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Exchange Traded Currency Futures & Options

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

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Exchange Traded Currency Futures & Options

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  1. THE STOCK OF THE NATION Exchange Traded Currency Futures & Options

  2. Agenda

  3. 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

  4. 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

  5. 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

  6. 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

  7. Features of Currency Pairs

  8. 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

  9. 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

  10. 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

  11. Possible out comes on different maturity rates • Corporate either gets compensated or gets the best rate with bank • SELL FUTURES - EXPORTER *Maturity date is a date on which corporate will convert (Spot) his inward remittance

  12. Cost of Funding Margin Required 2,19,000 INR

  13. 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

  14. 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)

  15. USDINR Futures – Volumes & Open Interest

  16. 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)

  17. 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

  18. Product Specifications: Exchange Traded Currency Options

  19. 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

  20. Example on Hedging Using Currency 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

  21. Possible outcomes on different maturity rates: • 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

  22. USDINR Options – Volumes & Open Interest

  23. Exchange Traded Currency Futures Vs Options

  24. RBI Circular 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

  25. Customers are allowed to 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

  26. Identify a trading member 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

  27. The Foreign Exchange Markets - Comparison

  28. FX Tracker – Futures Contracts

  29. FX Tracker – Options Contracts

  30. Market Watch Screen - NOW

  31. WHY National Stock Exchange ….. • 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

  32. Thank You 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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