Currency Derivative

In: Business and Management

Submitted By ash25
Words 2651
Pages 11
International Journal of Marketing, Financial Services & Management Research Vol.1 Issue 11, November 2012, ISSN 2277 3622 Online available at www.indianresearchjournals.com

INDIAN CURRENCY FUTURES: AN ANALYTICAL STUDY OF ITS PERFORMANCE
DR. DEVAJIT MAHANTA*
* Vice President-Benzcom Consulting Pvt. Ltd. 3A-Oberon Appartement, 6-Lamb Road Ambari, Guwahati-781001, Assam, India

ABSTRACT Since its inspection in 2008, currency derivative trade in India had experienced explosive growth, both in volumes and value over the years across all the four currencies contracts that were in operation in INRUSD, INRGBP, INREUR and INRJPY. However in terms of the open interest currency derivatives trade in MCX is more as compared to the NSE. By consider both stock and commodity exchanges for launching currency futures contracts government of India has done a commendable job which is expected to increase the number of quality players, introduce healthy competition and boost trading volumes of Indian currency futures. The global markets (mainly USA) become active only after Indian markets close at 5.00 pm and as a result there is an evident fear about the risks associated with overnight fluctuations in the currency pair. Therefore the functioning as well as the profitability in Indian currency futures is effected by the current performance of the international currency futures market. It is imperative that any evaluation, projection on Indian currency futures market should be undertaken keeping the international market in perspective. KEYWORDS: Currency Futures, Open Interest, Contract Traded, Turnover ___________________________________________________________________________ INTRODUCTION Currency Futures is an agreement or contract, which involves buying or selling one currency for another (foreign exchange), on a specified future date, at an indicated price. Although foreign…...

Similar Documents

Uwa Plc and Zombie Analysis (Advance Treasury and Risk Management; Derivatives Hediging; Option; Currency Swap)

...both of them can launch their foreign expansion in low cost. (b) (In zombits million) Cash Flow Discounted rate NPV (15%) Initial investment (2000) 1 (2000) 1 yr annual fees 40 0.8696 34.78 2 yr annual fees 40 0.7561 30.25 3 yr annual fees 40 0.6575 22.872 Reselling to government 4000 0.6575 2287.2 Net present value of project 721.4 By using the relevant risk adjusted discount rate 15%, Bath will gain positive net present value 721.4 million zombits which shows that the project is worth to do. But Bath is an UK based company and they need to convert the benefit zombits to £ (their home currency) in order to transfer to their cash flow. But the Zombie has a floating inflation rate which means that the exchange rate is also unstable. If the zombits is too much less value than the £ which means the exchange rate of zombits to £ is high, than the Bath will receive a small amount in term of £. So Bath needs to calculate whether the project is still profitable by using the two expected inflation rate (15% and 50%) that the Zombie can have during next three years. For initial investment 2000 million zombits, the exchange rate will be the spot rate 85.4 zombits/£.Then we will have £23.42 (2000/85.4). The annual fees that are received for technical expertise and training for local staff (40 million zombits for three......

Words: 5074 - Pages: 21

Derivatives

...DERIVATIVES & RISK MANAGEMENT ASSIGNMENT – II By: ATTIKA RAJ, ROLL NO: MS10A009, MBA- 2012 BATCH, DOMS, IITM 2/21/2012 I. Case Analysis – Risk management Policy of Lufthansa Submitted in Assignment 1 II. Case Analysis: Commodity Market Derivatives Case Solutions: 1. Discuss the risk exposure of Amarnath hedge fund. Ans: The Amaranth hedge fund was exposed to following risks: a. Market risk: The risk that occurs from the volatility of investment returns b. Liquidity risk: It measures the degree of difficulty in exiting a given trading position c. Funding risk: It measures the extent to which they were able to meet margin calls on their natural gas position d. Capacity risk: The risk due to putting too much money into one particular strategy 2. What are the negatives to rolling a spread position? Ans: Negatives to rolling a spread position are: When rolling a spread position the investor expects the following months to which the contract was rolled over to be favourable and thus be able to unload its positions. But, if the market moves in a direction opposite to the one anticipated by the investor it can result in huge losses. Also, if the risk increases for a spread position with the increase in the leverage. In the case of Amaranth hedge fund, it had rolled its short positions prior to august into the next month, hoping that market conditions would change and enable it to unload its positions. There were now no more summer months into which it could roll......

Words: 3366 - Pages: 14

Derivatives

...Study Material on Derivatives, Options & Futures Content No. | Contents | Page No. | | Section 1: Derivatives | | 1.1 | Derivatives: History, Meaning and Definition | 3 | 1.2 | Classification of Derivatives | 4 | 1.3 | Features, Types and Players in Derivatives | 4 | 1.4 | Forwards: Meaning, Definition & Limitations | 6 | | Section 2: Futures | | 2.1 | Meaning | 8 | 2.2 | Terminologies | 8 | 2.3 | Payoff Profile | 10 | 2.4 | Numerical Examples | 11 | | Section 3: Options | | 3.1 | Meaning | 13 | 3.2 | Terminologies | 13 | 3.3 | Payoff Profile | 15 | 3.4 | Numerical Examples | 18 | | 1.0 Derivatives Introduction: Indian Financial Markets: Where does derivative fall? From the above chart we can see that derivatives fall under secondary market channel. 1.1 Derivatives History, Meaning and Definition History Derivatives have been a recent development in the Indian financial markets. But there have been derivatives in the commodities market. There are Cotton and Oilseed futures in Mumbai, Soya futures in Bhopal, Pepper futures in Cochin, Coffee futures in Bangalore etc. But the players in these markets are restricted to big farmers and industries, who need these as an input to protect themselves from the vagaries of agriculture sector. Globally too, the first derivatives started with the commodities, way back in 1894. Financial derivatives are a relatively late development,......

Words: 4719 - Pages: 19

Derivatives

...1a) Derivatives are an important financial instruments that play significant role in today’s financial markets. It offers various types of risk protection and allow innovative investment strategies. A derivative is so called derivative because its value is derived from another financial security. According to Oxford dictionary, derivative is defined as something derived or obtained from another, coming from a source; not original. In financial jargon, a derivative security is referred to a financial contract whose value is derived from the value of an underlying asset or simply underlying. This underlying is usually stocks, bonds, foreign currency, or commodities. The derivative buyer or seller does not have to own the underlying security to trade these instruments. Several factors have contributed to massive development in derivative markets since the 1970s. First, the collapse of the Bretton Woods system of fixed exchange rates in 1971 increased the demand for hedging against exchange rate risk. The Chicago Mercantile Exchange allowed trading in currency futures in the following year. Second, the changing of its monetary policy target instrument by the US Federal Reserve (FED) promoted various derivatives markets. The adoption of a target for money growth by the FED in 1979 has led to increased interest-rate volatility of Treasury bonds. That in turn raised the demand for derivatives to hedge against adverse movements in interest rates. Later in 1994 when the US......

Words: 7545 - Pages: 31

Derivative

...DERIVATIVES A derivative is a financial instrument - or more simply, an agreement between two people or two parties - that has a value determined by the price of something else (called the underlying). It is a financial contract with a value linked to the expected future price movements of the asset it is linked to - such as a share or a currency. There are many kinds of derivatives, with the most notable being swaps, futures, and options. However, since a derivative can be placed on any sort of security, the scope of all derivatives possible is nearly endless. Thus, the real definition of a derivative is an agreement between two parties that is contingent on a future outcome of the underlying. Some of the widely known underlying assets are: * Indexes (consumer price index (CPI), stock market index, weather conditions or inflation) * Bonds * Currencies * Interest rates * Exchange rates * Commodities * Stocks (equities) Categorization Derivatives are usually broadly categorized by the: * relationship between the underlying and the derivative (e.g., forward, option, swap) * type of underlying (e.g., equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity derivatives or credit derivatives) * market in which they trade (e.g., exchange-traded or over-the-counter) * pay-off profile (Some derivatives have non-linear payoff diagrams due to embedded optionality) Another arbitrary distinction is......

Words: 1908 - Pages: 8

Derivatives

...FINANCIAL DERIVATIVES (A Future of Indian Financial Market) Dr. Ritu Kothiwal, Associate Professor, BIET, Hyderabad Contact No: 09246193330 Email Id: kothiwal55@gmail.com Mr. Ankur Goel, Research Scholar (Management), Mewar University, GZB. Contact No: 9917745990 Email Id: mrankurgoel@gmail.com. ABSTRACT Among all the innovations that have flooded the international financial markets, financial derivatives occupy the driver's seat. These specialized instruments facilitate the shuffling and redistribution of the risks that an investor faces. Thus aids in the process of diversifying ones portfolio. The volatility in the equity markets over the past years has resulted in greater use of equity derivatives. The volume of the exchange traded equity futures and options in most of the mature markets have seen a significant growth. It goes beyond that the local derivative in the emerging markets have witnessed widespread use of the derivative instrument for a variety of reasons. This continuous growth and development by the emerging market participants has resulted in capital inflows as well as helped the investors in risk protection through hedging. INTRODUCTION AND CONCEPT OF DERIVATIVES: Derivatives are financial contracts whose values are derived from the value of an underlying primary financial instrument, commodity or index, such as: interest rates, exchange rates, commodities, and equities. The International Monetary Fund defines derivatives as......

Words: 2550 - Pages: 11

Derivatives

...1. INTRODUCTION TO DERIVATIVES While, trading in derivatives products has grown tremendously in recent times, the earliest evidence of these types of instruments can be traced back to ancient Greece. Even though derivatives have been in existence in some form or the other since ancient times, the advent of modern day derivatives contracts is attributed to farmers’ need to protect themselves against a decline in crop prices due to various economic and environmental factors. Thus, derivatives contracts initially developed in commodities. The first “futures” contracts can be traced to the Yodoya rice market in Osaka, Japan around 1650. The origin of derivatives can be traced back to the need of farmers to protect themselves against fluctuations in the price of their crop. From the time it was sown to the time it was ready for harvest, farmers would face price uncertainty. Through the use of simple derivative products, it was possible for the farmer to partially or fully transfer price risks by locking-in asset prices. These were simple contracts developed to meet the needs of farmers and were basically a means of reducing risk. A farmer who sowed his crop in June faced uncertainty over the price he would receive for his harvest in September. In years of scarcity, he would probably obtain attractive prices. However, during times of oversupply, he would have to dispose off his harvest at a very low price. Clearly this meant that the farmer and his family were......

Words: 4572 - Pages: 19

Derivatives

...1 Lecture 1: Introduction to Derivatives 第一讲:衍生工具与衍生工具市场 Outline大纲 • Overview概览 • Types of Derivatives衍生工具的种类 • Derivatives Trading衍生工具交易 • The Notion of Arbitrage套利的概念 Lecture 1: Introduction 2 衍生工具概念 Derivatives is an instrument whose value depends on the values of other more basic underlying variables. Unlike shares, which are issued by companies and purchased by investors. Derivatives represents an agreement between a buyer and a seller. Thus, a derivatives contract is a zero-sum game.衍生工 具的价值依附于其他更基本的标的物(不一定原生品),这与 股票不同,因为股票由公司发行,由投资者购买。衍生工 具是买者和卖者之间的一种合约,因此衍生合约是一种零 合博弈。 Primary security Equity Derivatives ISF: futures contract on individual shares; share options Index futures: futures contract on equity index; index options Interest rate futures; swaps Interest rate options; swaptions Bonds Lecture 1: Introduction 3 • Derivatives is not a terminology solely for rocket scientists. Real estate developers know options. They buy an option on a plot of land for a tiny fraction of its total value. That gives them the right to buy it at a fixed price by a fixed date. Insurance is also essentially an option of a different sort, an option that provides protection on your house and your car, your life. 衍生 工具不只是金融学家的术语。房地产开发商知道期权。他们以土地总 价值的很小比例来购买土地期权。这给与他们在特定日期以特定价格 购买土地的权力。保险也是一种能够为你的房子,车子和生活提供保 障的期权合约。 • Derivatives is becoming more important and popular in practice. „Derivative‟ appears in WSJ headlines only 2 times in 1990; in 1992, 8 times; in......

Words: 3018 - Pages: 13

Derivatives

...What are Derivatives? A) A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates, market indexes and “even some other derivative”. In short we can say that Derivatives is a “claim on a claim”, it enables the avoidance of unnecessary risk. Q) At what stage is Derivatives Market in Pakistan? A) In Pakistan, the derivatives market is in the nascent stage. It has been in this stage from 2004. Although in Pakistan trading in the derivatives market is done in different parts, but still it’s considered in the nascent stage, because there is no common awareness of this sort of market. In Pakistan trading in the derivatives market is done by. * Banks * DFIs * Mutual Funds * Non-Banking Financial Institutions * Islamic Banking Banks/DFIs may take exposure in future contracts to the extent of 10% of their equity on an aggregate basis. In this connection, the 10% exposure limit for future contracts will include both, positions taken in future buying and selling. Despite this regulatory support, Banks / DFIs participation is very low. Mutual Funds manage funds of the general public and they work under the supervision of their respective trustees. Mutual Funds mostly trade in equity derivatives to reap......

Words: 347 - Pages: 2

Derivatives

...000 Australian dollars (A$). Stark Industries’ fiscal year ends on December 31. The direct exchange rates follow: Date | Spot Rate | Forward Rate for March 31, 2014 | December 1, 2013 | $ 0.600 | 0.609 | December 31, 2013 | 0.610 | 0.612 | January 30, 2014 | 0.608 | 0.605 | March 31, 2014 | 0.602 | | Instructions Prepare all journal entries for Stark Industries for the following independent situations: a. The forward contract was to manage the foreign currency risk from the purchase of furniture for A$ 100,000 on December 1, 2013, with payment due on March 31, 2014. The forward contract is not designated as a hedge b. The forward contract was to hedge a firm commitment agreement made on December 1, 2013. To purchase furniture on January 31, with payment due on March 31, 2014. The derivatives is designated as a fair value hedge c. The forward contract was to hedge an anticipated purchase of furniture on January 30. The purchase took place on January 30. With payment due on March 31, 2014. The derivatives is designated as a cash flow hedge. The company uses the forward exchange rate to measure hedge effectiveness d. The forward contract was for speculative purposes only Problem 2 – Futures Peny One Inc. is a jewelry trading company. On November 1, 2013, Peny One Inc has 1,000,000 ounces of Gold carried at cost of $ 5,000,000 ($5 per ounce). Peny One Inc believes that the price of gold will decrease in the coming month due to bad economic recession. Therefore...

Words: 793 - Pages: 4

Currency

... GRAND PROJECT ON CURRENCY DERIVATIVES NANCY SHAH – PROJECT TRAINEE CHAPTER 2 INTRODUCTION TO CURRENCY MARKETS 2.1 BASIC FOREIGN EXCHANGE DEFINITIONS Spot: Foreign exchange spot trading is buying one currency with a different currency for immediate delivery. The standard settlement convention for Foreign Exchange Spot trades is T+2 days, i.e., two business days from the date of trade. Forward Outright: A foreign exchange forward is a contract between two counterparties to exchange one currency for another on any day after spot. In this transaction, money does not actually change hands until some agreed upon future date. The duration of the trade can be a few days, months or years. For most major currencies, three business days or more after deal date would constitute a forward transaction Base Currency / Terms Currency: In foreign exchange markets, the base currency is the first currency in a currency pair. The second currency is called as the terms currency. Exchange rates are quoted in per unit of the base currency. E.g. The expression US Dollar–Rupee, tells you that the US Dollar is being quoted in terms of the Rupee. The US Dollar is the base currency and the Rupee is the terms currency. Exchange rates are constantly changing, which means that the value of one currency in terms of the other is constantly in flux. Changes in rates are expressed as strengthening or weakening of one currency vis-à-vis the other currency. Changes are also......

Words: 15256 - Pages: 62

Why Companies Use Currency Derivatives?

...Essay topic: why companies use currency derivatives? Currency derivative can be defined as a contract or financial agreement to exchange two currencies at a given rate or a contract whose value is derived from the rate of exchange of two currencies on spot (Shoup, 1998). Currency derivatives are developed and adopted to implement a strategy known as hedging, in which an organisation acquires a contract in order to offset an expected drop or rise in value of a position or future cash flow (Belk & Edelshain, 1997). This essay will outline the incentives and rationales behind an organisation that uses currency derivatives. There are three types of currency derivatives used in hedging, future contracts, forward contracts and options, although swaps are also commonly considered as a currency derivative (Shoup, 2008). These instruments are derived from a spot rate, which is the price of the “underlying currency” (Eiteman, Stonehill & Moffett, 2009). Options are normally more costly than future contracts and forward contracts, because options are rights rather than obligations to buy or sell a currency (gives buyers the right not to exercise the contract if the spot rate movement is not favourable) (Belk & Edelshain, 1997). Research in New Zealand indicates that 70% of currency derivative users used forwards, which are most prevalent currency derivative instrument (Chan, Gan & McGraw, 2003). This is possibly because forwards are easy to manage and understand and can be used in......

Words: 2235 - Pages: 9

Derivative

...Here is the definition at a reference site where you can look up other terms you need to define also. What Does Derivative Mean? A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage. Investopedia explains Derivative Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Derivatives are contracts and can be used as an underlying asset. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region. Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative purposes. For example, a European investor purchasing shares of an American company off of an American exchange (using U.S. dollars to do so) would be exposed to exchange-rate risk while holding that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into Euros. English is always "simple" if you know the meaning of words. How can someone explain how an internal combustion engine works if you don't know the difference......

Words: 261 - Pages: 2

Derivatives

...underlying stock was trading at $55, you are out of the money with a $5 * loss. SWAPS How does it work? In an interest rate swap, each counter party agrees to pay either a fixed or floating rate denominated in a particular currency to the other counter party. The fixed or floating rate is multiplied by a notional principal amount (say, $1 million). This notional amount is generally not exchanged between counter parties, but is used only for calculating the size of cash flows to be exchanged. The most common interest rate swap is one where one counter party A pays a fixed rate (the swap rate) to counter party B while receiving a floating rate (usually pegged to a reference rate such as LIBOR — London Inter Bank Offered Rate). A pays fixed rate to B (A receives floating rate) B pays floating rate to A (B receives fixed rate). Consider the following swap in which Party A agrees to pay Party B periodic fixed interest rate payments of 3.784%, in exchange for periodic floating interest rate payments of LIBOR + 70 bps (0.70%). There is no exchange of the principal amount and that the interest rates are on a notional principal amount. The interest payments are settled in net. The fixed rate (3.784% in this example) is referred to as the swap rate.  Example of Currency Swap  Company A is doing business in USA and it has issued bond of $ 20 Million to bondholders that has been nominated in US $. Other company B is doing business in Europe. It has issued bond of  $ 10 Million......

Words: 3329 - Pages: 14

Derivative

...Handbook on Derivatives © Rajkumar .S Adukia B.com (Hons.), L.L.B, AICWA, FCA radukia@vsnl.com/rajkumar@gmail.com 093230 61049/ 093221 39642 www.carajkumarradukia.com If interested in receiving similar technical updates subscribe to carajkumarradukia-subscribe@yahoogroups.com PREFACE Derivatives have changed the world of finance as pervasively as the Internet has changed communications .Well they are everywhere nowadays. The most significant event in finance during the past decade has been the extraordinary development and expansion of financial derivatives. These instruments enhance the ability to differentiate risk and allocate it to those investors who are most able and willing to take it -- a process that has undoubtedly improved national productivity, growth and standards of living. Derivatives products provide certain important economic benefits such as risk management or redistribution of risk away from risk-averse investors towards those more willing and able to bear risk. Derivatives also help price discovery, i.e. the process of determining the price level for any asset based on supply and demand. All markets face various kinds of risks. This has induced the market par-ticipants to search for ways to manage risk. The derivatives are one ofthe categories of risk management tools. As this consciousness about risk management capacity of derivatives grew, the markets for......

Words: 15288 - Pages: 62

Spawn #284C - Virgin Mattina Variant (Wk14) | Ravvivamole in carburo di silicio Silverline 25 x 25 x 150 mm - Grana 20 | TUTORIAL= How to install your Signature (Ver. 2)