Hedging Through Currency Futures

“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/ Futures

OTC market

FACTORS AFFECTING DEMAND AND SUPPLY OF CURRENCIES Supply

Demand

Export Companies

Import Companies

Foreign Investors

Foreign Investors

Speculators

Speculators

Central Bankers

Central Bankers

Currency Futures-Introduction  It

is a derivative instrument  Definition is the same as currency forward  Forwards are traded over the counter  Futures are traded in organised exchanges (separate financial futures exchanges)  Futures are transacted through brokers  Traded only in a limited number of currencies

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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

Cur ren cy futu res Kev in

OTC vs. Futures OTC Market/Forwards Currency Futures Accessibility

Restricted entry

Entry not restricted

Price

Limited access

Online high visibility

Required

Not required

Liquidity

Depth not known

Depth visible

Settlement

Physical delivery

Net Settled in INR

Agreements

Customized

Standard

Transparency Underlying exposure

Credit Exposure Yes

Mitigated through Clearing member

Contract specifications Category

Description

Particulars

Time

Underlying

Rate of exchange

Trading Hours

9:00 am to

between 1 USD & INR

5:00 pm Near Month 12 Noon on 2days contract expiry on prior to last working day

Contract Size

USD1000

Contract Months

12 near Calendar Months

Settlement

Margin Requirement

Exchange – 3%

Daily MTM

T+1

Final Settlement

T+2(Last working day)

Rate

RBI Ref Rate

Recommended – 5%

Tick Size

.25Paise or . 0025INR

Settlement

Cash settled in INR on relevant RBI reference rate

Who can trade? 

Speculators

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Commodity Traders

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Exporters/Importers

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Corporates

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Offshore Investors

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Expenditure/Remittance in Foreign Currency

Speculators

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New asset class for diversification

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Concentration on one single scrip.

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Relaxation of STT.

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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

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A long Crude position results in losses with Rupee strengthening

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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.

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No credit line required from their Banker as is the case with Forwards.

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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

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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

EXPOSED TO THE RISK OF STRENGTHENING USD

EXAMPLE 2: SHORT FUTURES HEDGE EXPOSED TO THE RISK OF WEAKENING USD

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

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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.

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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 

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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 

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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 & EURO o

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When euro is stronger position we can also see that rupee is showing recovery sign against its base currency which is dollar. Dollar being the common in both currency pair makes them interrelated to each another. 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

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FIIs / NRIs

 Position

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Limits

Other currency pairs - Euro, Yen & Sterling

THANK YOU

AS IF……