Welcome to the
world of currencies
What is a currency?
• A generally acceptedmedium of exchange for goods and services, issued by a government
and circulated within an economy.
World currencies
• Different countries have different currencies.
What is currency exchange rate?
• Each currency of a country is valued with other currency, the net ratio is called exchange rate.
Currency exchange rates
• Each currency exchange rate represents a pair of currency.
• Examples of currency pairs:
USD/INR - US Dollar against Indian Rupee
EUR/USD - Euro against US Dollar
EUR/GBP - Euro against British Pound
GBP/INR - British Pound against Indian Rupee
How is currency quoted?
• Each currency is quoted/paired/valued with another currency.
USD/INR = 55.60
Base currency
Quote currency
• Quote of USD/INR = 55.60 means for every 1 USD paid, INR 55.60 will be received.
• Quote of EUR/USD = 1.2745 means for every 1 Euro paid, 1.2745 USD will be received.
$
Understanding appreciation & depreciation of currency
`
• How valuation of rupee changes?
Valuation changes due to
Economic forces - inflation
rate, purchasing power,
interest rate
Market forces - supply &
demand of dollar & rupee
due to economic factors
The value of a currency depends on demand and supply of currency.
Demand depends on economic valuations & economic factors.
Economic forces affecting rupee…
• Macro economic reviews
ws
• Monetary policy
• Banking policies
cements
• Economic data announcements
rio
• Global economic scenario
• Global capital flow
• Performance of equity/financial markets
• Performance of other currencies
• Performance of key commodities affecting trade
• Policy announcements affecting flows – trade or capital
Do we have
control on
these
factors???
Impact of economic news on rupee…
News flow
Meaning
Impact on rupee
Greek crisis
Outflow of Greek currency & investment in USD.
Depreciation
Euro crisis
USD demanded in market against Euro
Depreciation
FII outflow
FII sell rupee & buy USD
Depreciation
Rise of OIL price
Higher inflation - Low purchasing power,
& demand for more USD, fall of rupee value against USD
Depreciation
Overseas loan payment
Payment in USD against rupee. Corp sell rupee & buy USD
Depreciation
RBI managing strong rupee
Demands dollars & supply rupee
Depreciation
FII/FDI inflow in India
Inflow by FDI/FII supply of USD & demand of rupee
Appreciation
Overseas borrowing
Demands for dollars by corporate against INR
Appreciation
Higher bank rates
Investment by FII for bank interest
Appreciation
News: GDP will improve
Foreign investors will bring money to invest
Appreciation
NRI sending money
USD flow
Appreciation
Gold rises
Buying gold against USD. Supply of USD.
Appreciation
RBI managing rupee fall
Demand for dollar against rupee. Outflow of dollar
Appreciation
How is change in currency rate a financial risk?
USD-INR in last 4 years
USD-INR movement impact…
Do we know
what will be
USD-INR rate
next???
What is currency risk?
When rise or fall in value of one currency against another currency has direct
or indirect impact on financial statements, it is a currency risk.
When is currency a risk?
• Currency risk occurs when
- transactions undertaken by entity involves international currencies.
- rate of exchange has direct or indirect impact on its financial statements.
• Transactions may be
- receivable or payable fx instruments.
- purchase/sale commitments in fx.
- future transactions in a foreign currency.
- speculative transactions.
Who is affected by currency market?
Corporate, exporters,
importers, governments,
central & other banks,
financial markets, individuals
- travellers, students
How is exchange rate a financial risk?
• Mr. ABC is an exporter and has to receive USD 5 million as payment for his exported
goods next month. If today USD-INR rate is 55.60, Mr. ABC is expecting to receive
INR 27.8 Crs. (5*10^6*55.60 = 27.8 Cr).
• By the time of payment delivery, if USD-INR moves to 57.30, Mr. ABC will receive
INR 28.65 Cr. He will gain additional INR 0.85 Cr.
• In a situation, USD-INR changes to 53.50 at the time of delivery, Mr. ABC will receive
INR 26.75 Cr. A loss of INR 1.05 Cr.
• In above situations, Mr. ABC will hugely gain or lose basis exchange rate
movement in USD-INR, for which he has no control.
How is currency a risk – more examples...
• Mr. XYZ imports goods. He is expecting delivery of his contract next month and has to
pay USD 10 million at the time of goods delivered.
• If today USD-INR rate is 55.60, XYZ has to pay INR 55.60 Cr. (10*10^6*55.60 = 55.6 Cr).
• By the time of payment, if USD-INR moves to 57.30, Mr. XYZ will have to pay INR 57.30
Cr. He will have to pay additional INR 1.70 Cr.
• In a situation, USD-INR changes to 53.50 at the time of delivery, Mr. XYZ will have to pay
INR 53.50 Cr. A gain of INR 2.10 Cr.
• In above situations, Mr. XYZ will gain or lose basis exchange rate movement in
USD-INR, for which he has no control.
Some more situations • Anjali Jewellers is importing 100 KG of Gold, worth INR 30 Cr from US.
• Ruchi Soya has entered in a contract to export Soya Oil to US worth INR 20,000 Cr next year.
• Indian importer ABC partners has deposited USD 5 Million as refundable guarantee deposit
to tie up with US Company for 5 Years.
• Same ABC partners is sourcing business from US every month worth INR 25 Cr every year.
• Indo-Call runs 1000-seat BPO in India and US. Receives $100 per day as servicing fee.
• What happens if the INR depreciates against USD - rate moves from $50 to &52 in a month
And the fx risks • Anjali Jewellers’ operating profit falls with Rs 1.2 Cr every month.
• Ruchi Soya’s net income rises by 800 Cr a year.
• ABC partners will receive INR 10 Million extra on conversion of his deposit.
• Same ABC partners’ profit for the year increases to 1Cr for the year.
• Indo-Call receives Rs 60 Lakh additional gain each month.
Problem - currency exposure risk solution - hedging
Problem • Firms involved in international transactions face a risk, an unknown gain/loss,
on account of unanticipated changes in exchange rates.
• These transactions are quantified in terms of ‘international exposure’.
• Un-hedged exposures adversely affects P&L of companies and creates
operational hitches like cash flow requirements etc.
We need to manage our fx exposure
Payables
Receivables
Imports
Exports
Capital good
imports
Engineering
offshore contracts
Overseas borrowings FCCBs, ECBs
Capital flows FDI, FI
Foreign deposits
Service export
contracts
Solution on fx risk - hedging
• Hedging is a position established in one market in an attempt to offset
exposure in some opposite position in another market.
• The goal is to minimize one's exposure to unwanted risk.
• Hedging is thus taking of a position, either acquiring a cash flow or an asset
or a contract(including a forward contract) that will rise(fall) in value to
offset a fall(rise) in value of an existing position.
What is hedging – overview & concept?
• Hedging is a position established in one market in an attempt to offset
exposure in some opposite position in another market.
• The goal is to minimize one's exposure to unwanted risk.
• Hedging is thus taking of a position, either acquiring a cash flow or an asset
or a contract(including a forward contract) that will rise(fall) in value to
offset a fall(rise) in value of an existing position.
Keeping it simple - how to hedge?
Forex receivable
Forex payable
• Short/Sell futures
• Long/Buy futures
Cost of hedging & management of hedge
• Set price for transacting a foreign currency in the future
• Hedge forex exposure
• Cost to “lock in” this exchange rate
- margin deposits
- premium related to future rate for currency
- brokerage fee to obtain contract
- mark to market cash flow
- net settlement cash flow
Problem - currency
Currency exposure
Exposure risk
Risk
Solution - hedging
Hedging
Best Tool - currency
Currency derivatives
Derivatives
What are currency derivatives?
• The term 'Derivatives' indicates it derives its value from some underlying i.e. it has
no independent value. Underlying can be securities, stock market index,
commodities, bullion, currency etc.
• Currency derivatives implies contracts where underlying would be the currency
exchange rate.
• Examples of currency trading pairs:
- USD-INR – US Dollar against Indian Rupee
- USD-EUR – US Dollar against Euro
- EUR-GBP – Euro against British Pound
Currency Derivatives @ ICICIdirect.com
Currency trading @ ICICIdirect.com
• Products offered
- 4 currency pairs
• USD-INR – 6 month forward contracts available for trading
• GBP-INR – 3 month forward contracts available for trading
• EUR-INR - 3 month forward contracts available for trading
• JPY-INR – 2 month forward contracts available for trading
- Only futures
- Option trading not available
• Trading screens
- Online through web-trading
- Call n trade facility
Currency Trading @ ICICIdirect.com
Symbol
USD/INR
EUR/INR
GBP/INR
JPY/INR
Instrument Type
Units of Trading
FUTCUR
1 unit denotes
1000 Dollar
FUTCUR
1 unit denotes
1000 Eur
FUTCUR
1 unit denotes
1000 GBP
FUTCUR
1 unit denotes
1000 Yen
Underlying
The Exchange rate in
The Exchange rate
in INR for US Dollars INR for Euro
The Exchange rate in
INR for Pound Sterling
The Exchange rate in
INR for Japanese Yen
0.25 paise or
INR 0.0025
0.25 paise or
INR 0.0025 (The Quote
will be for 100 JPY)
Tick Size
Trading Hours
Contract Trading Cycle
Last trading Cycle
Final Settlement Day
0.25 paise or
INR 0.0025
0.25 paise or
INR 0.0025
9.00 am to 5.00 p.m. ( Monday - Friday )
12 months Trading Cycle
Two working days prior to the last business day of the expiry month at 12.15 pm
Last working day ( excluding Saturdays ) of the expiry month. The last working day will b e the
same as that for interbank Settlements in Mumbai
Daily Settlement : T+ 1
Final Settlement : T + 2
Mode of Settlement
Daily Settlement price (DSP)
Final Settlement Price
Cash Settled in INR
Calculated on the basis of the last half an hou weighted average price
RBI reference rate
on last trading day
RBI reference rate
on last trading day
RBI reference rate
on last trading day
RBI reference rate
on last trading day
Margin calculation in currency futures
Pair
Underlying
Contract example
Qty
USD-INR
USD
against INR
FUT-USD-INR28-08-2013
1
EUR-INR
EUR
against INR
FUT-EUR-INR28-08-2013
1
GBP-INR
GBP
against INR
FUT-GBP-INR28-08-2013
1
JPY-INR
JPY
against INR
FUT-JPY-INR
28-08-2013
1
Lot size
1000
1000
1000
1000
LTP
Contract
value
Margin
per lot
Margin
%
62.7425
62742.5
5333
8.5%
83.6325
83632.5
3764
4.5%
98.0925
98092.5
4904
5%
64.6925
64692.5
3882
6%
Equity
Currency
Derivatives
Equity derivates vs currency derivatives
Underlying
• Market indices like nifty, bank nifty
• Equity scrips
• Currency pair is used as indices like
USD-INR, EUR-INR
Equity derivates vs currency derivatives
Margins
• Vary from 11% to 35%, and upto
60% in exception.
• Low margins in indices – starting
from 11%.
• Prime stock margins vary
from 16% to 25%.
• General stocks margins start from
25% and above.
• 1 contract of nifty worth,
Rs 2,45,000/- available at margin of
Rs 26950. (@4900).
• Margins very low.
• Vary from 8.5% for USD INR.
• Exceptional margin applicable and
extended to 1 - 2%.
• 1 Lot position of USD-INR available
at Rs 5200/-.
• For contracts, equivalent to nifty Rs 2,45,000/-, only Rs 20825/- is
required.
Equity derivates vs currency derivatives
Lot size
• Lot size is based on contract value.
• Standard value set by NSE is
Rs 2.5 Lakhs.
• Number of units in lot vary as per
market price of scrip at the time
of initiating the contract by NSE.
• Lot size is based on number of units
of underlying in contract.
• Standard is 1000 Units of currency.
• Lot value is not the set standard.
Equity derivates vs currency derivatives
Tick size
• Tick size of Eq Dv is Rs 0.05 i.e. 5 Paise.
• Example of bid & offer
• Fx Dv tick size is Rs 0.0025 or 1/4th
of 1Paise or 0.0025 Paise.
• Example of bid & offer
Eq Dv
Fx Dv
Best bid price
Best offer price
55.95
56.00
55.90
56.05
55.85
56.10
55.80
56.15
Best bid price
Best offer price
55.9875
55.9900
55.9850
55.9925
55.9825
55.9950
55.9800
55.9975
55.9775
56.0000
Equity derivates Vs currency derivatives
Exposure with Rs 1 Lakh fund
• 3 nifty contracts can be taken as
position(avg margin 11%).
• FX Dv is low margin & high
leverage product.
• 3 lots of nifty stocks
(avg margin 14-15%).
• You can take position of 20 lots
• 2 lots of junior nifty stocks.
• 1 lot of fair margin stock.
of USD-INR.
• You can take position of 26 lots
of EUR-INR.
• Position value is worth
Rs 12 lakhs.
Equity derivates vs currency derivatives
No. of
Position
contracts
value in
on full
lakhs
margin
Price
Contract
value
Margin
on
contract
Margin
value
50
4900
245000
11%
26950
3
7.35
100000
1000
233
233000
14%
32620
3
6.99
PFC
100000
2000
150
300000
19%
57000
2
3.00
USD INR
100000
1000
62.75
62750
9%
5333.75
19
11.76
EUR INR
100000
1000
83.68
83680
4.5%
3765.6
27
22.22
Funds
Contract
available
size
Nifty
100000
ITC
Instrument
• In Eq dv, Rs 1 Lakh can allow 3 Lots of nifty and total position value will be Rs 7.35 Lakhs
(assuming nifty price at 4900 and 11% margin).
• In FX, Rs 1 Lakh can allow 19 lots of USD-INR and total position value will be Rs 11.76 Lakhs
(assuming USD-INR pair at Rs 62 with 8.5% margin).
• Currency derivatives consumes lower margin & provides 3 times higher exposure than equity derivatives.
Daily currency report, provided by ICICI Securities research
Monthly Currency Derivatives Research Report
Disclaimer
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instruments traded on the Stock Exchanges. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. Investors should make independent
judgment with regard suitability, profitability, and fitness of any product or service offered herein above. I-Sec and affiliates accept no liabilities for any loss or damage of any kind
arising out of any actions taken in reliance thereon.The contents of this presentation are solely for informational purpose and may not be used or considered as an offer document
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