Currency futures ppt branches
- 2. Foreign Exchange Market • Largest Financial market • 24-hr market • Average daily trade – over US $ 3.5 trillion
- 3. Foreign Exchange Market • Most widely traded currency – Dollar – Investment currency in capital markets – Reserve currency of Central Banks – Transaction currency in many commodity markets – Invoice currency for many contracts
- 4. Foreign Exchange Market • Participants – Central Banks – Commercial Banks – Hedge Funds – Commercial companies – Investment management firms – Retail FX brokers – INDIVIDUALS
- 5. Foreign Exchange Market • Main Instruments – Spot – Outright forwards – Swaps • Interest Rate Swaps • Currency Swaps – OTC Currency Options – Exchange Traded Currency Futures
- 6. Factors affecting USD/INR Rates • Supply and Demand Forces • Dollar against major currencies like Euro, Pound, Yen • Global Asian Stock markets • Indian Stock markets • Economic factors – Government budget deficits – Interest rates – Inflation – Fiscal and Monetary Policy
- 7. Market activity • Hedging – Banks – Importers & Exporters – Corporate • Trading/ Speculation – View on appreciation or depreciation of USD/INR • Arbitrage – Inter market (OTC forwards and NSE - futures) – Inter exchange ( NSE and MCX-SX, NSE and DGCX)
- 8. OTC Market Interbank Market - Average daily turnover in Global FX market- over $3.5 trillion Forward Contracts – Customized Contracts • High Spreads – Access restricted to participants with underlying positions – Physical Settlement – Low Accessibility – Counterparty Risk
- 9. A new and better alternative for trading FX USD/ INR cash settled futures market at NSE • Access to all Indians • Transparent online trading platform • No requirement for underlying position • Low Margins Anonymous order matching facility • Robust settlement systems with counterparty guarantee • Low Bid – Offer Spreads • Euro, Yen and Sterling v/s Rupee futures to be added soon to the Currency Derivatives Segment (RBI has already given permission)
- 10. Exchange based trading volumes • Average Daily Volumes – Oct'09 $ 1613.40 Million – Sept'09 $1171.15 Million – Jun'09 $ 714.75 Million – Apr'09 $ 490.72 Million
- 12. FX Volatility Is The Reality
- 13. Trading / Speculation Expectation that dollar will strengthen against the rupee • Buy 10 November futures @ 46.60 – Cash outflow of margin @ 5 % - Rs 23,300 • Book Potential Profit / Loss • Sell November futures @ 46.75 to book profit of – Rs 1,500 on an investment of Rs 23,300 RETURN of 6.43 % INTRA-DAY • What if my view is completely wrong ? – Sell futures @ 46.30 and book a loss of – Rs 3000 Stop Loss Trigger at a movement of 10 paise per $ against the view – to prevent excess losses
- 14. Protecting Earnings of Underlying Hedge the FX exposure – Exporter : IT, Electronics & Hardware, Jewelery, Auto Ancillaries, Textiles, Chemicals, Food & Beverages – Importer : Oil and Gas , Gems and Jewelery – Investors : Institutions investing abroad – Borrowers : ECB's and FCCB's – Individuals : Students studying abroad
- 15. Hedging Example - Importer • If an Oil Importer wants to import Crude Oil, worth $1 million on June 3, 2009 with delivery and payment dates being three months ahead, in Sept 2009. Spot Rate on 3rd June 09 INR 46.74 per USD Amt payable as on 3rd June 09 Rs 4,67,40,000 (46.74 * 1000000) Buy 3 month futures contract Futures Price = Spot + Cost of Carry USD 47.05 (46.74+0.31) Futures Price in INR Rs 4,70,50,000 Spot Rate on 3rd September 09 INR 49.20 per USD If not hedged payment would Rs 4,92,00,000 Saving due to hedging Rs 21,50,000
- 16. Hedging Example – Exporter • Exporter earning USD 1,000,000 for DEC 09, expecting remittance on 25 DEC 2009 Spot Rate on 30th OCT 09 INR 47.02 per dollar Sell 1000 USDINR contracts DEC 09 Futures Price = Spot+ Cost of INR 47.20 per USD (47.02+0.18) Carry Price in INR Futures Rs 4,72,00,000 Spot Rate on 28 DEC 09 INR 46.50 per USD If not hedged receipt would be Rs 4,65,00,000 Saving due to hedging Rs 7,00,000
- 17. Costs • Deposit Upfront Margin – 5% of the contract amount • Charges Brokerage – 0.04 % of the contract value • Government Taxes and Duty Service Tax – 10 % of Brokerage STT (only on sell) – Nil ( as of now) Transaction Tax – Nil ( as of now) Stamp Duty – 0.002 %
- 18. Margins Margins / collaterals To be deposited pre – trade Released once trade is unwound or the contract matures • Forms of collaterals (*) Cash Bank guarantees Fixed deposits, GOI bonds Approved equities / mutual fund units ( * )- Check with Head office
- 19. Margins Providing collaterals Cash through CIM (debited from clearing bank account) FD and BG from approved banks GOI bonds through National Securities Clearing Corporation Ltd (NSCCL) Approved securities • Releasing collaterals Cash – next day in the bank a/c, FD and BG same day Approved securities to custodians on same day
- 21. Thank you 21
Editor's Notes
- #16: n this example the downside is an appreciation of Dollar which is protected by a fixed forward contract. The main advantage of a forward is that it can be tailored to the specific needs of the firm and an exact hedge can be obtained. On the downside, these contracts are not marketable, they can’t be sold to another party when they are no longer required and are binding.