hedging through currency futures
DESCRIPTION
the file is related to what exactly the currency market is all about, after that how practically trading is done in futures market, and different strategies for hedging, speculation and arbitraging in the currency market. it also contain the fundamental analysis of rupee with different global factors.TRANSCRIPT
“HEDGING THROUGH CURRENCY FUTURES”
Presented by:-
Ambesh Kumar Srivastava
FT-08-616
PGDM 08-10
INTRODUCTION TO FOREX MARKET
24 hours open starting in New Zealand Monday morning and closing in Chicago Friday night – No gap up/down opening except on Monday morning.
Volume: 2.5 Trillion dollar Daily Turnover Global Market- Participants from all over the
world , trading at the same time No liquidity problem – no single participant
can run the price First and quick reaction to global events Vast range of derivative products—
attendant risks.
Forex Market – India
Spot
Forward/ OTC market
Futures
FACTORS AFFECTING DEMAND AND SUPPLY OF
CURRENCIESSupply Demand
Export Companies Import Companies
Foreign Investors Foreign Investors
Speculators Speculators
Central Bankers Central Bankers
Currency Futures-Introduction
It is a derivative instrumentDefinition is the same as currency
forwardForwards are traded over the counterFutures are traded in organised
exchanges (separate financial futures exchanges)
Futures are transacted through brokersTraded only in a limited number of
currencies
Currency
futures -
Kevin
Regulatory Framework
• RBI & SEBI All resident individuals permitted NRIs and FIIs not permitted Underlying exposure not necessary Only Dollar rupee trading permitted Settlement of currency futures-cash settled
in INR Commenced trading on Aug 29,’08 12 Months Contract at any point of time Near month most active Next three months more active Tight Bid-ask spreads
OTC vs. Futures
OTC Market/Forwards
Currency Futures
Accessibility Restricted entry Entry not restricted
Price
Transparency
Limited access Online high visibility
Underlying
exposure
Required Not required
Liquidity Depth not known Depth visible
Settlement Physical delivery Net Settled in INR
Agreements Customized Standard
Credit Exposure
Yes Mitigated through Clearing member
Contract specifications
Category DescriptionUnderlying Rate of
exchange
between 1 USD &
INR
Contract Size USD1000
Contract Months 12 near Calendar Months
Margin Requirement
Exchange – 3%
Recommended –
5%
Tick Size .25Paise or .0025INR
Settlement Cash settled in INR on relevant RBI reference rate
Particulars Time
Trading Hours 9:00 am to
5:00 pm
Near Month contract expiry on
12 Noon on 2days prior to last working day
Settlement
Daily MTM T+1
Final Settlement T+2(Last working day)
Rate RBI Ref Rate
Who can trade?
Speculators
Commodity Traders
Exporters/Importers
Corporates
Offshore Investors
Expenditure/Remittance in Foreign Currency
Speculators
New asset class for diversification
Concentration on one single scrip.
Relaxation of STT.
Small margin of 5% i.e. by paying Rs2500 you can trade up to $1000
Commodity players
Commodities like Crude & Gold quoted on MCX after converting into Rupee
A long Crude position results in losses with Rupee strengthening
Hedge in Currency Futures can undo the losses
Exporters/Importers
Exporters and importers can hedge their future payables and receivables starting with a meager amount of $1000.
No credit line required from their Banker as is the case with Forwards.
Hassle free process
Corporate
Borrowers, can hedge foreign currency (FCY) loans for interest and principal payments
Offshore Investor
Resident Indians can hedge their offshore investments through Currency Futures
TRADING and its LOGISTICS
Online & Offline trading facility on all the bourses
Regular updates on Dollar INR movement with calls to buy and sell
Special consultancy to Exporters, Importers & Corporates for their FOREX transactions
Receive education on the product through seminars/con-calls organized by NSE
Client’s Cash Margin from brokers can be used for all the segments – Equity, Commodity & Currency
“NOW” TRADING PORTAL BY NSE Buying and Selling of Future contracts Buying and Selling of spreads contracts Update of prices of all the 12 month
contracts Give snapshot of every months contracts
Bid/Ask, highs/lows, volume, etc. Keep track record of all the trades done and
the trader can see it on the order book Gives quote of the best open contracts Gives graphs and analysis of the day and
month trade
“REUTRS” Gives current Bid/Ask of different currencies Graphs and technical analysis of different
factors like NDF, Crude, exchanges, currencies, etc
Latest news update from different areas like Forex, political, social, economics, etc
Give bid/ask quote for currency contracts Give prices of different metals, and
agricultural commodities Give information of different currency
indexes Provide information of NDF, LIBOR,etc
HEDGING THROUGH CURRENCY FUTURES
Types of FX Hedgers using Futures
Long hedge:• Underlying position: short in the foreign currency• Hedging position: long in currency futures
Short hedge:• Underlying position: long in the foreign currency• Hedging position: short in currency futures
EXAMPLE 1: LONG FUTURES HEDGE EXPOSED TO THE RISK OF STRENGTHENING
USD
EXAMPLE 2: SHORT FUTURES HEDGE EXPOSED TO THE RISK OF WEAKENING USD
EXAMPLE 3: RETAIL HEDGING – LONG FUTURES HEDGE EXPOSED TO THE RISK OF A
STRONGER USD
EXAMPLE 4: RETAIL HEDGING – REMOVE FOREX RISK WHILE INVESTING ABROAD
FUNDAMENTAL ANALYSIS OF RUPEE
INR & CRUDE
o One school of thought espouses that since crude is denominated in dollars, when oil prices rise, the demand of USD increases and hence Euro/INR will depreciate. This is seen from the above graph.
o The second school of thought states that the demand for crude oil increases when the economy is doing well. At times like these investors will remove money from low yielding currencies (like the USD) and invest them in higher yielding currencies (like the INR).
INR & STOCK MARKET The continues upward moment of
Sensex result to an upward moment in the price of the Rupee (INR) and made it stronger in the comparison of US Dollar.
Both show a proportionate relationship moment any of these two elements will result the same directional moment in the other factor.
More and more people start investing in the companies stocks result huge amount of capital inflow from the global investors which will rise the demand of rupee in the county’s exchange market.
INR & USD
On the basis of dollars value with other currencies there is a dollar index which is prepared.
This index is calculated by factoring in the exchange rates of six major world currencies: The euro, Japanese yen, Canadian dollar, British pound, Swedish kroner and Swiss franc.
When the dollar index goes up rupee falls and when the rupees appreciates the dollar index comes down.
INR & EUROo When euro is stronger position
we can also see that rupee is showing recovery sign against its base currency which is dollar.
o Dollar being the common in both currency pair makes them interrelated to each another.
o Euro and rupee both are high yielding currency so if there is a flow in market towards high yielding currency from low yielding currency like dollar the demand of that currency increase and we see and the similar kind of moment in both currency pairs.
Awaited delicacies
Options
FIIs / NRIs
Position Limits
Other currency pairs - Euro, Yen & Sterling
THANK YOU
AS IF……