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THE STOCK OF THE NATION. Exchange Traded Currency Futures & Options. Agenda. What is Derivative ?.

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Exchange traded currency futures options

THE STOCK OF THE NATION

Exchange Traded Currency Futures & Options



What is Derivative ?

  • A security whose price is 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. 

  • KeyInstruments In Foreign Exchange Markets:

  • Spot

  • Outright forwards

  • OTC Currency Options

  • Exchange Traded Currency Futures & Currency Options

  • Futures Contracts – Preliminaries

  • A futures contract is like a forward contract:

    • It specifies that a certain currency will be exchanged for another at a specified time in the future at prices specified today

  • A futures contract is different from a forward contract:

    • Futures are standardized contracts trading on organized exchanges with daily resettlement through a clearinghouse


Exchange Traded Currency Futures

  • Currency Futures: It is a futures contract to exchange one currency for another at a specified date in the future, at a price (exchange rate) that is fixed on the purchase or on sell date

  • Currency Futures at National Stock Exchange

    • Currency Futures were introduced in India on 28th August 2008 by NSE

    • Current daily volume is at $ 2.25billion (Average between Jan 2012 to Sep 2012)

    • In excess of 850 Trading Members(TM) and Banks registered with the Exchange

    • High price transparency

    • Broad Client Participation: Individuals, Small, Medium and Large Corporate Entities, Proprietary Desk of Trading Members

    • Narrow bid-ask spread on regular basis

    • No underlying documents are required, ability to hedge derived exposures


Market Activity

  • Hedging:

  • Helps Corporate (Exporters & Importers) to hedge against foreign exchange risk arising out of future FX cash flows

  • Speculating:

  • Taking risk to profit from rising or falling exchange rates

  • Arbitraging:

  • Currency arbitrage takes advantage of temporary discrepancies in price between the two markets


Product specifications nse traded currency futures
Product Specifications: NSE Traded Currency Futures

  • Order driven market

  • Revised methodology of computation and dissemination of Reference rate: Rates will be polled in a 5 minute window from 11:45 AM to 12:15 PM chosen randomly

  • Expiry at 12:15PM



Margins / Collateral Specifications

  • Based on previous day volatility

  • Released once trade is unwound or the contract matures

  • Forms of Collaterals

    • Cash, Bank Guarantees (BG), Fixed Deposits (FD), GOI Bonds, Approved Equities / Mutual Fund Units

  • Releasing Collaterals

    • Cash – next day in the Bank Account, FD and BG on the same day

    • Approved securities to custodians on the same day


  • Clearing and Settlement

    • Daily settlement

      • Closing price of each contract – last 30 minutes weighted average

      • T + 1

      • Through your clearing member

      • Paid or received in cash

    • Final settlement

      • RBI fixing price on last trading day

      • Net settled in cash


    Example on Hedging Using Currency Futures

    XYZ is an exporter. On 5th Nov 2012 XYZ Limited wishes to book its inward remittance for 27th Nov 2012 worth $100,000.

    Month End*-Settlement of Currency Futures @ RBI Ref .Rate

    On expiry 27th Nov 2012 if RBI Ref Rate is:

    Case ICase II

    Assume USD/INR-55.75 Assume USD/INR-53.75

    (RBI Ref Rate) (RBI Ref Rate)

    Loss : Profit :

    =(55.75–54.75)*1,00,000$ = (54.75-53.75)*1,00,000 $

    = 1,00,000 INR = 1,00,000 INR

    Margin will get released

    Month End– On the same day

    Case I***Case II***

    Sell USD to bank Sell USD to bank

    @ Spot 55.75 @ Spot 53.75

    Futures Rate for Oct Expiry: 54.75

    No of Contracts : 100

    Day1-Sell Currency Futures at 54.75

    Notional Value

    for $100,000 = 54,75,000(54.75*100000)

    Margin** 4% posting on T day*

    =2,19,000 (54,75,000*4%)

    * T day-Trade day

    ** Margin 4% is subjective

    *** Assuming Nil Execution Charges, and no bid-offer difference


    *Maturity date is a date on which corporate will convert (Spot) his inward remittance


    Margin required 2 19 000 inr

    Cost of Funding

    Margin Required 2,19,000 INR


    Averaging

    An export house , XYZ Limited wishes to book his 1 Million Dollar exposure for next month.

    Treasury person has a view that dollar is going to surge in further few sessions therefore he formulates a strategy of booking $250,000 every day..

    If corporate does with Bank

    If corporate does with NSE

    Saving worth INR 62,500

    In order to hedge in NSE, corporate will have to park margins (4%) ie., Rs. 27,33,000,out of this 2% interest will be given to corporate and residual 2% will be in cash which will not fetch any interest.

    Interest lost in 2%(Cash Margin) is calculated to be at Rs. 6,832 per month


    Arbitrage

    Bloomberg

    (A) Arbitrage between Month End Futures Vs. Month End Forward

    (B) Arbitrage between EEFC Vs. Month End Futures.

    First Day(Entry Leg)

    Action 1:Keep $ in EEFC(Spot)

    Action 2:Sell Futures(Spot+Premium)

    Final Day(Exit Leg)-RBI RR

    Action 3:Sell EEFC(Spot conversion)

    Action 4:Buy Futures(Spot)

    First Day(Entry Leg)

    Action 1:Sell Forward(Premium)

    Action 2:Buy Futures(Discount)

    Final Day(Exit Leg)-RBI RR

    Action 3:Cancell Forward(Spot)

    Action 4:Sell Futures(Spot)



    Exchange traded currency options
    Exchange Traded Currency Options

    A Currency Option is a Financial Contract which gives the BUYER (Holder) theRIGHT, but not the Obligation, to exchange a specified amount of currency versus another at a specified rate on, or up to, a specified date.

    The SELLER (or Writer) of the Currency Option contract has the OBLIGATION to deliver the specified amount of currency at the specified rate on the specified date.

    • Usage of Currency Options:

      • Protect downside without necessarily giving up upside

      • Allows you to structure a set of bought and sold options to suit your risk profile and/or view

    • Currency Options were launched on 29th Oct. 2010

    • European Style Options in Dollar/INR only

    • Currently Daily Volume (Notional) is around $1 Billion (Average between Jan 2012 to Sep 2012)


    Classification of currency options
    Classification of Currency Options

    Currency Options

    USDINR

    Call options

    (Purchase of Right to buy the currency at stated price)

    Put options

    (Purchase of Right & not Obligation to sell the currency at stated price)

    Purchase-call options

    Selling-call options

    Purchase-Put options

    Selling-Put options

    • Option Terminology:

      • Buyer(Holder)-: Owner of the option Contract

      • Premium-:Cost of the option-Up front

      • Exercise-:Call upon the right

      • Strike price-:The price at which buyer is entitle to either buy or sell the underlying currency

      • Expiry Date-:Final date at which option may be exercised


    Product specifications exchange traded currency options
    Product Specifications: Exchange Traded Currency Options


    Risk Management – Margining portfolio based (Futures and Options)

    • Margins are computed Online, Real Time, Upfront and at the client level

    • Portfolio Based Margining - Futures and Options Combined

    • Unlike Futures, Options Daily Mark to Market (MTM) is adjusted through margins

    • Initial Margins :

    • Premium Margin (released after payment of premium)

    • SPAN Margin :

      • Portfolio Scenario Approach (Price and Volatility Changes)

      • Net Option Value

        • Net positive value reduced from the SPAN margins

        • Net negative value added to the SPAN margins

    • Extreme Loss Margins – 1.5% fixed on Gross Short Option Positions


    Example on Hedging Using Currency Options Options)

    XYZ is an exporter. On 06th Nov.2012 XYZ Limited wishes to buy downside protection on dollar till 27th Nov 2012 for $100,000.

    Strike price: 54.75

    Downside Protection Option Put

    Premium: 0.47

    No of Contracts : 100

    Day1-Buy Put at strike 54.75 and pay 0.47 INR

    Notional Value

    for $100,000=54,75,000 INR (54.75*100000)

    Margin 100% of Premium Value on T Day

    =47,000(0.47*100*1000)

    Month End-Settlement of Currency Futures @ RBI Ref .Rate

    On expiry 27th Nov 2012 if RBI Ref Rate

    Options(Put) bought will be worthless exercising since dollar appreciated above strike 54.75

    Maximum loss or cost of hedging=47,000 INR(100000*0.47)

    Month End– Sell spot at 56.00

    On the same day and time XYZ will convert its inward

    remittance at 56.00 with bank.

    • When there is high volatility in underlying

    • Corporate wants to minimize losses on hedging front

    T day-Trade day

    Margin 4% is subjective


    • Possible outcomes on different maturity rates: Options)

    • Its can be seen that if dollar moves up any where above 54.75 losses at option bought will be limited to 0.47INR

    • At down side Put option value increases as soon as it falls below 54.75

    • BUY PUT OPTION- EXPORTER

    *=Maturity date is a date at which corporate will convert (Spot) his inward remittance




    RBI Circular Options)

    Continued in next page..

    • Forwards Foreign Exchange Contracts:

    • A maximum period of 15 days may be allowed for production of the documents

    • Past Performance limit: 25 percent of the eligible limit can be cancel, rebook

    • Undertaking and quarterly certificates from the statutory auditor to be provided

    • Foreign currency loans will be eligible for hedge only after final approval is accorded by the Reserve Bank

    • Foreign Currency - INR Options:

  • For cost reduction structure, Listed companies and their subsidiaries/joint ventures/associates having common treasury and consolidated balance sheet or unlisted companies with a minimum net worth of Rs. 200 cr.

  • Term sheet is mandatory for hedging

  • Circulars as on 2nd July 2012 & 31st July 2012


    • Customers are allowed to Options)only buy plain vanilla European style options in OTC Market.

    • Leveraged structures, digital options, barrier options, range accruals and any other exotic products are not permitted in OTC Market

    • EEFC Guidelines: Corporate need to convert its EEFC balance excluding their future payment obligation on or before 2 month time


    Identify a trading member Options)

    You can trade through multiple trading members

    Appoint one clearing member to settle all your trades

    Complete KYC as per NSE requirements

    Board Approval from the Corporate Mandatory

    Member Constituent Agreement

    Risk Disclosure

    Unique Client Code (UCC)

    Post margins

    You are ready to trade

    Your trading member can give you online WEB based access to the live trading screen – deal from your desk

    How to Trade on NSE



    FX Tracker – Options)Futures Contracts


    FX Tracker – Options)Options Contracts



    WHY National Stock Exchange ….. Options)

    • Pioneer of online trading in India

    • NSCCL Rated “CCR AAA” for fourth consecutive year - 28th Dec 2011

    • NSE launches “EMERGE” – SME Platform

    • 13 Asset Class available for trading on NSE platform

    • Derivatives on leading Global Indices – S&P 500, DJAI, FTSE 100

    • Volatility Index – India VIX

    • State of Art technology, DMA, Co-Location facility for Members

    • Access to investors from over 210,000 terminals, 1500 locations

    • Dedicated Member Support Team

    • First to launch Currency Derivatives in India

    • Globally ranked 1st in Equity Trades, 2nd in Stock Index options


    Thank You Options)

    NATIONAL STOCK EXCHANGE OF INDIA LIMITED

    Exchange Plaza, Bandra Kurla Complex, Bandra (E),

    Mumbai 400051, India

    Tel: + 91 22 26598100/ 66418100

    Fax: + 91 22 26598120

    Web Site: www.nseindia.com


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