Archive for May, 2012


Currency = basic

Cash is King-Currency Trading


—  Finance Minister PranabMukherjee has refused to waive off any of the duties. India, which does not own any gold mine, imports 900 tonnes of the yellow metal annually. Higher gold imports meant the country spent more US dollars, increasing the total import bill and widening the current account deficit.

—  Gold imports alone contributed nearly 40 basis points in the 130 basis points widening of India’s current account deficit between fiscal year 2008 and fiscal year 2011, research house Macquarie said in late November.

—  The market is expecting the RBI to announce a direct dollar window for oil companies, similar to one they have done in 2008.

—  COMEX Gold prices are up by 4% only in last 9 months, whereas Indian Gold price is up by 24%

—  Currency trading may have risen to a record $5 trillion a day in September, surpassing the peak reached before Lehman Brothers (LEHMQ) Holdings Inc.’s collapse in 2008, according to the Bank for International Settlements

—  Currency futures are standardized foreign exchange contracts traded on a recognized stock exchange to buy or sell one currency against another on a specified future date, at a price specified on the purchase or sale date.

—    Currency Options are standardized contracts that gives the holder the right, but not the obligation, to buy or sell currency at a specified exchange rate during a specified period of time.

—  The Chicago Mercantile Exchange (CME) created FX futures, the first ever financial futures contracts, in 1972.

—  In India, NSE started Currency Futures on August 29,2008.Later on 2 more exchanges MCX and USE Started Currency Futures on October 6, 2008 and September 20, 2010 respectively.

—  Financial experts are expecting a multifold growth in the currency segment in the next few years. This can be clearly understood by the current average volume of approx. Rs.32000 crores per day with in a short span of time.

—  Only USD, EUR, GBP, JPY  futures n options (USD only) contracts is presently traded.

—  The trading on currency futures n options would be available from 9 a.m. to 5 p.m. From Monday to Friday.

—  The contract size for all is of 1000 units (except JPY with lot size of 100000).

—  The prices in currency derivatives segment are displayed, traded and reported up to the fourth decimal place instead of up to two. For example, Rs 46.50 shall be displayed as Rs 46.5000.

—  As per RBI Guidelines, physical delivery of currency is not allowed, so the currency futures contract are compulsory settled in cash in Indian Rupees.

—  In the Currency futures market, at the end of each trading day, the margin account is adjusted to reflect the investor’s gain or loss depending upon the futures closing price.

—  The last trading day of the contract will be 2 days prior to the last business/trading day of the month.

—  All resident Indians are allowed to participate in currency futures, only NRIs and FIIs are not eligible to trade.


—  Impact cost is higher in forward contract

—  Jewellery Exporter – Dollar Receivable in next three months

—  Forward Bid-Ask Spread – 49.1400/49.1500

—  Bank Quotes to an exporter after tightening spreads – 49.0400/49.2500, so the exporter is taking a hit of 10 paise.

—  Future Bid/Ask Spread – 49.2000/49.2275, in futures there are no such hits.

—  Also incase of forward contract if the exporter decides to windup his hedge way before expiry again on unwinding the position he will loose 10 paise on the spread

—  Cash inflows for corporates from cancelled forward contracts with banks will be available on expiry of the hedge period as against daily MTM settlement in Currency Futures Exchange

—  Wide bid-ask spreads at the time of cancellation of forward contracts can reduce the hedge cover

—  Linear Payoff – not complicated for market participants to understand

—  Standardized Contracts, small lot size – US$ 1,000

—  Electronic Settlement of MTM Profits / Losses

—  No counterparty default risk – notation by clearing house

—  Efficient price discovery due to high liquidity

—  Large number of market participants

—  Transparency – real-time dissemination of prices

—  Access through internet from remote locations

—  Concept – Standard volume of a particular currency to be exchanged on a specific settlement date

—  Participation – corporate, banks, SME, individuals, investors, etc.

—  Intermediaries – brokers facilitate broader participation

—  Leverage – Margining System

—  No counterparty default risk –Effective and Efficient hedge

—  Easy Settlement – in INR currency

—  Real-time access – electronic trading platform

—  Offset positions – without delivery



Trading Hours

: 9:00 AM to 5:00 PM

Size of Contract

: Minimum Lot Size is US$ 1,000

Tenor of Contract

: Maximum of 12 Months

Available Contracts

: Monthly

Settlement Reference Rate

:RBI USD/INR Reference Rate

Final Settlement Date

: Last working day of the month, except Saturday.

—  Hedging means taking a position in the future market that is opposite to position in the physical market with a view to reduce or limit risk associated with unpredictable changes in price

—  A long futures hedge is appropriate when you know you will buy an asset in the future and want to lock in the price

—  A short futures hedge is appropriate when you know you will sell an asset in the future & want to lock in the price

—  The profit (loss) in the cash position is offset by equivalent loss (profit) in the futures position

—  Price difference between currency futures traded on different exchanges results in arbitrage positions


—                  E.g. On 20 Oct 2008, following is the USDINR Oct futures contract prices

—  Exchange A                                         USD/INR              49.0750

—  Exchange B                                         USD/INR              49.0275

—  Buy on Exchange B and simultaneously sell on Exchange A

—  Hold until maturity. Final settlement of both contracts at same price of RBI reference rate

—  In the current scenario no one likes to lose an opportunity to make money out of volatility if predictable, the same holds good if one can predict premium movement, and hence can capitalize on that.

—  Forward Premia differentials between two value dates are based on following factors:

—  Interest Rate Differentials

—  Liquidity in Banking System

—  Monetary Policy Decision  (Repo, Reverse Repo and CRR)

—  Inflation    



Open interest





Strongly Bullish




Bearish trend reversing




Strongly bearish




Bullish trend reversing





—  PP = (H + L + C) / 3
The first Resistance (R1) and Support (S1) are based on the difference between the Pivot Point line and the previous period’s High and Low prices and are calculated as

—  R1 = PP + (PP – L) = 2 x PP – L
S1 = PP – (H – PP) = 2 x PP – H

—  The second Resistance (R2) and Support (S2) lines are based on the width of the trading range (High – Low) and are calculated as

—  R2 = PP + (H – L)
S2 = PP – (H – L)

—  The formula for the second resistance and support lines is commonly used to determine higher support and resistance levels:

Rn = PP + (n – 1) x (H – L)
Sn = PP – (n – 1) x (H – L)
where n is the support/resistance level number.

—  Foreign exchange is the mechanism by which the currency of one country gets converted into the currency of another country.

—  Nostro (our account)

—  Vostro (your account)

—  Loro (their account)

—  Two extreme forms of exchange rate systems are fixed rate and floating rate system. Under the fixed, the exchange rate is kept at a specified value by the monetary authority and the market rate is permitted to fluctuate within a narrow range.

—  Under Floating rate, the exchange rate is determined purely by market forces. 

—  1990s witnessed serious currency crises in Brazil, Mexico, Argentina, Russia and South East Asian countries. Even Indian rupee crossed level of 40 per dollar. There was net outflow of foreign investments.

—  RBI responded to the situation and succeeded.

—  No country can afford to have high deficit in the current account for a long time. Same should not be covered by volatile short term forms.

—  Thailand had reserves of USD 38.7 billion at the end of 1996 lost around USD 13 billions in less than months in 1997. Quality of foreign exchange reserve is important.

—  There is need for keeping the exchange rate of the currency aligned to the fundamentals.

—  The banking system should be regulated and subject to prudential norms.    


May 2012
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