual Stock futures Concerned Company Stock November 9,2001
5 Interest Rate Future T – Bills and 10 Years Bond June 23,2003
6 IT Futures & Options CNX IT August 29,2003
7 Nifty Futures & Options Bank June 13,2005
8 Nifty Junior Futures &Options CNX June 1,2007
9 Futures & Options CNX100 June 1,2007
10 Midcap 50 Futures &Options Nifty October 5,2007
11 Mini index Futures &Options S&P CNX Nifty index January 1, 2008
12 2008long Term Option contracts S&P CNX Nifty Index March 3,2008
13 Currency Future US Dollar Rupee August 29,2008
CHAPTER-6
CURRENCY DEREVATIVES
Introduction
India’s foreign exchange market has been
witnessing extreme volatility trends for the past one year due to unstable foreign
investment flows into and out of the country. Such high volatilities of Rupee
emphasised the need for appropriate risk management measures. In this context,
derivatives become important tools for risk management. OTC derivatives,
particularly forwards, are widely used in the post liberalisation period. Although
futures have been introduced in Aug 2008, there appears to be no extensive use of
them as hedging tools, as there are not substantial shift volumes from forwards to
futures plausibly due to some inherent constraints (Lingered, 2009). For this
reason, the OTC markets are dominant in currency markets world over compared
to exchange traded futures.
Nevertheless, futures are a fitting alternative for
minimizing risk in currency markets and are used both by all major types of
market participants hedgers, speculators and arbitrageurs. In India, part from
futures, options have also been introduced in Oct 2012. But it is apparent that the
OTC forwards are still preferred instruments for hedging in the Indian currency
market as well, similar to the global trends.
The term “Derivative” indicates the value
derived from a underlying level. It has no independent value, underlying can be
security, stock market index, commodity, bullions, or currency. Currency Derivatives
implies contracts where underlying would be the currency exchange rate.
Examples of currency underlying pair
USD-INR = Unaited state dollar against Indian rupee
USD-EUR = Unaited state dollar against euro
EUR-GPB = Euro against Grate Britain pound
GPB-INR = Grate Britain pound against Indian rupee
(Figure I): Currency derivative at ICICI Direct
Products offering for currency trading in ICICI Direct
ICICI Direct offers four types of foreign currency derivative
pair for trading
SUCH AS:-
USD-INR = 6 month forward contract available for trading.
GPB-INR = 3 month forward contract available for trading.
EUR-INR = 3 month forward contract available for trading.
JPY-INR = 2 month forward contract available for trading.
All currency derivatives are available in future; option trading is not available in ICICI
Direct.
Table 3:- currency derivative system in ICICI Direct
Symble USD-INR EUR-INR GPB-INR JPY-INR
Instrument type FUT-CUR FUT-CUR FUT-CUR FUT-CUR
Unit of trading 1 unit = 1000 Dollar 1 unit = 1000 Euro 1 unit = 1000
Pound
1 unit = 1000
Yen
Underlying The exchange rate in
INR of USD
The exchange rate in
INR of EUR
The exchange rate
in INR of GBP
The exchange
rate in INR of
JPY
Tick size 0.25 paisa or INR
0.0025
0.25 paisa or INR
0.0025
0.25 paisa or INR
0.0025
0.25 paisa or
INR 0.0025
(The quote is
for 100 JPY)
Trading hours 9.00 AM to 5.00 PM
Trading cycle 12 months continue
Last trading cycle Tow working days prior to the last business day of the expiry month @ 12.15 P.M .
Final settlement
date
Last working day,(excluding Sunday) of the expiry month. The last working day will
be the same as that for interbank settlement in Mumbai.
DAILY SETTELMENT = T+1
FINAL SETTLEMENT = T+2
Mode of settlement Cash settlement in INR
Daily settlement
price
Calculated on the basis of the last half-an –hour weighted average price.
Final settlement
price
RBI reference on last
trading day
RBI reference on last
trading day
RBI reference on
last trading day
RBI reference
on last trading
day
Table 4:- Margin calculation in currency futures
Pair Underlying Contract
example
Quant
ity
Lot
size
LTP Contract
value
Margin
lot
Margi
n %
USD-INR USD against INR FUT-USD-INR
28.8.13
1 1000 62.7425 6,27,425 5333 85
EUR-INR EUR against INR FUT-EUR-INR
28.8.13
1 1000 83.6325 8,36,325 3764 4.5
GPB-INR GPB against INR FUT-GPB-INR
28.8.13
1 1000 98.0925 9,80,925 4904 5
JPY-INR JPY Against INR FUT-EUR-INR
28.8.13
1 1000 64.6925 6,46,925 3882 6
Currency derivative in ICICI security LTD
ICICI Direct offers you a simple and convenient way to trade and hedge your
currency risk in four pair of Currencies- Dollar, Euro, Pound and Japanese Yen against
Indian Rupee.
By offering you the choice of trading in different asset class of Currencies we offer you
the opportunity to diversify your portfolio opportunity to diversify your portfolio
The benefits of choosing ICICI Direct for your Currency Trading are:
 Convenience - Provides a well-diversified set platform for online trading with
competitive brokerage under a single sign-on and completely paper-less
investing experience
 Expertise - You can access to our Daily Research Reports as well as
Fundamental & Technical Reports and Advisory.
 Flexibility - You can select the Currency Pair USD/INR, EUR/INR, GBP/INR
and JPY/INR in which you wish to trade
Few Advantages of this market are
1. Trading hours of 09:00 am to 05:00 pm provide more trading opportunities
2. Trade in prominent currencies like US Dollar, EURO, Pound, Yen against Indian
Rupee
3. Real time and Transparent Currency Rates in comparison to OTC Rates.
4. No Counterparty Default risk due to settlement guarantee by regulated clearing
house.
5. Low Taxation ( No STT and CTT)
6. Daily Cash Settlement in INR via MTM (Mark to Market)
Currency Futures - An Assets Class
If you have an ICICI Direct account, login to your account and select the Currency
Segment Section If the Currency Segment section is not enabled either you have not
opted for the facility or may not be KYC (Know-Your-Customer) Compliant. KYC is
mandatory for all investments in Currency Futures as per the Securities and Exchange
Board of India (SEBI).
Futures of currency market
Currency Futures
 Forex = Foreign exchange is the simultaneous buying of one currency and
selling of another. Currencies are traded through a broker or dealer and are
executed in currency pairs. For example: the Euro and the US Dollar (EUR/USD)
or the British Pound and the Japanese Yen (GBP/JPY). The Foreign Exchange
Market (Forex) is the largest financial market in the world, with a daily volume
of over $4 trillion.
This is more than three times the total amount of the
stocks and futures markets combined. Unlike other financial markets, the Forex
spot market has neither a physical location nor a central exchange. It operates
through an electronic network of banks, corporations, and individuals trading
one currency for another. The lack of a physical exchange enables the Forex
market to operate on a 24-hour basis, spanning from one time zone to another
across the major financial centers.
 Currency trading = Trade is an international business and for any trade
payments are settled in Currencies, which are specific to the countries/regions
involved. Whenever any Currency is bought or sold for another, the transaction
is known as 'Currency trading'. Currency trading is the largest financial market
globally, followed by Commodities and Equities. Investors, speculators and
corporate are involved in cross-border Currency trade
 OTC Market = OTC is short for 'over-the-counter'. The OTC market has no
central marketplace and is linked to a network of dealers/traders who do not
physically meet but, instead, communicate through phone and computer
networks. OTC contracts are customized contracts, based on negotiations
between the counter-parties. In the case of OTC markets, the counter-party
default risk depends on the counter-party creditworthiness, among other factors.
 Exchange Traded Currency Futures = The Exchange Traded Currency Futures
contract is an agreement to buy or sell the underlying Currency on a specified
date in the future and at a specified rate. The underlying asset for a Currency
Futures contract is a Currency. The Exchange's clearing house acts as a central
counter-party for all trades and thus, takes on a performance guarantee.
Currency Futures contract
 Currency Futures contract = A Currency Futures contract is a standardized version
of a Forward contract that is traded on a regulated Exchange. It is an agreement to buy
or sell a specified quantity of an underlying Currency on a specified date in the future
at a specified rate.
 Participant of currency future contract = Any Indian resident or company,
including banks and financial institutions, can participate in the Currency
Futures market. At present, Foreign Institutional Investors (FII's) and Non-
Resident Indians (NRI's) are not permitted to participate in the Currency Futures
market in India. Participants in the Currency Derivatives segment can be
classified in two broad categories:
a. Hedgers
Foreign Currency markets have been volatile in recent times due to
various geo-political uncertainties. In order to ensure that profits for any business
are not depleted due to fluctuations in the Currency exchange rate, hedging
Currency risk can be an excellent tool.
Large corporate, small and medium enterprises (SME's) and individual
businessmen, apart from the general investing public, are increasingly exposed to
the global markets. Hence, protecting against Forex risk is becoming more
significant.
b. View-based-traders
Currency Futures provide view-based traders with an
efficient platform to observe the movements of the local Currency (INR) against
other Currencies. These traders can trade based on various technical indicators,
fundamental factors, economic and policy-based news and developments on the
global stage.
What Currencies can be traded on the Exchanges?
In India, currently only USD/INR, EUR/INR, GBP/INR and JPY/INR are available for
trading on various Exchanges
Table-5:- Contract Specification of USDINR futures contract
Trading hours Monday to Friday: 9:00am to 5:00pm
Contract Months 12 near calendar months
Contract Size USD 1000, EUR 1000, GBP 1000 and JPY 1,00,000
Tick Size 0.25 paisa or INR 0.0025 per 1 USD
Last trading day
Two working days prior to last business day of the expiry
month at 12.15 noon
Final Settlement
date
Last working day (excluding Saturdays) of the expiry month
Settlement Daily settlement: T + 1 /Final settlement: T + 2
Daily settlement price Weighted average price during last half hour of trading
Final settlement price RBI reference rate on expiry date
Source: ICICI direct.com
Table-6:- Features of Currency Pairs
USD-INR EUR- INR INRGBP- JPY-INR
Quotation Rate of exchange
between 1 USD
and INR
(USDINR)
Rate of exchange
between 1 EURO
and INR (EUR-
INR)
Rate of exchange
between 1 GBP
and INR (GBP-
INR)
Rate of exchange
between 100 JPY
and INR (JPY-
INR)
Contract Size USD 1000 EURO 1000 GBP 1000 JPY 1000
Calendar Spread
Margin
Rs. 400 for a
spread of 1
month; Rs 500
for a spread
of 2 months, Rs
800 for a spread
of 3 months
Rs.700 for spread
of 1 month
Rs.1000 for
spread of 2
months
Rs.1500 for
spread of 3
months or more
Rs.1500 for
spread of 1
month
Rs.1800 for
spread of 2
months
Rs.2000 for
spread of 3
months or more
Rs.600 for spread
of 1 month
Rs.1000 for
spread of 2
months
Rs.1500 for
spread of 3
months or more
Source: NSE Website
Stock Derivative V/S Currency Derivative
UNDERLYING (Table - 7)
Stock derivative Currency derivative
 Market indices like Nifty, bank Nifty
 Equity scrip’s
 Currency pair is used as indices, like-
USD-INR, EUR-INR
MARGIN (Table - 8)
LOT SIZE (Table - 9)
Stock derivative Currency derivative
 Lot size is based on contract value
 Standard value is set by NSE is Rs.2.5
laks
 Numb of unit in a lot very as per.
Market price of scrip at the time of
initialing the contract by NSE.
 Lot size is based on numb of units of
underlying in a contract.
 Standard is 1000 units of currency.
 Lot value is not set the standard.
Stock derivative Currency derivative
 Very from 11% to 35%, and up to 60% in
exception.
 Low margin in indices starting from 11%
 Prime stock margin very from 16%to
25%
 General stock margins start from 25%
and above.
 Contract for Nifty worth Rs.2,
45,000 available @ margin of
Rs.26, 950 (@4900).
 Margins are very low.
 Very from 8.5% for USD-INR
 Exceptional margin applicable and
extended to 1-24%
 A lot position of USD-INR available
@Rs.5200.
 For contracts, equivalent to marginally
RS.2,45,000 .
TICK SIZE (Table - 10)
Stock derivative Currency derivative
 Tick size of stock derivative is Rs. 0.05.
 EX of bid & offer
Best bid price Best offer price
55.95 56.00
55.90 56.05
55.85 56.10
55.80 56.15
 Foreign exchange derivative Tick size is
Rs. 0.0025 or 1/4th of 1 paisa.
 EX of bid & offer
Best bid price Best offer price
55.9875 55.9900
55.9850 55.9925
55.9825 55.9950
55.9800 55.9975
55.9775 56.0000
EXPOSURE FROM RS. 1 LAKH (Table - 11)
Stock derivative Currency derivative
 3 Nifty contracts can be taken as position
(avg margin 11%)
 3 lots of Nifty stock (avg margin 14-15%)
 2 lots of junior Nifty stocks.
 1 lot of pair may in stock
 Foreign exchange derivative law margin
and high level products.
 You can take position of 20 lots of USD-
INR.
 You can take position of 26 lots of EUR-
INR.
 Position value is worth Rs. 12 lakhs
Stock Derivative V/S Currency Derivative (Table - 12)
instrument Fund
available
Contract
size
Price Contract
value
Margin
of
contract
Margin
value
Numb of
contain full
margin
Position
value in
lakhs
NIFTY 1,00,000 50 4,900 2,45,000 11% 26,950 3 7.35
ITC 1,00,000 1,000 233 2,33,000 14% 32,620 3 6.99
PFC 1,00,000 2,000 150 3,00,000 19% 57,000 2 3.00
USD-INR 1,00,000 1,000 62.75 62.75 9% 5,333.75 19 11.76
EUR-INR 1,00,000 1,000 83.68 83.68 45% 3,765.6 27 22.22
CHAPTER-7
TRADING MECHANISM
Trading Mechanism (STOCK)
Web10 states that the trading system of derivatives at NSE, known as NEAT-F&O
trading System, provides a fully automated screen-based trading for all kinds of
derivatives products available on NSE on a national wide basis. It supports an
anonymous order driven market, which operates on a time priority/strict price basis?
It offers great flexibility to users in terms of kinds of orders that can be placed on the
terminal. Various time and price-related conditions like Immediate/Cancel,
Limit/Market Price, Stop Loss, etc. can be built into an order. The trading in
derivatives is essentially similar to that of trading of securities in the Capital Market
segment.
There are four entities in the trading system of a derivative market:
1. Trading members: Trading members can trade either on their own account
or on behalf of their clients including participants. They are registered as members with
NSE and are assigned an exclusive trading member ID.
2. Clearing members: Clearing members are members of NSCCL. They carry
out confirmation/inquiry of trades and the risk management activities through the
trading system. These clearing members are also trading members and clear trade for
Themselves or/and other.
3. Professional clearing members: A clearing member who is not a trading
member is known as a professional clearing member (PCM). Typically, banks and
custodian become PCMs and clear and settle for their trading members.
4. Participants: A participant is a client of trading members like financial
institutions. These clients may trade through multiple trading members, but settle their
trades through a single clearing member only. The terminals of trading of futures &
options segment are available in 298 cities at the end of March 2006. Besides trading
terminals, it can also be accessed through the internet by investors from anywhere.
Trade Details of Derivatives Market
After recording a 60.43 percent growth (2009–2010) in trading volume on year-on-year
basis, the NSE’s derivatives market continued its momentum in 2010–2011 by having a
growth rate of 65.58 percent (Table 3). The NSE further strengthened its dominance in
the derivatives segment in 2010– 2011 by having a share of 99.99 percent of the total
turnover in this segment. The share of the BSE in the total derivatives market turnover
fell from 0.0013 percent in 2009–2010 to 0.0005 percent in 2010–2011. The total turnover
of the derivatives segment increased by 26.56 percent during the first half of 2011–2012
compared to the turnover in the corresponding period in the previous fiscal year. In
terms of product wise turnover of futures and options segment in the NSE, index
options segment was the clear leader in 2010–2011
(Figure II): Trade Details of Derivatives in NSE
Source: International Journal of Marketing, Financial Services & Management Research
Trade Details of Derivatives in BSE: (Figure III)
Source: International Journal of Marketing, Financial Services & Management Research
Product-wise distribution of turnover of F&O segment of NSE :( Figure IV)
Source: International Journal of Marketing, Financial Services & Management Research
Table 13: Trade Details of Derivatives Market
Source: NSE Website
Trading Mechanism (CURRENCY)
The Currency Derivatives trading system of NSE, called NEAT-CDS (National
Exchange for Automated Trading – Currency Derivatives Segment) trading system,
provides a fully automated screen-based trading for currency futures on a
nationwide basis as well as an online monitoring and surveillance mechanism.
The NEAT-CDS system supports an order driven
market, wherein orders match automatically. Order matching is essentially on the
basis of security, its price and time. All quantity fields are in contracts and price in
Indian rupees. The exchange notifies the 160 contract size and tick size for each of
the contracts traded on this segment from time to time. When any order enters the
trading system, it is an active order. It tries to find a match on the opposite side of
the book. If it finds a match, a trade is generated. If it does not find a match, the
order becomes passive and sits in the respective order book in the system. Contract
Specifications for Currency Futures NSE trades Currency Derivatives contracts
having near 12 calendar month expiry cycles. All contracts expire two working days
prior to the last working day of every calendar month (subject to holiday calendars).
This is also the last trading day for the expiring contract. The contract would cease
to trade at 12:00 noon on the last trading day.
A new contract with 12th month expiry
would be introduced immediately ensuring availability of 12
monthly contracts for trading at any point. The Instrument type: FUTCUR refers
to 'Futures contract on currency' and Contract symbol: USDINR denotes a currency
pair of 'US Dollars – Indian Rupee'. Each futures contract has a separate limit
order book. All passive orders are stacked in the system in terms of price-time
priority and trades take place at the passive order price (order which has come
earlier and residing in the system). The best buy order for a given futures contract
will be the order to buy at the highest price whereas the best sell order will be the
order to sell at the lowest price. The contract specification for US Dollars – Indian
Rupee (USDINR) Currency Futures is summarized in the table below.
TURNOVER
Trading in Currency Futures segment commenced
on August 29, 2008. On the very first day of operations a total number of 65,798
contracts valued at Rs.291 crore were traded
on the Exchange. Since then trading activity in this segment has been witnessing a
rapid growth. The total traded volume from August 2008 till March 2009 was
Rs.162, 272 crore (US $ 31,849 million). Total numbers of contracts traded during
the August 2008 to March 2009 were 32,672,768. The business growth of Currency
Futures Segment is shown in picture
Chart 7utures
Business growth of currency features in NSE :( Figure V)
Traded Value Records
Trading Volumes in the CDS Segment during 2008-09 reached a
high of Rs.3,911.39 crore (US $ 767.69 million) on March 20, 2009. The following table
shows the record highs in the Currency Derivatives segment.
Table 14
CDS Segment Date Number/Value
Record Number of Trades March 20, 2009 25,702
Record No. of Contracts Traded March 20, 2009 775,933
Record Daily Turnover (value in Rs. crores) March 20, 2009 Rs.3911.39
CHAPTER-8
FUCTURE PROSPECTS
Future Prospects
Even though the derivatives market has
shown good progress in the last few years, the real issues facing the future of the
market have not yet been resolved. The number of products allowed for derivative
trading have increased and the volume and the value of business has zoomed, but
the objectives of setting up different derivative exchanges may not be achieved and
the growth rates witnessed may not be sustainable unless these real issues are
sorted out as soon as possible. Some of the main unresolved issues are as under.
o Commodity Options: Trading in commodity options contracts has been
stopped since 1952. The market for commodity derivatives is not
completed without the presence of this important derivative. Both
futures and options are necessary for the healthy growth of the market.
There is an immediate need to bring about the necessary legal and
regulatory changes to introduce commodity options trading in the
country. The matter is believed to be under the active consideration of
the Government and the options trading may be introduced in the near
future.
o Issues for Market Stability and Development: The enormous size and fast
growth of the Over the Counter (OTC) derivatives market has attracted
the attention of regulators and supervisory bodies. Some OTC
derivatives have been viewed as amplifiers of the stress in the present
global financial crisis. The more common criticisms relate to the fact
that the OTC markets are less transparent and highly leveraged, have
weaker capital requirements and contain elements of hidden systemic
risk.
o The Warehousing and Standardization: For commodity derivatives market
to work smoothly, it is necessary to have a sophisticated, cost-effective, reliable
and convenient warehousing system in the country. The Habibullah (2003) task
force admitted, “A sophisticated warehousing industry has yet to come about”.
Further, independent labs or quality testing centers should be set up in each region
to certify the quality, grade and quantity of commodities so that they are
appropriately standardized and there are no shocks waiting for the ultimate buyer
who takes the physical delivery.
o Cash vs. Physical Settlement: Only about 1% to 5% of the total
commodity derivatives trade in the country is settled in physical delivery. It is
probably due to the inefficiencies in the present warehousing system. Therefore the
o warehousing problem obviously has to be handled on a war footing, as a good
delivery system is the backbone of any commodity trade. A major problem in cash
settlement of commodity derivative contracts is that at present, under the Forward
Contracts (Regulation) Act 1952, cash settlement of outstanding contracts at
maturity is disallowed. In other words, all outstanding contracts at maturity should
be settled in physical delivery. To avoid this, participants settle their positions
before maturity. So, in practice, most contracts are settled in cash but before
maturity. There is a need to modify the law to bring it closer to the widespread
practice and save the participants from unnecessary hassles.
o Increased Off-Balance Sheet Exposure of Indian Banks: The growth of
derivatives as off-balance sheet (OBS) items of Indian Banks has been an area of
concern for the RBI. The OBS exposure/risk has increased significantly in recent
years. The notional principal amount of OBS exposure increased from Rs.8,42,000
crore at the end of March 2002 (approximately $181 billion at the exchange rate of
Rs.46.6 to a US $) to Rs.149,69,000 crore (approximately $321 billion) at the end
of March 2008. (RBI, 2009)
o The Regulator: As the market activity pick-up and the volumes rise, the market
will definitely need a strong and independent regulator; similar to the Securities
and Exchange Board of India (SEBI) that regulates the securities markets. Unlike
SEBI which is an independent body, the Forwards Markets Commission (FMC) is
under the Department of Consumer Affairs (Ministry of Consumer Affairs, Food
and Public Distribution) and depends on it for funds. It is imperative that the
Government should grant more powers to the FMC to ensure an orderly
development of the commodity markets. The SEBI and FMC also need to work
closely with each other due to the inter-relationship between the two markets.
o Competition of OTC derivatives with the Exchange-traded Derivatives: A
general view emerging after the recent financial crisis is that OTC
derivatives trading should be moved to an exchange platform. The
proponents of this view hope that this would increase liquidity and
reduce significantly the opacity of the market. They argue that
exchanges provide transparent and reliable price formation
mechanisms, neutrality, robust and appropriate technology, better
regulation and, above all, centralized clearing and settlement system.
These arguments are based on the assumption that the existing method
of trading in OTC products is all based on telephone trading and there
is no clearing system in place.
o Lack of Economies of Scale: There are too many (3 national level and 21
regional) commodity exchanges. Though over 80 commodities are
allowed for derivatives trading, in practice derivatives are popular for
only a few commodities. Again, most of the trade takes place only on a
few exchanges. All this splits volumes and makes some exchanges
unviable. This problem can possibly be addressed by consolidating some
exchanges. Also, the question of convergence of securities and
commodities derivatives markets has been debated for a long time now.
The Government of India has announced its intention to integrate the
two markets. It is felt that convergence of these derivative markets
would bring in economies of scale and scope without having to duplicate
the efforts, thereby giving a boost to the growth of commodity
derivatives market. It would also help in resolving some of the issues
concerning regulation of the derivative markets. However, this would
necessitate complete coordination among various regulating authorities
such as Reserve Bank of India, Forward Markets commission, the
Securities and Exchange Board of India, and the Department of
Company affairs etc.
o Strengthening the Centralized Clearing Parties: CCIL, which started functioning
in 2002, is the only centralized clearing party for trade processing and settlement
services in India. It currently provides a guaranteed settlement facility for
government securities trading, clearing of collateralized borrowing and lending
obligations (CBLO), guaranteed settlement of foreign exchange trading, and
settlement of all Indian Revenue Service (IRS). Though the concentration of
business relating to
money, securities and forex markets with the CCIL helps in pooling risks and
reducing the overall transactions costs for the system, the Certified Financial
Services Auditor’s (CFSA) report opined that the concentration of such a wide
spectrum of activities leads to concentration of risks in one entity. Therefore,
there is the need to strengthen more and more clearing parties.
o Tax and Legal bottlenecks: In India, at present there are tax restrictions on
the movement of certain goods from one state to another. These need to be
removed so that a truly national market could develop for commodities and
derivatives. Also, regulatory changes are required to bring about uniformity
in octroi and sales taxes etc. VAT has been introduced in the country in 2005,
but has not yet been uniformly implemented by all states.
o New Derivatives Products for Credit Risk Transfer (CRT): Credit risk transfer
(CRT), in a broad sense (including guarantees, loan syndication, and
securitization),has a long history. However, there has been a sustained and rapid
growth of new and
innovative forms of CRT associated with credit derivatives. The most common
credit derivatives are credit default swaps (CDS) on single corporate entity (single-
name CDS) and collateralizeddebt obligations (CDOs). Since 2005, CRT activity
became significant for two additional underlying asset classes – asset backed
securities (ABS) and leveraged loans. Internationally, banks and financial
institutions are able to protect themselves from credit default risk through the
mechanism of credit derivatives. However, credit derivatives were not allowed in
India until recently. The RBI has made an announcement in its second-quarter
monetary policy 2009-10 that it has considered it appropriate to proceed with
caution on this issue. To start with Ist December 2011, RBI has introduced
guidelines for a basic, over-the-counter, single name CDS for corporate bonds for
resident entities, subject to safeguards.
CHAPTER-9
FINDINGS AND SUGGESTIONS
FINDINGS
 The Indian derivative market has achieved tremendous growth over the last few years.
 The derivatives market has seen ups and downs.
 The new and innovative derivative products have emerged over the time to meet the
various needs of the different types of investors.
 Though, the derivative market is burgeoning with its divergent products, yet there are
many issues.
 Indian derivative market has a great future.
CHAPTER-10
ANNEXURE
Books
Godern and Natrajan, Financial market and services
L.M Bhole, Financial institutions and markets
Journals
International journal of market and research
Websites
www.nse.com
www.bse.com
www.uaexchange.com
www.icicidirect.com
www.icicigroup.com
www.wikipedia.com

More Related Content

DOC
Project report on currency derivatives2
PDF
A STUDY ON EQUITY & EQUITY DERIVATIVE - INDIAN SECURITIES MARKET
PDF
Derivative market in india
PDF
Future of Derivatives in India
DOCX
Currency derivatives
DOC
Currency futures in india a way forward
DOCX
Currency futuers in india
PDF
Mcx sx faq
Project report on currency derivatives2
A STUDY ON EQUITY & EQUITY DERIVATIVE - INDIAN SECURITIES MARKET
Derivative market in india
Future of Derivatives in India
Currency derivatives
Currency futures in india a way forward
Currency futuers in india
Mcx sx faq

What's hot (20)

DOC
PPTX
Forward and futures - An Overview
DOCX
Comparative analysis-of-equity-and-derivative-market
PDF
Http Www Karvy Com Articles Arbitrage
PPTX
Physical delivery of commodity
PPTX
Exchange rate theories
PPTX
capital market and money market
PPTX
Derivative
PPTX
Commodities and Commodity Futures
PDF
Msc Project - Hedging vs Speculating with derivative instruments
PPTX
Introductory presentation on commodity trading
PPTX
commodities presentation Inventure
PDF
Commodity (gold m) projoject 13 15 ramanjineyulu 13 f21e0062
DOCX
WP FINAL
PPTX
A study about derivative market in india.
DOCX
PPT
Revenue generation through Currency trading
PPTX
Foreign exchange rates concepts
PDF
Study of volatility_and_its_factors_on_indian_stock_market
PDF
Finance research report
Forward and futures - An Overview
Comparative analysis-of-equity-and-derivative-market
Http Www Karvy Com Articles Arbitrage
Physical delivery of commodity
Exchange rate theories
capital market and money market
Derivative
Commodities and Commodity Futures
Msc Project - Hedging vs Speculating with derivative instruments
Introductory presentation on commodity trading
commodities presentation Inventure
Commodity (gold m) projoject 13 15 ramanjineyulu 13 f21e0062
WP FINAL
A study about derivative market in india.
Revenue generation through Currency trading
Foreign exchange rates concepts
Study of volatility_and_its_factors_on_indian_stock_market
Finance research report
Ad

Viewers also liked (14)

PPTX
Mime -Exercise of Style
PDF
Activated marketing
PPTX
Эффективные технологии коммуникации на мероприятии - Демьяненко Руслан. Event...
PPTX
Universidad especializada de las americas
PDF
updated resume for 26MAY15
PDF
บทเรียนการพัฒนาระบบเครือข่ายบริการทางการแพทย์
PPTX
Cara memperoleh kewarganegaraan di indonesia
PPTX
Modul 2 kwn kb 1
PPTX
Net core path by Ibon Landa
PPTX
Επιπτώσεις των ψηφιακών παιχνιδιών #EDUC558
PDF
First aid kits
PPTX
Modul 3 kwn kb 3
PPTX
Modul 2 kwn kb 3
PPTX
Modul 4 kwn kb 2
Mime -Exercise of Style
Activated marketing
Эффективные технологии коммуникации на мероприятии - Демьяненко Руслан. Event...
Universidad especializada de las americas
updated resume for 26MAY15
บทเรียนการพัฒนาระบบเครือข่ายบริการทางการแพทย์
Cara memperoleh kewarganegaraan di indonesia
Modul 2 kwn kb 1
Net core path by Ibon Landa
Επιπτώσεις των ψηφιακών παιχνιδιών #EDUC558
First aid kits
Modul 3 kwn kb 3
Modul 2 kwn kb 3
Modul 4 kwn kb 2
Ad

Similar to final sip (20)

DOCX
Derivatives market
DOC
A project on derivatives market in india
DOC
Derivatives market in india
DOCX
Comperative Study on Derivative Markets
DOCX
Ajay pandey sip report
PDF
3 Derivatives In India.pdf
DOC
88859133 currency-derivative
DOCX
Final yo yo 2
DOCX
Debt market
PDF
Derivatives in india
DOCX
Financial Derivatives
PPTX
Security market
PDF
Fm project
DOC
Derivatives kotak 2010
DOC
Astudyonfinancialderivativesfuturesoptions 140404093552-phpapp01
PPTX
Chapter 1 Financial Derivatives.pptx
DOC
Deriveties in india
DOCX
Study of Derivative Market In India
DOCX
Project report
DOCX
Equity options strategies
Derivatives market
A project on derivatives market in india
Derivatives market in india
Comperative Study on Derivative Markets
Ajay pandey sip report
3 Derivatives In India.pdf
88859133 currency-derivative
Final yo yo 2
Debt market
Derivatives in india
Financial Derivatives
Security market
Fm project
Derivatives kotak 2010
Astudyonfinancialderivativesfuturesoptions 140404093552-phpapp01
Chapter 1 Financial Derivatives.pptx
Deriveties in india
Study of Derivative Market In India
Project report
Equity options strategies

final sip

  • 1. Internal Guide Certificate Prof. ………………………. Professor/ Asst. Professor / Lecturer IBCS, SOA University Certificate This is to certify that Mr. Debashish paikray having regd No…1361333072 has done this research project work on “STOCK AND CURRENCY DERIVATIVES MARKET IN INDIA:- EVOLUTION, TRADING MECHANISM AND FUTURE PROSPECTS.” and submitted the report in partial fulfilment for the degree of Master of Business Administration to IBCS, SOA University, Bhubaneswar under my supervision and guidance. His report is the record of original work done by him. To the best of my knowledge, no part of the content of this report has been submitted for any degree by him or anybody else to any other University or Institution. Date : - / / 2010 (Prof………………….) Place : - Bhubaneswar Project Guide
  • 2. Declaration I, Mr. Debashish paikray, hereby declare that the project report submitted by me entitled “STOCK AND CURRENCY DERIVATIVES MARKET IN INDIA:- EVOLUTION, TRADING MECHANISM AND FUTURE PROSPECTS ” in the partial fulfilment for the degree of Master of Business Administration to IBCS, SOA University, Bhubaneswar, is the record of original work done by me. No part of the content of this report has been submitted to any institution / university for the award of any other degree. Previous works in this field have been duly acknowledged as and when they have been referred. Date : - / /2014 Place : - Bhubaneswar (Name & Signature of the Student)
  • 3. ACKNOWLEDGEMENT I am grateful to all those who help me directly or indirectly to prepare this report. I believe that my research work will help the organisation to improve their strategic in future days. This kind of project work is definitely very hart to prepare, may be starching a period of time. Whenever a person is helped and cooperate by other, his/her bound to pay obligation to them. I cannot in full measure; reciprocate the kindness shown and contribution made by various individual in this period. I would like to extend of my parents, family, friends, and my guide Mr. Ramchandra Mohapatra for their fatigable care, keen interest and valuable suggestions enabled me to accomplices my project work. I am also thankful to those respondents of Bhubaneshwar who shared their precious time and necessary information during the survey. Indeed this page of acknowledgement shall never be able to touch the horizon of generosity of all those who tendered help to me.
  • 5. PREFACE As a part of the MBA curriculum of Institute of dusiness arend computer studies a unit of SOA university, I have been assigned to do my summer project entitled “St Ock and currency derivative in india, :- evaltion, treding mechanism and future prospects”under the faculty guidance of Prof. R.C. Mohapatra. In the organizationunder the guidance of Mr. Padmashree Das, I have experience in the derivativessector. I shall be amply awarded if the finding recommendations and other study previous beneficial for the organization in augmenting its effects towardsexcellence. Place:Bhubaneswar Date: DebashishPaikray
  • 8. OVERVIEW Fixed exchange rate was in existence under the Bretton Woods system. According to Avadhani (2000), Financial derivatives came into the spotlight, when during the post- 1970 period, the US announced its decision to give up gold- dollar parity, the basic king pin of the Bretton Wood System of fixed exchange rates. With the dismantling of this system in 1971, exchange rates couldn’t be kept fixed. Interest rates became more volatile due to high employment and inflation rates. Less developed countries like India opened up their economies and allowed prices to vary with market conditions. Price fluctuations made it almost impossible for the corporate sector to estimate future production costs and revenues. The derivatives provided an effective tool to the problem of risk and uncertainty due to fluctuations in interest rates, exchange rates, stock market prices and the other underlying assets. The derivative markets have become an integral part of modern financial system in less than three decades of their emergence. This paper describes the evolution of Indian Derivatives market, trading mechanism in its various securities, the various unsolved issues and the future prospects of the derivatives market.
  • 9. DEFINITION OF DERIVATIVE Section 2(ac) of Securities Contract Regulation Act (SCRA) 1956 defines Derivative as: a) “a security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security; b) “a contract which derives its value from the prices, or index of prices, of underlying securities”. The International Monetary Fund (2001) defines derivatives as “financial instruments that are linked to a specific financial instrument or indicator or commodity and through which specific risks can be traded in financial markets in their own right. The value of a financial derivative derives from the price of an underlying item, such as an asset or index. Unlike debt securities, no principal is advanced to be repaid and no investment income accrues.” Kinds of financial derivatives Forward Future Option Swap Forward= forwards are the oldest of all the derivatives. A forward contract refers to an agreement between two parties to exchange an agreed of an asset for cash at a certain date in future at a predetermined price specified in that agreement. The promised asset may be currency, commodity, instrument etc. Future = a future contract is very similar to the forward contract in all respect excepting the fact that it is completely a standardize one. Hence, it is rightly said that a future contract is nothing but a standardize forward contract. It is legally enforceable and it is always traded on an organized exchange. Option = in the volatile environment, risk of heavy fluctuation in the prices of assets is very heavy. Option is yet another tool to manage risk.
  • 10. Swap = swap is yet another exciting trading instrument. Infect, it is a combination of forwards by two counterparties. It is arranged to reap the benefits arising from the fluctuations in the market. It may be in currency market or any other market. F&O Derivatives ICICI sicurity provide trading facility only on future and option in derivative segment. So we will discuss detail on future and option. Typesof future  Commodity future= A commodity future is a future contract in commodities like agricultural products, metals and minerals etc. In organized commodity future markets, contracts are standardized with standard quantities. Of course this standard varies from commodity to commodity. they also have fixed delivery dates in each month or a few months in a year. In India commodity futures in agricultural products are popular. Some well establish commodities exchanges are as follow.  London Metal Exchange (LME)to deal in gold.  ChicagoBoard of Trade (CBT)to deal in soyabean oil.  New York cotton Exchange (NCE) to deal in cotton.  Commodity Exchange New York (COMEX)to deal in agricultural products  International Petroleum Exchange (IPE) in London to deal in crude oil.  Financial future= financial futures refer to a future contract in foreign exchange or financial instrument like treasure bill, commercial paper, share market, stock index or interest rate. It is an area where financial companies can play a dynamic role. financial futures are very popular in western countries as hedging instrument to protect against exchangeinterest rate fluctuations and for ensuring future interest on loan. Some well establish financialfuture exchanges are as follow.  International Monetary Market(IMM) to deal in US treasury bills, Euro Dollar deposits, sterling etc.
  • 11.  London International FinancialFuture Exchange(LIFFE) to deal in Euro Dollar deposits.   New York Future Exchange (NYFE)to deal in sterling, Eurodollar deposit etc. Typesof option  Call option= A call option is one which gives the option holder the right to buy a underlying asset (commodity, foreign exchange, stock, shares etc) at a predetermine price called “exercise price” or strike price on before a specified date on future. In such a case, the writer of a call option is under an obligation to sell the asset at a specified period, in case the buyer exercise his option to buy.  Put option=A put option is one which gives the option holder the right to sell an underlying asset at a predetermine price on or before a specified date in future. It means that the writer of a put option is under an obligation to buy the asset at the exercise price provided the option holder exercise his option to sell.  Double option= A double option is one which gives the option holder both the rights - --- either to buy or to sell an underlying asset at a predetermined price on or before a specified date in future.
  • 15. According to Greenspan (1997)“By far the most significanteventin finance during the past decades has been the extraordinary developmentand expansion of financial derivatives…” Avadhani(2000)stated that a derivative,an innovative financial instrument, emerged to protect againstthe risks generated in the past, as the history of financial markets is repleted with crises). Events like the collapse of the fixed exchange rate system in 1971, the Black Monday of October 1987, the steep fall in the Nikkei in 1989, the US bond debacle of 1994, occurred because of very high degree of volatility offinancial markets and their unpredictability.Such disasters have become more frequent with increased global integration of markets. Sahoo(1997)opines “Derivatives products initiallyemerged, as hedging devices againstfluctuation in commodity prices and the commodity-linked derivatives remainedthe sole form of such products for many years. Marlowe (2000) argues that the emergence of the derivative marketproducts most notably forwards, futures and options can be traced back to the willingness ofrisk-averse economic agents to guard themselves againstuncertainties arising out of fluctuations in asset prices. It is generally stated thatregulation has an importantand critical role to ensure the efficient and smooth functioning of the markets. Accordingto Sahoo (1997)the legal frameworkfor derivatives trading is a critical partof overall regulatory frameworkof derivative markets. The purpose of regulation is to encourage the efficiency and competition rather than Impeding it. Hathaway(1998)stated that, while there is a perceived similarityof regulatory objective, there is no single preferred model for regulation of derivative markets. Derivatives include a wide range of financial contracts, including forwards,futures, swaps and options. Forward contractis an agreementbetween two parties calling for deliveryof ,and paymentfor, a specified quantity and quality of a commodity ata specified future date. The price may be agreed upon in advance, or determined by formula atthe time of deliveryor other point in time” (Web 2). Just like other instruments, itis used to control and hedge currency exposure risk (e.g. forward contracts on USD or EUR)or commodity prices (e.g. forward contracts on oil). Patwari and Bhargava (2006)explain itin simple words and further add thatone of the parties to a forward contract assumes a long position and agrees to buy the underlying assetata certain future date for a certain price and the other agrees to short it. The specified price is referred to as the deliveryprice. The parties to the contract mutually agree upon the contract terms like deliveryprice and quantity. Web4 states that “A Futures
  • 16. Contract is a standardizedcontract, traded on a futures exchange, to buy or sell a certain underlyinginstrumentata certain date in the future, at a pre-set price. The future date is called the delivery date or final settlement date. The pre-set price is call the futures price. The price of the underlyingasseton the deliverydate is called the settlementprice. The futures price, naturally, converges towards the settlement price on the delivery date”.
  • 18. About Company: ICICI Securities Ltd is an integrated securities firm offering a wide range of services including investment banking, institutional broking, retail broking, private wealth management, and financial product distribution. ICICI Securities sees its role as 'Creating Informed Access to the Wealth of the Nation' for its diversified set of clients that include corporates, financial institutions, high net- worth individuals and retail investors. Headquartered in Mumbai, ICICI Securities operates out of 66 cities and towns in India and global offices in Singapore and New York. ICICI Securities Inc., the stepdown wholly owned US subsidiary of the company is a member of the Financial Industry Regulatory Authority (FINRA) / Securities Investors Protection Corporation (SIPC). ICICI Securities Inc. activities include Dealing in Securities and Corporate Advisory Services in the United States. ICICI Securities Inc. is also registered with the Monetary Authority of Singapore (MAS) and operates a branch office in Singapore. ICICI Securities empowers over 2 million Indians to seamlessly access the capital market with ICICIdirect.com, an award winning and pioneering online broking
  • 19. platform. The platform not only offers convenient ways to invest in Equity, Derivatives, Currency Futures, Mutual Funds but also other services Fixed Deposits, Loans, Tax Services, New Pension Systems and Insurance are available. ICICIdirect.com offers a convenient and easy to use platform to invest in equity and various other financial products using its unique 3-in-1 account which integrates customer's saving, trading and demat accounts. Apart from convenience, ICICIdirect.com also offers access to comprehensive research information, stock picks and mutual fund recommendations among other offerings. Tailored services and trading strategies are available to different types of customers; long term investors, day traders, high-volume traders and derivatives traders to name some. ICICIdirect.com uses the most advanced commercially available 128-bit encryption technology enabled Secure Socket Layer (SSL), to ensure that the information transmitted between the client and ICICIdirect.com across the internet is safe and cannot be accessed by any third party. ICICIdirect.com is the first broker in India to introduce `Digitally Signed Contract Note' to its customers. As a result, the process of generating contract notes has been automated and the same would be instantly available to its customers in a safe and secure manner through the website.
  • 20. ABOUT THE ICICI GROUP ICICI Bank was originally established in 1994 by ICICI Limited, an Indian financial institution, and was its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank was reduced to 46% through a public offering of shares in India in fiscal 1998, an equity offering in the form of ADRs (American Depositary Receipts) listed on the NYSE in fiscal 2000. ICICI Bank's acquisition of Bank of Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary market sales by ICICI to institutional investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at the initiative of the World Bank, the Government of India and representatives of Indian industry. The principal objective was to create a development financial institution for providing medium-term and long-term project financing to Indian businesses. ICICI Bank is India's second-largest bank with total assets of Rs. 4,736.47 billion (US$ 93 billion) at March 31, 2012 and profit after tax Rs. 64.65 billion (US$ 1,271 million) for the year ended March 31, 2012. ICICI Bank is also the no.1 private sector bank in India. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries in the areas of investment banking, life and non-life insurance, venture capital and asset management. ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE).
  • 21. ICICIGROUP  ICICI Prudential (Deals with Mutual Fund)  Prudential ICICI (Deals with Life Insurance)  ICICI Lombard (Deals with General Insurance)  ICICI HFFD (Deals with Home Finance Fixed Deposit)  ICICI Securities (Deals with Stock Market)  ICICI Home Finance About ICICI Securities Limited ICICI Securities Ltd named its online division as ICICI direct.com and it is in to retail broking. The business of the company overhauled in 2002. It acts as a discount brokerage house to full service investment solution provider. It has specialized research product for the all small investors and day traders. ICICI Direct is one of the core products and group organisations of ICICI bank. ICICI Direct offers range of financial services for the customer. It has been exclusively incorporated for inviting investments from customers on shares and securities. Introduction of Demat Account has stimulated ICICI to offer financial service directly to the customers. Eventually, ICICI Direct Demat Account has been introduced and linked with ICICI Direct, which facilitates the account holders and investors to trade in share market, securities etc online. For people who have not heard about Demat account, it is nothing but similar to a bank account introduced for the purpose of online trading in the stock and financial market.
  • 22. No fees or charge is levied for opening an ICICI Direct Demat Account. Neither the customer need to visit the bank nor meet the representatives for having a Demat account. The account can be opened just by filling the account opening form online. Further, they need not be an existing customer of ICICI bank. However, for having such account, PAN – Permanent Account Number is mandatory and through which the online transactions are done. Login ID and Login password are provided for the customers, similar to ICICI Net banking. In addition, for purchase and sale of shares and securities or for confirming the transfer of shares, specific passwords are provided for initiating the transaction and confirming the same. ICICI Direct Demat Account facilitates the investors to trade and invest in the following:  Equity funds  Mutual Funds  Shares and securities offered by companies  Investment in savings plans and much more It is not necessary that only the investors are allowed to trade using ICICI Direct Demat Account. It is also extended for agents, brokers and sub brokers to deal with securities. Trading with this account is absolutely free and does not involve any fee towards registration or stamp duty.
  • 24. Development of Derivatives Markets in India Indian Derivatives markets have been in existence in one form or the other for a long time. In the area of commodities, the Bombay Cotton Trade Association started futures trading in 1875. In 1952, with the ban on cash settlement and option trading by the Government of India, derivatives trading shifted to informal forwards markets. In recent years, government policy has shifted in favor of an increased role of market-based pricing and less suspicious derivatives trading. The first step towards the introduction of financial derivatives trading in India was the promulgation of the Securities Laws (Amendment) Ordinance, 1995. This provided for withdrawal of prohibition on options in securities. In the last decade, beginning the year 2000, ban on futures trading in many commodities was lifted out. During the same period, National Electronic Commodity Exchanges were also set up. Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2001 on the recommendation of L. C Gupta committee. Securities and Exchange Board of India (SEBI) permitted the derivative segments of two stock exchanges, NSE and BSE, and their clearing house/corporation to commence trading and settlement in approved derivatives contracts. Initially SEBI approved trading in index futures contracts based on various stock market indices such as, S&P CNX, Nifty and Sensex. Subsequently, index-based trading was permitted in options as well as individual securities. Participants in the derivative market: Patwari and Bhargava (2006) stated that there are three broad categories of participants in the derivative market. They are: Hedgers, Speculators and Arbitrageurs.  Hedger is a trader who enters the derivative market to reduce a pre-existing risk. In India, most derivatives users describe themselves as hedgers (Fitch Ratings, 2004) and Indian laws generally require the use of derivatives for hedging purposes only.  Speculators= the next participant in the derivative market, buy and sell derivatives to book the profit and not to reduce their risk. They wish to take a position in the market by betting on future price movement of an asset. Speculators are attracted to exchange traded derivative products because of their high liquidity, high leverage, low impact cost, low transaction costand default risk behavior. Futures and options both add to the potential gain and losses of the speculative venture. It is the speculators who keep the market going because they bear the risks, which no one else is willing to bear. The third participant,
  • 25.  Arbitrageur = is basically risk-averse and enters into the contracts, having the potential to earn riskless profits. It is possible for an arbitrageur to have riskless profits by buying in one market and simultaneously selling in another, when markets are imperfect (long in one market and short in another market). Arbitrageurs always look out for such price differences. Arbitrageurs fetch enormous liquidity to the products which are exchanges traded. The liquidity in-turn results in better price discovery, lesser market manipulation and lesser cost of transaction. Derivatives Products Traded in Derivatives Segment of BSE The Bombay Stock Exchange (BSE) created history on June 9, 2000 when it launched trading in Sensex based futures contract for the first time. It was then followed by trading in index options on June 1, 2001; in stock options and single stock futures (31 stocks) on July 9, 2001 and November 9, 2002, respectively. It permitted trading in the stocks of four leading companies namely; Satyam, State Bank of India, Reliance Industries and TISCO (renamed now Tata Steel). Chhota (mini) SENSEX7 was launched on January 1, 2008. With a small or 'mini' market lot of 5, it allows for comparatively lower capital outlay, lower trading costs, more precise hedging and flexible trading. Currency futures were introduced on October 1, 2008 to enable participants to hedge their currency risks through trading in the U.S. dollarrupee future platforms. Table 1 summarily specifies the derivative products and their date of introduction on the BSE. Table 1: Products Traded in Derivatives Segment of the BSE Product Traded with underlying asset Introduction Date 1 Index Futures Sensex June 9,2000 2 Index Options Sensex June 1,2001 3 Individual Stock Option Concerned Company Stock July 9, 2001 4 Individual Stock futures Concerned Company Stock November 9,2002 5 Weekly Option 4 Stocks September 13,2004 6 Chhota (mini) SENSEX January 1, 2008 7 Currency Futures US Dollar Rupee October 1,2008 Source:International Journal of Marketing, Financial Services & Management Research
  • 26. Derivatives Products Traded in Derivatives Segment of NSE NSE started trading in index futures, based on popular S&P CNX Index, on June 12, 2000 as its first derivatives product. Tradingin index options was introduced on June 4, 2001. On November 9, 2001, Futures on individual securities started.As stated by the Securities & Exchange Board of India (SEBI), futures contracts are available on 233 securities. Tradingin options on individual securities commenced w.e.f. July 2, 2001. The options contracts, available on 233 securities, are of American style and cash settled. Tradingin interestrate futures was started on 24 June 2003 butit was closed subsequently due to pricing problem. The NSE achieved another landmark in product introduction by launching Mini Index Futures & Options with a minimum contract size of Rs 1 lac. NSE created history by launching currency futures contract on US Dollar-Rupee on August 29, 2008 in Indian Derivativesmarket.Table 2 presents a description of the types of products traded at F& O segment of NSE. Table 2: Products Traded in F&O Segment of NSE Source:International Journal of Marketing, Financial Services & Management Research S.no Product Traded with underlying asset Introduction Date 1 Index Futures S&P CNX Nifty June 12,2000 2 Index Options S&P CNX Nifty June 4,2001 3 Individual Stock Option Concerned Company Stock July 2, 200 4 Individual Stock futures Concerned Company Stock November 9,2001 5 Interest Rate Future T – Bills and 10 Years Bond June 23,2003 6 IT Futures & Options CNX IT August 29,2003 7 Nifty Futures & Options Bank June 13,2005 8 Nifty Junior Futures &Options CNX June 1,2007 9 Futures & Options CNX100 June 1,2007 10 Midcap 50 Futures &Options Nifty October 5,2007 11 Mini index Futures &Options S&P CNX Nifty index January 1, 2008 12 2008long Term Option contracts S&P CNX Nifty Index March 3,2008 13 Currency Future US Dollar Rupee August 29,2008
  • 28. Introduction India’s foreign exchange market has been witnessing extreme volatility trends for the past one year due to unstable foreign investment flows into and out of the country. Such high volatilities of Rupee emphasised the need for appropriate risk management measures. In this context, derivatives become important tools for risk management. OTC derivatives, particularly forwards, are widely used in the post liberalisation period. Although futures have been introduced in Aug 2008, there appears to be no extensive use of them as hedging tools, as there are not substantial shift volumes from forwards to futures plausibly due to some inherent constraints (Lingered, 2009). For this reason, the OTC markets are dominant in currency markets world over compared to exchange traded futures. Nevertheless, futures are a fitting alternative for minimizing risk in currency markets and are used both by all major types of market participants hedgers, speculators and arbitrageurs. In India, part from futures, options have also been introduced in Oct 2012. But it is apparent that the OTC forwards are still preferred instruments for hedging in the Indian currency market as well, similar to the global trends. The term “Derivative” indicates the value derived from a underlying level. It has no independent value, underlying can be security, stock market index, commodity, bullions, or currency. Currency Derivatives implies contracts where underlying would be the currency exchange rate. Examples of currency underlying pair USD-INR = Unaited state dollar against Indian rupee USD-EUR = Unaited state dollar against euro EUR-GPB = Euro against Grate Britain pound GPB-INR = Grate Britain pound against Indian rupee
  • 29. (Figure I): Currency derivative at ICICI Direct Products offering for currency trading in ICICI Direct ICICI Direct offers four types of foreign currency derivative pair for trading SUCH AS:- USD-INR = 6 month forward contract available for trading. GPB-INR = 3 month forward contract available for trading. EUR-INR = 3 month forward contract available for trading. JPY-INR = 2 month forward contract available for trading. All currency derivatives are available in future; option trading is not available in ICICI Direct.
  • 30. Table 3:- currency derivative system in ICICI Direct Symble USD-INR EUR-INR GPB-INR JPY-INR Instrument type FUT-CUR FUT-CUR FUT-CUR FUT-CUR Unit of trading 1 unit = 1000 Dollar 1 unit = 1000 Euro 1 unit = 1000 Pound 1 unit = 1000 Yen Underlying The exchange rate in INR of USD The exchange rate in INR of EUR The exchange rate in INR of GBP The exchange rate in INR of JPY Tick size 0.25 paisa or INR 0.0025 0.25 paisa or INR 0.0025 0.25 paisa or INR 0.0025 0.25 paisa or INR 0.0025 (The quote is for 100 JPY) Trading hours 9.00 AM to 5.00 PM Trading cycle 12 months continue Last trading cycle Tow working days prior to the last business day of the expiry month @ 12.15 P.M . Final settlement date Last working day,(excluding Sunday) of the expiry month. The last working day will be the same as that for interbank settlement in Mumbai. DAILY SETTELMENT = T+1 FINAL SETTLEMENT = T+2 Mode of settlement Cash settlement in INR Daily settlement price Calculated on the basis of the last half-an –hour weighted average price. Final settlement price RBI reference on last trading day RBI reference on last trading day RBI reference on last trading day RBI reference on last trading day Table 4:- Margin calculation in currency futures Pair Underlying Contract example Quant ity Lot size LTP Contract value Margin lot Margi n % USD-INR USD against INR FUT-USD-INR 28.8.13 1 1000 62.7425 6,27,425 5333 85 EUR-INR EUR against INR FUT-EUR-INR 28.8.13 1 1000 83.6325 8,36,325 3764 4.5 GPB-INR GPB against INR FUT-GPB-INR 28.8.13 1 1000 98.0925 9,80,925 4904 5 JPY-INR JPY Against INR FUT-EUR-INR 28.8.13 1 1000 64.6925 6,46,925 3882 6
  • 31. Currency derivative in ICICI security LTD ICICI Direct offers you a simple and convenient way to trade and hedge your currency risk in four pair of Currencies- Dollar, Euro, Pound and Japanese Yen against Indian Rupee. By offering you the choice of trading in different asset class of Currencies we offer you the opportunity to diversify your portfolio opportunity to diversify your portfolio The benefits of choosing ICICI Direct for your Currency Trading are:  Convenience - Provides a well-diversified set platform for online trading with competitive brokerage under a single sign-on and completely paper-less investing experience  Expertise - You can access to our Daily Research Reports as well as Fundamental & Technical Reports and Advisory.  Flexibility - You can select the Currency Pair USD/INR, EUR/INR, GBP/INR and JPY/INR in which you wish to trade Few Advantages of this market are 1. Trading hours of 09:00 am to 05:00 pm provide more trading opportunities 2. Trade in prominent currencies like US Dollar, EURO, Pound, Yen against Indian Rupee 3. Real time and Transparent Currency Rates in comparison to OTC Rates. 4. No Counterparty Default risk due to settlement guarantee by regulated clearing house. 5. Low Taxation ( No STT and CTT) 6. Daily Cash Settlement in INR via MTM (Mark to Market) Currency Futures - An Assets Class If you have an ICICI Direct account, login to your account and select the Currency Segment Section If the Currency Segment section is not enabled either you have not opted for the facility or may not be KYC (Know-Your-Customer) Compliant. KYC is mandatory for all investments in Currency Futures as per the Securities and Exchange Board of India (SEBI).
  • 32. Futures of currency market Currency Futures  Forex = Foreign exchange is the simultaneous buying of one currency and selling of another. Currencies are traded through a broker or dealer and are executed in currency pairs. For example: the Euro and the US Dollar (EUR/USD) or the British Pound and the Japanese Yen (GBP/JPY). The Foreign Exchange Market (Forex) is the largest financial market in the world, with a daily volume of over $4 trillion. This is more than three times the total amount of the stocks and futures markets combined. Unlike other financial markets, the Forex spot market has neither a physical location nor a central exchange. It operates through an electronic network of banks, corporations, and individuals trading one currency for another. The lack of a physical exchange enables the Forex market to operate on a 24-hour basis, spanning from one time zone to another across the major financial centers.  Currency trading = Trade is an international business and for any trade payments are settled in Currencies, which are specific to the countries/regions involved. Whenever any Currency is bought or sold for another, the transaction is known as 'Currency trading'. Currency trading is the largest financial market globally, followed by Commodities and Equities. Investors, speculators and corporate are involved in cross-border Currency trade  OTC Market = OTC is short for 'over-the-counter'. The OTC market has no central marketplace and is linked to a network of dealers/traders who do not physically meet but, instead, communicate through phone and computer networks. OTC contracts are customized contracts, based on negotiations between the counter-parties. In the case of OTC markets, the counter-party default risk depends on the counter-party creditworthiness, among other factors.  Exchange Traded Currency Futures = The Exchange Traded Currency Futures contract is an agreement to buy or sell the underlying Currency on a specified date in the future and at a specified rate. The underlying asset for a Currency Futures contract is a Currency. The Exchange's clearing house acts as a central counter-party for all trades and thus, takes on a performance guarantee.
  • 33. Currency Futures contract  Currency Futures contract = A Currency Futures contract is a standardized version of a Forward contract that is traded on a regulated Exchange. It is an agreement to buy or sell a specified quantity of an underlying Currency on a specified date in the future at a specified rate.  Participant of currency future contract = Any Indian resident or company, including banks and financial institutions, can participate in the Currency Futures market. At present, Foreign Institutional Investors (FII's) and Non- Resident Indians (NRI's) are not permitted to participate in the Currency Futures market in India. Participants in the Currency Derivatives segment can be classified in two broad categories: a. Hedgers Foreign Currency markets have been volatile in recent times due to various geo-political uncertainties. In order to ensure that profits for any business are not depleted due to fluctuations in the Currency exchange rate, hedging Currency risk can be an excellent tool. Large corporate, small and medium enterprises (SME's) and individual businessmen, apart from the general investing public, are increasingly exposed to the global markets. Hence, protecting against Forex risk is becoming more significant. b. View-based-traders Currency Futures provide view-based traders with an efficient platform to observe the movements of the local Currency (INR) against other Currencies. These traders can trade based on various technical indicators, fundamental factors, economic and policy-based news and developments on the global stage. What Currencies can be traded on the Exchanges? In India, currently only USD/INR, EUR/INR, GBP/INR and JPY/INR are available for trading on various Exchanges
  • 34. Table-5:- Contract Specification of USDINR futures contract Trading hours Monday to Friday: 9:00am to 5:00pm Contract Months 12 near calendar months Contract Size USD 1000, EUR 1000, GBP 1000 and JPY 1,00,000 Tick Size 0.25 paisa or INR 0.0025 per 1 USD Last trading day Two working days prior to last business day of the expiry month at 12.15 noon Final Settlement date Last working day (excluding Saturdays) of the expiry month Settlement Daily settlement: T + 1 /Final settlement: T + 2 Daily settlement price Weighted average price during last half hour of trading Final settlement price RBI reference rate on expiry date Source: ICICI direct.com Table-6:- Features of Currency Pairs USD-INR EUR- INR INRGBP- JPY-INR Quotation Rate of exchange between 1 USD and INR (USDINR) Rate of exchange between 1 EURO and INR (EUR- INR) Rate of exchange between 1 GBP and INR (GBP- INR) Rate of exchange between 100 JPY and INR (JPY- INR) Contract Size USD 1000 EURO 1000 GBP 1000 JPY 1000 Calendar Spread Margin Rs. 400 for a spread of 1 month; Rs 500 for a spread of 2 months, Rs 800 for a spread of 3 months Rs.700 for spread of 1 month Rs.1000 for spread of 2 months Rs.1500 for spread of 3 months or more Rs.1500 for spread of 1 month Rs.1800 for spread of 2 months Rs.2000 for spread of 3 months or more Rs.600 for spread of 1 month Rs.1000 for spread of 2 months Rs.1500 for spread of 3 months or more Source: NSE Website
  • 35. Stock Derivative V/S Currency Derivative UNDERLYING (Table - 7) Stock derivative Currency derivative  Market indices like Nifty, bank Nifty  Equity scrip’s  Currency pair is used as indices, like- USD-INR, EUR-INR MARGIN (Table - 8) LOT SIZE (Table - 9) Stock derivative Currency derivative  Lot size is based on contract value  Standard value is set by NSE is Rs.2.5 laks  Numb of unit in a lot very as per. Market price of scrip at the time of initialing the contract by NSE.  Lot size is based on numb of units of underlying in a contract.  Standard is 1000 units of currency.  Lot value is not set the standard. Stock derivative Currency derivative  Very from 11% to 35%, and up to 60% in exception.  Low margin in indices starting from 11%  Prime stock margin very from 16%to 25%  General stock margins start from 25% and above.  Contract for Nifty worth Rs.2, 45,000 available @ margin of Rs.26, 950 (@4900).  Margins are very low.  Very from 8.5% for USD-INR  Exceptional margin applicable and extended to 1-24%  A lot position of USD-INR available @Rs.5200.  For contracts, equivalent to marginally RS.2,45,000 .
  • 36. TICK SIZE (Table - 10) Stock derivative Currency derivative  Tick size of stock derivative is Rs. 0.05.  EX of bid & offer Best bid price Best offer price 55.95 56.00 55.90 56.05 55.85 56.10 55.80 56.15  Foreign exchange derivative Tick size is Rs. 0.0025 or 1/4th of 1 paisa.  EX of bid & offer Best bid price Best offer price 55.9875 55.9900 55.9850 55.9925 55.9825 55.9950 55.9800 55.9975 55.9775 56.0000 EXPOSURE FROM RS. 1 LAKH (Table - 11) Stock derivative Currency derivative  3 Nifty contracts can be taken as position (avg margin 11%)  3 lots of Nifty stock (avg margin 14-15%)  2 lots of junior Nifty stocks.  1 lot of pair may in stock  Foreign exchange derivative law margin and high level products.  You can take position of 20 lots of USD- INR.  You can take position of 26 lots of EUR- INR.  Position value is worth Rs. 12 lakhs Stock Derivative V/S Currency Derivative (Table - 12) instrument Fund available Contract size Price Contract value Margin of contract Margin value Numb of contain full margin Position value in lakhs NIFTY 1,00,000 50 4,900 2,45,000 11% 26,950 3 7.35 ITC 1,00,000 1,000 233 2,33,000 14% 32,620 3 6.99 PFC 1,00,000 2,000 150 3,00,000 19% 57,000 2 3.00 USD-INR 1,00,000 1,000 62.75 62.75 9% 5,333.75 19 11.76 EUR-INR 1,00,000 1,000 83.68 83.68 45% 3,765.6 27 22.22
  • 38. Trading Mechanism (STOCK) Web10 states that the trading system of derivatives at NSE, known as NEAT-F&O trading System, provides a fully automated screen-based trading for all kinds of derivatives products available on NSE on a national wide basis. It supports an anonymous order driven market, which operates on a time priority/strict price basis? It offers great flexibility to users in terms of kinds of orders that can be placed on the terminal. Various time and price-related conditions like Immediate/Cancel, Limit/Market Price, Stop Loss, etc. can be built into an order. The trading in derivatives is essentially similar to that of trading of securities in the Capital Market segment. There are four entities in the trading system of a derivative market: 1. Trading members: Trading members can trade either on their own account or on behalf of their clients including participants. They are registered as members with NSE and are assigned an exclusive trading member ID. 2. Clearing members: Clearing members are members of NSCCL. They carry out confirmation/inquiry of trades and the risk management activities through the trading system. These clearing members are also trading members and clear trade for Themselves or/and other. 3. Professional clearing members: A clearing member who is not a trading member is known as a professional clearing member (PCM). Typically, banks and custodian become PCMs and clear and settle for their trading members. 4. Participants: A participant is a client of trading members like financial institutions. These clients may trade through multiple trading members, but settle their trades through a single clearing member only. The terminals of trading of futures & options segment are available in 298 cities at the end of March 2006. Besides trading terminals, it can also be accessed through the internet by investors from anywhere.
  • 39. Trade Details of Derivatives Market After recording a 60.43 percent growth (2009–2010) in trading volume on year-on-year basis, the NSE’s derivatives market continued its momentum in 2010–2011 by having a growth rate of 65.58 percent (Table 3). The NSE further strengthened its dominance in the derivatives segment in 2010– 2011 by having a share of 99.99 percent of the total turnover in this segment. The share of the BSE in the total derivatives market turnover fell from 0.0013 percent in 2009–2010 to 0.0005 percent in 2010–2011. The total turnover of the derivatives segment increased by 26.56 percent during the first half of 2011–2012 compared to the turnover in the corresponding period in the previous fiscal year. In terms of product wise turnover of futures and options segment in the NSE, index options segment was the clear leader in 2010–2011 (Figure II): Trade Details of Derivatives in NSE Source: International Journal of Marketing, Financial Services & Management Research Trade Details of Derivatives in BSE: (Figure III)
  • 40. Source: International Journal of Marketing, Financial Services & Management Research Product-wise distribution of turnover of F&O segment of NSE :( Figure IV) Source: International Journal of Marketing, Financial Services & Management Research Table 13: Trade Details of Derivatives Market
  • 41. Source: NSE Website Trading Mechanism (CURRENCY) The Currency Derivatives trading system of NSE, called NEAT-CDS (National Exchange for Automated Trading – Currency Derivatives Segment) trading system, provides a fully automated screen-based trading for currency futures on a nationwide basis as well as an online monitoring and surveillance mechanism. The NEAT-CDS system supports an order driven market, wherein orders match automatically. Order matching is essentially on the basis of security, its price and time. All quantity fields are in contracts and price in Indian rupees. The exchange notifies the 160 contract size and tick size for each of the contracts traded on this segment from time to time. When any order enters the trading system, it is an active order. It tries to find a match on the opposite side of the book. If it finds a match, a trade is generated. If it does not find a match, the order becomes passive and sits in the respective order book in the system. Contract Specifications for Currency Futures NSE trades Currency Derivatives contracts having near 12 calendar month expiry cycles. All contracts expire two working days prior to the last working day of every calendar month (subject to holiday calendars). This is also the last trading day for the expiring contract. The contract would cease to trade at 12:00 noon on the last trading day.
  • 42. A new contract with 12th month expiry would be introduced immediately ensuring availability of 12 monthly contracts for trading at any point. The Instrument type: FUTCUR refers to 'Futures contract on currency' and Contract symbol: USDINR denotes a currency pair of 'US Dollars – Indian Rupee'. Each futures contract has a separate limit order book. All passive orders are stacked in the system in terms of price-time priority and trades take place at the passive order price (order which has come earlier and residing in the system). The best buy order for a given futures contract will be the order to buy at the highest price whereas the best sell order will be the order to sell at the lowest price. The contract specification for US Dollars – Indian Rupee (USDINR) Currency Futures is summarized in the table below. TURNOVER Trading in Currency Futures segment commenced on August 29, 2008. On the very first day of operations a total number of 65,798 contracts valued at Rs.291 crore were traded on the Exchange. Since then trading activity in this segment has been witnessing a rapid growth. The total traded volume from August 2008 till March 2009 was Rs.162, 272 crore (US $ 31,849 million). Total numbers of contracts traded during the August 2008 to March 2009 were 32,672,768. The business growth of Currency Futures Segment is shown in picture Chart 7utures Business growth of currency features in NSE :( Figure V)
  • 43. Traded Value Records Trading Volumes in the CDS Segment during 2008-09 reached a high of Rs.3,911.39 crore (US $ 767.69 million) on March 20, 2009. The following table shows the record highs in the Currency Derivatives segment. Table 14 CDS Segment Date Number/Value Record Number of Trades March 20, 2009 25,702 Record No. of Contracts Traded March 20, 2009 775,933 Record Daily Turnover (value in Rs. crores) March 20, 2009 Rs.3911.39
  • 45. Future Prospects Even though the derivatives market has shown good progress in the last few years, the real issues facing the future of the market have not yet been resolved. The number of products allowed for derivative trading have increased and the volume and the value of business has zoomed, but the objectives of setting up different derivative exchanges may not be achieved and the growth rates witnessed may not be sustainable unless these real issues are sorted out as soon as possible. Some of the main unresolved issues are as under. o Commodity Options: Trading in commodity options contracts has been stopped since 1952. The market for commodity derivatives is not completed without the presence of this important derivative. Both futures and options are necessary for the healthy growth of the market. There is an immediate need to bring about the necessary legal and regulatory changes to introduce commodity options trading in the country. The matter is believed to be under the active consideration of the Government and the options trading may be introduced in the near future. o Issues for Market Stability and Development: The enormous size and fast growth of the Over the Counter (OTC) derivatives market has attracted the attention of regulators and supervisory bodies. Some OTC derivatives have been viewed as amplifiers of the stress in the present global financial crisis. The more common criticisms relate to the fact that the OTC markets are less transparent and highly leveraged, have weaker capital requirements and contain elements of hidden systemic risk. o The Warehousing and Standardization: For commodity derivatives market to work smoothly, it is necessary to have a sophisticated, cost-effective, reliable and convenient warehousing system in the country. The Habibullah (2003) task force admitted, “A sophisticated warehousing industry has yet to come about”. Further, independent labs or quality testing centers should be set up in each region to certify the quality, grade and quantity of commodities so that they are appropriately standardized and there are no shocks waiting for the ultimate buyer who takes the physical delivery. o Cash vs. Physical Settlement: Only about 1% to 5% of the total commodity derivatives trade in the country is settled in physical delivery. It is probably due to the inefficiencies in the present warehousing system. Therefore the
  • 46. o warehousing problem obviously has to be handled on a war footing, as a good delivery system is the backbone of any commodity trade. A major problem in cash settlement of commodity derivative contracts is that at present, under the Forward Contracts (Regulation) Act 1952, cash settlement of outstanding contracts at maturity is disallowed. In other words, all outstanding contracts at maturity should be settled in physical delivery. To avoid this, participants settle their positions before maturity. So, in practice, most contracts are settled in cash but before maturity. There is a need to modify the law to bring it closer to the widespread practice and save the participants from unnecessary hassles. o Increased Off-Balance Sheet Exposure of Indian Banks: The growth of derivatives as off-balance sheet (OBS) items of Indian Banks has been an area of concern for the RBI. The OBS exposure/risk has increased significantly in recent years. The notional principal amount of OBS exposure increased from Rs.8,42,000 crore at the end of March 2002 (approximately $181 billion at the exchange rate of Rs.46.6 to a US $) to Rs.149,69,000 crore (approximately $321 billion) at the end of March 2008. (RBI, 2009) o The Regulator: As the market activity pick-up and the volumes rise, the market will definitely need a strong and independent regulator; similar to the Securities and Exchange Board of India (SEBI) that regulates the securities markets. Unlike SEBI which is an independent body, the Forwards Markets Commission (FMC) is under the Department of Consumer Affairs (Ministry of Consumer Affairs, Food and Public Distribution) and depends on it for funds. It is imperative that the Government should grant more powers to the FMC to ensure an orderly development of the commodity markets. The SEBI and FMC also need to work closely with each other due to the inter-relationship between the two markets. o Competition of OTC derivatives with the Exchange-traded Derivatives: A general view emerging after the recent financial crisis is that OTC derivatives trading should be moved to an exchange platform. The proponents of this view hope that this would increase liquidity and reduce significantly the opacity of the market. They argue that exchanges provide transparent and reliable price formation mechanisms, neutrality, robust and appropriate technology, better regulation and, above all, centralized clearing and settlement system. These arguments are based on the assumption that the existing method of trading in OTC products is all based on telephone trading and there is no clearing system in place.
  • 47. o Lack of Economies of Scale: There are too many (3 national level and 21 regional) commodity exchanges. Though over 80 commodities are allowed for derivatives trading, in practice derivatives are popular for only a few commodities. Again, most of the trade takes place only on a few exchanges. All this splits volumes and makes some exchanges unviable. This problem can possibly be addressed by consolidating some exchanges. Also, the question of convergence of securities and commodities derivatives markets has been debated for a long time now. The Government of India has announced its intention to integrate the two markets. It is felt that convergence of these derivative markets would bring in economies of scale and scope without having to duplicate the efforts, thereby giving a boost to the growth of commodity derivatives market. It would also help in resolving some of the issues concerning regulation of the derivative markets. However, this would necessitate complete coordination among various regulating authorities such as Reserve Bank of India, Forward Markets commission, the Securities and Exchange Board of India, and the Department of Company affairs etc. o Strengthening the Centralized Clearing Parties: CCIL, which started functioning in 2002, is the only centralized clearing party for trade processing and settlement services in India. It currently provides a guaranteed settlement facility for government securities trading, clearing of collateralized borrowing and lending obligations (CBLO), guaranteed settlement of foreign exchange trading, and settlement of all Indian Revenue Service (IRS). Though the concentration of business relating to money, securities and forex markets with the CCIL helps in pooling risks and reducing the overall transactions costs for the system, the Certified Financial Services Auditor’s (CFSA) report opined that the concentration of such a wide spectrum of activities leads to concentration of risks in one entity. Therefore, there is the need to strengthen more and more clearing parties. o Tax and Legal bottlenecks: In India, at present there are tax restrictions on the movement of certain goods from one state to another. These need to be removed so that a truly national market could develop for commodities and derivatives. Also, regulatory changes are required to bring about uniformity in octroi and sales taxes etc. VAT has been introduced in the country in 2005, but has not yet been uniformly implemented by all states. o New Derivatives Products for Credit Risk Transfer (CRT): Credit risk transfer (CRT), in a broad sense (including guarantees, loan syndication, and securitization),has a long history. However, there has been a sustained and rapid growth of new and
  • 48. innovative forms of CRT associated with credit derivatives. The most common credit derivatives are credit default swaps (CDS) on single corporate entity (single- name CDS) and collateralizeddebt obligations (CDOs). Since 2005, CRT activity became significant for two additional underlying asset classes – asset backed securities (ABS) and leveraged loans. Internationally, banks and financial institutions are able to protect themselves from credit default risk through the mechanism of credit derivatives. However, credit derivatives were not allowed in India until recently. The RBI has made an announcement in its second-quarter monetary policy 2009-10 that it has considered it appropriate to proceed with caution on this issue. To start with Ist December 2011, RBI has introduced guidelines for a basic, over-the-counter, single name CDS for corporate bonds for resident entities, subject to safeguards.
  • 50. FINDINGS  The Indian derivative market has achieved tremendous growth over the last few years.  The derivatives market has seen ups and downs.  The new and innovative derivative products have emerged over the time to meet the various needs of the different types of investors.  Though, the derivative market is burgeoning with its divergent products, yet there are many issues.  Indian derivative market has a great future.
  • 52. Books Godern and Natrajan, Financial market and services L.M Bhole, Financial institutions and markets Journals International journal of market and research Websites www.nse.com www.bse.com www.uaexchange.com www.icicidirect.com www.icicigroup.com www.wikipedia.com