Currency futures ppt branches
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The document discusses currency futures and the foreign exchange market. It provides details on: 1) The foreign exchange market is the largest financial market in the world, with an average daily trading volume of over $3.5 trillion. 2) The US dollar is the most widely traded currency due to its role as an investment, reserve, transaction, and invoice currency in various markets. 3) Currency futures provide a transparent and accessible way for individuals and businesses to hedge currency risk and speculate on exchange rate movements through an exchange-traded market.
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 cant be sold to another party when they are no longer required and are binding.