The History of the money market

The money use spans 1000s of old ages. Earlier many points have been used as trade good money such as cherished metals, cowrie shells, beads etc. every bit good as many other things that could be thought of as holding some value.

The first people did n’t purchase goods from other people with money. They used swap. Barter is the exchange of personal ownerships of value for other goods that you want. This sort of exchange started at the beginning of world and is still used today. From 9,000-6,000 B.C. , farm animal was frequently used as a unit of exchange. Subsequently, as agribusiness developed, people used harvests for swap. For illustration, one could inquire another husbandman to merchandise a lb of apples for a lb of bananas.

At approximately 1200 B.C. in China, cowry shells became the first medium of exchange, or money. The cowrie has served as money throughout history even to the center of this century.A They can be thought of as the original development of metal currency. In add-on, tools made of metal, like knives and spades, were besides used in China as money.A From these theoretical accounts, coins were developed which are in day-to-day usage. The Chinese coins were normally made out of base metals which had holes in them so that these coins could be put together to do a concatenation.

At approximately 500 B.C. , pieces of Ag were the earliest coins.A A Eventually in clip they took the visual aspect of today and were imprinted with legion Gods and emperors to tag their value. These coins were first shown in Lydia, or Turkey, during this clip, but the methods were used over and over once more, and farther improved upon by the Greek, Persian, Macedonian, and Roman imperiums. Not like Chinese coins, which relied on base metals, these new coins were composed from scarce metals such as bronze, gold, and Ag, which had a batch of intrinsic value.

In 118 B.C. , banknotes in the signifier of leather money were used in China. One-foot square pieces of white deerskin edged in graphic colourss were exchanged for goods. This is believed to be the beginning of a sort of paper money.

During the 9th century A.D. , the Danes in Ireland had an look “ To pay through the olfactory organ. ” It comes from the pattern of cutting the olfactory organs of those who were careless in paying the Danish canvass revenue enhancement.

From the 9th century to the 15th century A.D. , in China, the first existent paper currency was used as money. Through this period the sum of currency skyrocketed doing terrible rising prices. Unfortunately, in 1455 the usage of the currency vanished from China. European civilisation still would non hold paper currency for many old ages.

In 1500, North American Indians engaged in potlach, a term that describes the exchange of gifts at feasts, dances, and assorted rites. Since the trading of gifts was so of import in calculating the leaders ‘ community position, potlach went out of control as the gifts became more excessive in an attempt to excel others ‘ gifts.

In 1535, though likely well before this earliest recorded day of the month, strings of beads made from clam shells, called boodle, are used by North American Indians as money. Wampum means white, the colour of the clam shells and the beads.

In 1816, England made gold a benchmark of value. This meant that the value of currency was pegged to a certain figure of ounces of gold. This would assist to forestall rising prices of currency. The U.S. went on the gilded criterion in 1900.

Because of the depression of the 1930 ‘s, the U.S. began a universe broad motion to stop binding currency to gold. Today, few states tie the value of their currency to the monetary value of gold. Other authorities and fiscal establishments now try to command rising prices. At present, states continue to alter their currencies. For illustration, the U.S. has already changed its $ 100 and $ 20 bills. More alterations are in the plants. Modern money is basically a nominal – in other words, an abstraction. Paper currency is possibly the most common type of physical money today. The Sumer civilisation developed a big graduated table economic system based on trade good money. The Babylonians and neighbouring metropolis provinces later developed the earliest system of economic sciences as we think of it today, in footings of regulations on debt, legal contracts and jurisprudence codifications associating to concern patterns and private belongings.

Future of money: Tomorrow is already here. Electronic money ( or digital hard currency ) is already being exchanged over the Internet.

THE Undertaking

Each state has ain currency through which both national and international concern minutess are conducted. All the international concern minutess involve exchange of a currency for another. Foreign exchange markets provide the mechanism of interchanging different currencies with one and another, and therefore, easing concern minutess from a state to another.

With the growing of international trade, trading in foreign currencies has grown many creases over the yesteryear. Since the exchange rates are volatile, trading houses are exposed to the hazard of exchange rate fluctuations. As a consequence the assets or liability or hard currency flows of a house which are denominated in foreign currencies change in value over a period of clip due to interchange rate fluctuation.

The fiscal environment today has become riskier than earlier. Firms, which are able to pull off these hazards efficaciously are Successful concern houses today. Due to alterations in the macroeconomic constructions, there has been a dramatic addition in the volatility of economic variables such as involvement rates, exchange rates, trade good monetary values etc. Firms must supervise their hazards carefully and pull off their hazards with wise policies to bask a more stable concern. Suitable mechanisms to pull off and cut down such hazards which are influenced by factors external to the concern demand to be adopted. One of the modern twenty-four hours solutions to pull off fiscal hazards is ‘hedging ‘ .

In this paper I have tried to analyze about what are the fudging instruments ( Currency Derivatives ) available in India and how the concern corporations are utilizing currency derived functions as a hazard direction tool.


Bretton Woods system of administrating fixed foreign exchange rates was abolished in favour of market-determination of foreign exchange rates in 1971, and a system of fluctuating exchange rates was introduced. Besides market-determined fluctuations, volatility in other markets around the universe prevailed due to increased rising prices and the oil crisis. Companies tried difficult to come up with the uncertainness in minutess. That ‘s how fiscal derived functions – foreign currency, involvement rate, and trade good derived functions emerged as agencies of pull offing hazards confronting corporations.

First of all time future contracts were created by The Chicago Mercantile Exchange ( CME ) created FX hereafters in the twelvemonth 1972. Leo Melamed, CME Chairman Emeritus helped making these contracts by supplying necessary counsel and leading. FX contracts capitalized on the forsaking of the Bretton Woods understanding, which had fixed universe exchange rates to a gilded criterion after World War II by USA. By making another type of market in which hereafters could be traded, CME currency hereafters extended the range of hazard direction beyond trade goods, which were the chief derivative contracts traded at CME until so. The construct of currency hereafters at CME was radical, and gained credibleness through indorsement of Nobel-prize-winning economic expert Milton Friedman.


The economic liberalisation in early 1890ss provided the principle for the debut of FX derived functions. Business houses started actively nearing foreign markets non merely with their merchandises but besides as a beginning of capital and direct investing chances. When limited convertibility on the trade history was introduced in 1993, environment became more favourable for the debut of these merchandises. Hence, the development in the Indian forex derived functions market follows the stairss taken to bit by bit reform the Indian fiscal markets.

The first measure towards debut of derived functions merchandising in India was the Securities Laws ( Amendment ) Regulation, 1995, which withdrew the prohibition on options securities. SEBI set up a 24 member commission under the chairmanship of Dr. L. C. Gupta on November 18, 1996 to develop appropriate regulative model for derived functions merchandising in India. The commission recommended that the derived functions should be declared as ‘securities ‘ so that regulative model applicable to trading of ‘securities ‘ could besides regulate trading of derived functions.

Trading in index options commenced in June 2001 & amp ; trading in options on single securities commenced in July 2001. Futures contracts on single stocks were launched in November 2001.

Standing proficient commission was jointly constituted by RBI & A ; SEBI to analyse the currency market around the universe and put down the guidelines to present Exchange Traded Currency Futures in the Indian market. The commission submitted its study on May 29, 2008. RBI and SEBI issued handbills in this respect on August 06, 2008.

Presently, Indian Currency market trades with all the major currencies like USD, EURO, YEN and POUND are traded. The principle for presenting hereafters in the Indian context has been outlined in the study of the internal working group of Currency Futures ( Reserve Bank of India, April 2008 ) as follows:

The principle for set uping currency hereafters market is diverse. Both occupants and non-residents purchase domestic currency assets. If the exchange rate remains unchanged from the clip of purchase of the plus to its sale, no additions and losingss are made out of currency exposures. But if domestic currency depreciates ( appreciates ) against the foreign currency, the exposure would ensue in addition ( loss ) for occupants buying foreign assets and loss ( addition ) for non occupants buying domestic assets. In this background, unannounced motions in exchange rates expose investors to currency hazards.

Currency hereafters enable these companies to fudge their hazards. Nominal exchange rates are frequently random walks with or without impetus, while existent exchange rates over long tally are average returning. As such, it is possible that over a long – tally, the inducement to fudge currency hazard may non be big. However, fiscal planning skyline is much smaller in the long-run, which is typically inter – generational in the context of exchange rates. As such, there is a strong demand to fudge currency hazard and this demand has grown variously with fast growing in cross-border trade and investing flows. The statement for fudging currency hazards appear to be natural in instance of assets and applies every bit to merchandise in goods and services, which consequences in income flows with leads and slowdowns and acquire converted into different currencies at the market rates. Empirically, alterations in exchange rate are found to hold really low correlativities with foreign equity and bond returns. Therefore theoretically it should hold low portfolio hazard. Therefore, sometimes it is argued against the demand of fudging currency hazards but there is strong empirical grounds to propose that fudging reduces the volatility of returns and so sing the episodic nature of currency returns. There are strong statements to utilize instruments to fudge currency hazards.

Chronological sequence of derived functions in India



14 December 1995

NSE asked SEBI for permission to merchandise index hereafters.

18 November 1996

SEBI apparatus L. C. Gupta Committee to outline a policy model for index hereafters

11 May 1998

L. C. Gupta Committee submitted study.

7 July 1999

RBI permitted OTC frontward rate understandings ( FRAs ) and involvement rate barters

24 May 2000

SIMEX chose Nifty for trading hereafters and options on an Indian index.

25 May 2000

SEBI gave permission to NSE and BSE to make index hereafters trading.

9 June 2000

Trading of BSE Sensex hereafters commenced at BSE.

12 June 2000

Trading of Nifty hereafters commenced at NSE.

31 August 2000

Trading of hereafters and options on Nifty to get down at SIMEX

June 2001

Trading of Equity Index Options at NSE

July 2001

Trading of Stock Options at NSE

9 November 2002

Trading of Single Stock hereafters at BSE

June 2003

Trading of Interest Rate Futures at NSE

13 September 2004

Weekly Options at BSE

1 January 2008

Trading of Chhota ( Mini ) Sensex at BSE

1 January 2008

Trading of Mini Index Futures & A ; Options at NSE

6 August 2008

Circulars sing Currency Futures by RBI & A ; SEBI

29 August 2008

Trading of Currency Futures at NSE

2 October 2008

Trading of Currency Futures at BSE

7 October 2008

MCX-SX came into being with USD/INR brace

16 June 2010

The all new United Stock Exchange started mock trading in Currency Futures.

Chapter – 2


Derivative is a merchandise whose value is derived from the value of one or more basic variables, called bases ( i.e. implicit in plus, index, or mention rate ) , in a contracted mode. The implicit in plus can be in the signifier of equity, foreign exchange, trade good or any other plus holding commercial value.

For illustration, a cotton husbandman may wish to sell his crop at a hereafter day of the month to extinguish the hazard of a alteration in monetary values by that day of the month. Such a dealing is an illustration of a derivative. The monetary value of this derived function is driven by the topographic point monetary value of cotton which is the “ implicit in ” .

In the Indian context the Securities Contracts ( Regulation ) Act, 1956 [ SC ( R ) A ] defines “ Derivative ” to include-

1. A security derived from a debt instrument, portion, loan whether secured or unbarred, risk instrument or contract for differences or any other signifier of security.

2. A contract which derives its value from the monetary values, or index of monetary values, of underlying securities.

The Underlying Securities for Derived functions are:

Commodities: Castor seed, Grain, Pepper, Potatoes, etc.

Cherished Metallic element: Gold, Silver

Short Term Debt Securities: Treasury Bills

Interest Ratess

Common shares/stock

Currency derived functions


Derivative instruments can be classified between trade good derived functions and fiscal derived functions. The basic difference between these is the nature of the underlying instrument assets.

In trade good derived functions the implicit in instrument is trade good which may be wheat, tea, cotton, Piper nigrum, sugar, jute, turmeric, maize, petroleum oil, natural gas etc.

In fiscal derived functions the implicit in instruments are exchequer measures, stocks, bonds, foreign exchange, stock index etc. It may be noted that fiscal derived function is reasonably standard and there are no quality issues whereas in trade good derived function, the quality may be the implicit in affairs.


Derived functions traded at exchanges are standardized contracts holding standard bringing day of the months and merchandising units.

OTC derived functions are customized contracts which enable parties to choose merchandising units and bringing day of the months to accommodate their demands.

Major difference between the two is that of counterparty hazard i.e. hazard of default by either party. With the exchange traded derived functions, the hazard is controlled by exchanges through glade house which act as a contractual mediator and enforce margin demand. In contrast, OTC derivatives signify greater liability.


Futures: Futures contract is an understanding between two parties to purchase or sell an plus at a certain clip in the hereafter at a certain in agreement monetary value. Futures contracts are particular types of forward contracts in the sense that they are standardized and are by and large traded on an exchange. A currency hereafters contract provides a coincident right and duty to purchase and sell a peculiar currency at a specified hereafter day of the month, a specified monetary value and a standard measure.

Forwards: Forward contract is a customized contract between two parties, where colony takes topographic point on a specific day of the month in the hereafter at today ‘s pre-agreed monetary value. The exchange rate is fixed at the clip the contract is entered into. The basic aim of a forward market is to repair a monetary value for a contract to be carried through on the hereafter agreed day of the month and is intended to liberate both the buyer and the marketer from any hazard of loss which might incur due to fluctuations in the monetary value of implicit in plus.

Barters: Barters are understandings between two parties to interchange hard currency flows in the hereafter harmonizing to a prearranged expression. They can be regarded as portfolios of forward contracts. The currency barter entails trading both chief and involvement between the parties, with the hard currency flows in one way being in a different currency than those in the opposite way. There are a assorted types of currency barters like as fixed-to-fixed currency barter, drifting to drifting barter, fixed to drifting currency barter.

In a barter usually three basic stairss are involved

Initial exchange of chief sum

Ongoing exchange of involvement

Re – exchange of chief sum on adulthood.

Options: Options are of two types – calls and puts. Calls give the purchaser the right but non the duty to purchase a given measure of the implicit in plus, at a given monetary value on or before a given hereafter day of the month. Puts give the purchaser the right, but non the duty to sell a given measure of the implicit in plus at a given monetary value on or before a given day of the month.

In other words, a foreign currency option is a contract for future bringing of a specified currency in exchange for another in which purchaser of the option has to compensate to purchase ( call ) or sell ( put ) a peculiar currency at an in agreement monetary value within specified period.

In India merely currency forwards and currency hereafters are merely allowed. Currency barters and currency option is yet non allowed in India.

Recently MCX-SX has started to offer currency hereafters contracts in US Dollar-Indian Rupee ( USD-INR, ) Euro-Indian Rupee ( EUR-INR ) , Pound Sterling-Indian Rupee ( GBP-INR ) and Nipponese Yen-Indian Rupee ( JPY-INR ) . Uncluttering and Settlement is conducted through the MCX Stock Exchange Clearing Corporation Ltd ( MCX-SX CCL ) .

SEBI is besides sing about establishing Currency Options for easing all the investors, exporters, importers and MNCs.


Forward contracts are understandings to interchange currencies at an in agreement rate on a specified hereafter day of the month. The existent colony day of the month is after two working yearss after the trade day of the month. The in agreement rate is called frontward rate and the difference between the topographic point rate and the forward rate is called as frontward border. Forward contracts are bilateral contracts and are in private negotiated, traded outside a regulated stock exchange and suffer from counter -party hazards and liquidness hazards. Counter Party hazard means that one party in the contract may default on carry throughing its duties thereby doing loss to the other party.

An of import section of the Forex derivatives market in India is the Rupee forward contracts market. This has been turning quickly with increasing engagement from companies, exporters, importers, Bankss and FIIs. Till February 1992, frontward contracts were permitted merely against trade related exposures and these contracts could non be cancelled except where the implicit in minutess failed to happen. In March 1992, unrestricted engagement and cancellation of forward contracts for all echt exposures, whether trade related or non, were permitted to supply operational freedom to corporate entities. During the Asiatic crisis, freedom to re-book off contracts was suspended, which has been since relaxed for the exporters but the limitation still remains for the importers.


Futures is a standardised forward contract to purchase ( long ) or sell ( short ) the implicit in plus at a specified monetary value at a specified hereafter day of the month through a specified exchange. Futures contracts are traded on exchanges working as purchasers or Sellerss for the counterparty. Exchange sets the standardised footings in term of quality, measure, monetary value citation, day of the month and bringing topographic point ( merely in instance of trade good ) .


The characteristics of a hereafters contract may be specified as follows:

These are traded on an organized exchange like NSE, BSE, MCX etc.

These involve standardized contract footings viz. the implicit in plus, the clip of adulthood and the mode of adulthood etc.

These are associated with a glade house to guarantee smooth operation of the market.

There are border demands and day-to-day colony to move as farther precaution.

These provide for supervising and monitoring of contract by a regulative authorization.

About 90 percent hereafter contracts are settled via hard currency colony alternatively of existent bringing of implicit in plus.

Futures contracts being traded on organized exchanges impart liquidness to the dealing. The clearinghouse, being the counter party to both sides of a dealing, provides a mechanism that guarantees the observance of the contract and guaranting really low degree of default.


Following are the of import types of fiscal hereafters contract:

Stock Future or equity hereafters,

Stock Index hereafters,

Currency hereafters, and

Interest Rate bearing securities like Bonds, T- Bill Futures.

Chapter – 3


A hereafter is a standardised contract, traded on an exchange. To purchase or sell a certain implicit in plus or an instrument at a certain day of the month in the hereafter, at a specified monetary value. When the implicit in plus is trade good the contract is termed as ‘Commodity Future Contract ‘ . When the underlying is an exchange rate, the contract is termed a “ Currency Futures Contract ” .

Therefore, the purchaser and the marketer enter into a contract for an exchange rate for a specific value or bringing day of the month. Both parties of the hereafter contract must carry through their duties on the colony day of the month.

Currency hereafters can be settled by presenting the duty of the marketer and purchaser severally. All colonies go through the exchange.

Currency hereafters are a additive merchandise, and ciphering net incomes or losingss on currency hereafters will be similar to ciphering net incomes or losingss on index hereafters. In finding net incomes and losingss, it is indispensable to cognize both the contract size and besides tick value, A tick value is the minimal trading increase or monetary value derived function at which bargainers are able to come in commands and offers. Tick value differ for different currency braces. In instance of USD-INR currency hereafters contract the tick size shall be 0.25 Paise. For illustration, if a bargainer buys a contract at Rs. 42.2500 one tick move on this contract will interpret to Rs. 42.2475 or Rs. 42.2525 depending on the way of market motion.


Traders in the foreign exchange market make legion trades daily, purchasing and selling currencies while interchanging market information may be used for varied intents:

For the import and export demands of companies and persons

For direct foreign investing

To gain from the short-run fluctuations in exchange rates

To pull off bing places or

To buy foreign fiscal instruments

Exchange rates are of import consideration while taking international investing determinations.

When an investor decides to “ hard currency out, ” or convey his money place, any additions could be magnified or wiped out depending on the alteration in the exchange rates in the meantime. Changes in exchange rates can hold following effects on economic system:

Affects the monetary values of imported goods

Affects the overall degree of monetary value and pay rising prices

Influences touristry forms

May influence consumers ‘ purchasing determinations and investors ‘ long-run committednesss.

In the volatile Forex market, bargainers invariably try to announce the behaviour of other market participants. By right expecting oppositions ‘ schemes, they can move first and crush the competition.

Traders net income by buying currency and selling it subsequently at a higher monetary value, or, expecting the market is heading down, selling at a high monetary value and purchasing back at a lower monetary value later.

To foretell the motions of currencies, bargainers frequently try to find whether the currency ‘s monetary value reflects its cardinal value in footings of current economic conditions. Analyzing rising prices, involvement rates, and the comparative strength of the state ‘s economic system are some of the factors which help them do a finding.

Currency-based derived functions are used chiefly by exporters invoicing receivables in foreign currency who are willing to protect their net incomes from the foreign currency depreciation by locking the currency transition rate at a high degree.

Importers use these derived functions in fudging foreign currency payables. It is effectual when the payment currency is expected to appreciate and the importers would wish to vouch a lower transition rate.

Investors in foreign currency denominated securities like to procure strong foreign net incomes by obtaining the right to sell foreign currency at a high transition rate, therefore supporting their gross from the foreign currency depreciation.

Multinational companies use currency derived functions in direct investings overseas. They want to vouch the rate of buying foreign currency for assorted payments related to the installing of a foreign subdivision or subordinate, or to a joint venture with a foreign spouse.

High grade of volatility of exchange rates creates an chance for foreign exchange speculators. Their aim is to guarantee a high merchandising rate of foreign currency by obtaining a derivative contract while anticipating to purchase the currency at a low rate in the hereafter. Alternatively, they may desire to obtain a foreign currency frontward purchasing contract, anticipating to sell the appreciating currency at a high hereafter rate. In either instance, they are exposed to the currency fluctuations hazard in the hereafter wagering on the form of the topographic point exchange rate accommodation consistent with their initial outlooks.

Most normally used instrument among the currency derived functions are currency frontward contracts. These are big fanciful value merchandising or purchasing contracts obtained by exporters, importers, investors and speculators from Bankss with denomination usually transcending 2 million USD.

Contracts guarantee the future transition rate between two currencies and can be obtained for any customized sum and any day of the month in the hereafter. They usually do non necessitate a security sedimentation since their buyers are largely big concern houses and investing establishments, although the Bankss may necessitate counterbalancing sedimentation balances or lines of recognition. Their dealing costs are set by spread between bank ‘s bargain and sell monetary values.

Currency hereafters provide an extra tool for fudging currency hazard by.

Further development of domestic foreign exchange market.

Permit trades other than hedges with a position to traveling bit by bit towards fuller capital history convertibility.

Supply a platform to retail section of the market to guarantee wide based engagement based on equal intervention.

Efficient method of recognition hazard transfer through the Exchange.

Make a market to ease big volume minutess to travel through on an anon. footing without falsifying the degrees.


Hedgers: They use derived functions markets to cut down or extinguish the hazard associated with monetary value of an plus. Majority of the participants in derived functions market belongs to this class.

Speculators: They transact hereafters and options contracts to acquire excess purchase in wagering on future motions in the monetary value of an plus. They can increase both the possible additions and possible losingss by use of derived functions in a bad venture.

Arbitrageurs: Their behaviour is guided by the desire to take advantage of a disagreement between monetary values of more or less the same assets or viing assets in different markets. If, for illustration, they see the hereafters monetary value of an plus acquiring out of line with the hard currency monetary value, they will take countervailing places in the two markets to lock in a net income.


In foreign exchange markets, base currency is the first currency in a currency brace and 2nd currency is called as the footings currency. Exchange rates are quoted in per unit of the base currency. That is the look Dollar-Rupee, tells that the Dollar is being quoted in footings of the Rupee. Dollar is the basal currency and the Rupee is the footings currency.

Exchange rates are invariably altering, which means that the value of one currency in footings of the other is invariably in flux. Changes in rates are expressed as strengthening or weakening of one currency vis-a-vis the 2nd currency. Changes are besides expressed as grasp or depreciation of one currency in footings of the 2nd currency. Whenever the base currency buys more of the footings currency, the base currency is said to hold been strengthened / appreciated and the footings currency has weakened / depreciated.

Chapter – 4


Future markets were designed to work out the jobs that exist in forward markets. A hereafters contract is an understanding between two parties to purchase or sell an plus at a certain clip in future at a certain monetary value. Unlike forward contracts, the hereafters contracts are standardized and exchange traded. To ease liquidness in hereafters contracts, exchange specifies certain standard characteristics of the contract. A hereafters contract is a standardised contract with standard underlying instrument, a standard measure and quality of the implicit in instrument that can be delivered ( or can be used for mention intents in colony ) and a standard timing of such colony. A hereafters contract may be offset prior to adulthood come ining into an equal and opposite dealing.


Exchange traded hereafters as compared to OTC forwards serve the same economic intent yet differ in cardinal ways. An single entrance into a forward contract agrees to transect at a forward monetary value on a hereafter day of the month. On the adulthood day of the month, the duty of the single peers to the forward monetary value at which the contract was executed. Except on the adulthood day of the month no money changes custodies.

On the other manus in instance of exchange traded currency hereafters contract grade to market duty is settled on a day-to-day footing. Since the net income or loss in a hereafter market are collected/ paid on a day-to-day footing, the range of constructing grade to market loss in the books of assorted participants gets limited. Counterparty hazard in future contract is farther eliminated by the presence of a glade corporation, which by presuming counterparty warrant eliminates recognition hazard.

Further in an exchange traded scenario where the market batch is fixed at a much lesser size than the OTC market, just chance is provided to all the categories of investors whether big or little to take part in the hereafter market. The dealing on an exchange are executed on a monetary value clip precedence guaranting that the best monetary value is available to all classs of market participant irrespective of their size. Other advantages of an exchange traded market would be greater transparence, efficiency and handiness.


Spot monetary value: The monetary value at which an plus trades in the topographic point market. In the instance of USD/INR, topographic point value is T + 2.

Futures monetary value: The monetary value at which the hereafters contract trades in the hereafters market.

Contract rhythm: The period over which a contract trades. Currency hereafters contracts on the SEBI recognized exchanges have one-month, two-month, and three-month up to twelve-month termination rhythms. Hence, these exchanges will hold 12 contracts outstanding at any given point in clip.

Value Date/Final Settlement Date: The last concern twenty-four hours of the month will be termed the Value date/ Final Settlement day of the month of each contract. Last concern twenty-four hours would be taken to the same as that for Inter-bank Colonies in Mumbai. The regulations for Inter-bank Settlements, including those for ‘known vacations ‘ and ‘subsequently declared vacation ‘ would be those as laid down by Foreign Exchange Dealers ‘ Association of India ( FEDAI ) .

Expiry day of the month: It is the day of the month specified in the hereafters contract. All contracts expire on the last on the job twenty-four hours ( excepting Saturdays ) of the contract months. The last twenty-four hours for the trading of the contract shall be two working yearss prior to the concluding colony day of the month or value day of the month.

Contract size: The sum of assets that have to be delivered under a contract, which is besides called as batch size. In the instance of USD/INR it is USD 1000 ; EUR/INR it is EUR 1000 ; GBP/INR it is GBP 1000 and in instance of JPY/INR it is JPY 100,000.

Footing: In the context of fiscal hereafters, footing can be defined as the hereafters monetary value minus the topographic point monetary value. There will be a different footing for each bringing month for each contract. In a normal market, footing will be positive. This reflects that hereafters monetary values usually exceed topographic point monetary values.

Cost of carry: The relationship between hereafters monetary values and topographic point monetary values can be summarized in footings of what is known as the cost of carry. This steps ( in trade good markets ) the storage cost plus the involvement that is paid to finance or ‘carry ‘ the plus boulder clay bringing less the income earned on the plus. For equity derived functions carry cost is the rate of involvement.

Initial border: The sum that must be deposited in the border history at the clip a hereafters contract is foremost entered into is known as initial border.

Marking-to-market: In the hereafters market, at the terminal of each trading twenty-four hours, the border history is adjusted to reflect the investor ‘s addition or loss depending upon the hereafters shutting monetary value. This is called marking-to-market.





Instrument Type


Unit of measurement of trading

1 ( 1 unit denotes 1000 USD )


The exchange rate in Indian Rupees for a US Dollar

Tick size

Rs.0.25 paise or INR 0.0025

Trading hours

Monday to Friday

9:00 a.m. to 5:00 p.m

Contract trading rhythm

12 month trading rhythm.

Last trading twenty-four hours

Two on the job yearss prior to the last concern twenty-four hours of the expiry month at 12 midday.

Concluding colony twenty-four hours

Last on the job twenty-four hours ( excepting Saturdays ) of the expiry month. The last on the job twenty-four hours will be the same as that for Interbank Settlements in Mumbai.

Measure Freeze

Above 10,000

Base monetary value

Theoretical monetary value on the 1st twenty-four hours of the contract. On all other yearss, DSP of the contract

Monetary value operating scope

Tenure up to 6 months Tenure more than 6 months

+- 3 % of basal monetary value +- 5 % of base monetary value

Position bounds

Clients Trading members Banks

Higher of 6 % of Higher of 15 % Higher of

entire unfastened involvement of the entire unfastened 15 % of entire

orUSD 10 million involvement or unfastened involvement

USD 50 million orUSD 100


Minimal initial border

1.75 % on twenty-four hours 1, 1 % thenceforth

Extreme loss border

1 % of MTM value of unfastened place.

Calendar spreads

Minimum Rs. 250/- per contract for all months of spread


Daily colony: T + 1

Concluding colony: T + 2

Mode of colony

Cash settled in Indian Sri lanka rupees

Daily colony monetary value ( DSP )

Calculated on the footing of the last half an hr leaden mean monetary value

Final colony monetary value ( FSP )

RBI mention rate

NSE trades Currency Derivatives contracts holding near 12 calendar month termination rhythms. All contracts expire two working yearss prior to the last on the job twenty-four hours of every calendar month ( capable to vacation calendars ) . This is besides the last trading twenty-four hours for the expiring contract. The contract would discontinue to merchandise at 12:00 midday on the last trading twenty-four hours. A new contract with 12th month termination would be introduced instantly guaranting handiness of 12 monthly contracts for trading at any point.

The Instrument type: FUTCUR refers to ‘Futures contract on currency ‘ and Contract symbol: USDINR denotes a currency brace of ‘US Dollars – Indian Rupee ‘ . Each hereafters contract has a separate bound order book. All inactive orders are stacked in the system in footings of price-time precedence and trades take topographic point at the inactive order monetary value ( order which has come before and shacking in the system ) . The best bargain order for a given hereafters contract will be the order to purchase at the highest monetary value whereas the best sell order will be the order to sell at the lowest monetary value.

Transaction OF A CONTRACT


Trade Date

Entire Contracts

Entire Value

Spread Volume

Open Interest

RBI Reference Rate

( in Rs. Cr. )







































Chapter – 5

Examples OF Hedge

1 ) . Suppose a machinery importer wants to import machinery worth USD 100,000 and topographic points his import order on June 12, 2010, with the bringing day of the month being 4 months in front. At the clip of puting the contract one USD is deserving Rs 46.50 in the topographic point market. But, suppose the Indian Rupee depreciates to INR 46.75 per USD when the payment is due in October 2010, the value of the payment for the importer goes up to Rs 4,675,000, instead than Rs 4,650,000. The fudging scheme for the importer, therefore, would be:

Current Topographic point Rate ( 12th June ’10 )


Buy 100 USD – INR Oct ’10 Contracts on 12thJune ’10

( 1000 * 46.5500 ) * 100 ( Assuming the Oct ’10 contract is merchandising at 46.5500 on 12th June, ’10 )

Sell 100 USD – INR Oct ’10 Contracts in Oct ’10 Profit/Loss ( hereafters market )


1000 * ( 46.75 – 46.55 ) * 100 = 20,000

Purchases in topographic point market @ 46.75 Entire cost of weasel-worded dealing

46.75 * 100,000

100,000 * 46.75 – 20,000 = Rs 4,655,000

2 ) . A garment exporter of Ludhiana, who is exporting Garments deserving USD 100,000, wants protection against possible Indian Rupee grasp in Dec ’10, i.e. when he receives his payment. He wants to lock-in the exchange rate for the above dealing. His scheme would be:

One USD – INR contract size

USD 1,000

Sell 100 USD – INR Dec ’10 ContractsA

( on 12th June ’10 )


Buy 100 USD – INR Dec ’10 Contracts in Dec ’10


Sell USD 100,000 in topographic point market @ 47.1025 in Dec ’10 ( Assume that ab initio Indian rupee depreciated, but subsequently appreciated to 47.1025 per USD as foreseen by the exporter by terminal of Dec ’10 )

Profit/Loss from hereafters ( Dec ’10 contract )

100 * 1000 * ( 47.2925 – 47.1025 )

= 0.19 *100 * 1000A

= Rs 19,000


The net reception in INR for the weasel-worded dealing would be: 100,000 *47.1025 + 19,000 = 2,355,125 + 19,000 = Rs 2,374,125. Had he non participated in hereafters market, he would hold got merely Rs 2,355,125. Therefore, he kept his gross revenues unexposed to foreign exchange rate hazard.

3 ) . Suppose an Indian exporter receives an export order deserving 100,000 from a European client with the bringing day of the month being in 3 months clip. At the clip of puting the contract, the Euro is deserving Rs 56.05 in the topographic point market, while a hereafters contract for an termination day of the month that matches with order payment day of the month is merchandising at Rs 56. This puts the value of the order, when placed, at Rs 5,605,000. However, if the domestic exchange rate appreciates significantly ( to Rs 55.20 ) when the order is paid for ( which is one month after the bringing day of the month ) , the house would have merely Rs 5,520,000 instead than Rs 5,605,000.

To see against such losingss, the house can, at the clip it receives the order, can come in into 100 Euro hereafters contract of 1000 each to sell at Rs 56 a Euro, which involves undertaking to sell a foreign currency on termination day of the month at the in agreement exchange rate. Suppose on payment day of the month the exchange rate is Rs 55.20, the exporter would have merely Rs 5,520,000 on selling the Euro in the topographic point market, but additions Rs 80,000 ( i.e. 56 – 55.20 * 100 * 1000 ) in the hereafters market. Therefore, overall the house receives Rs 5,600,000 and protects itself from the crisp grasp of domestic currency against Euro.

4 ) . A trader in India placed an import order worth 100,000 with a German maker. The current topographic point rate of the Euro is Rs 56.05 and at this rate the value of the order is Rs 5,605,000. The importer is concerned about crisp depreciation of the Indian Rupee against the Euro in approaching months when the payment is due. So, the importer buys 100 Euro hereafters contract ( 1000 each ) at Rs 56 a Euro. Suppose, at termination day of the month, the Rupee depreciated to Rs 57, the importer would hold to pay Rs 5,700,000, but he would derive Rs 100,000 ( i.e. Rs.67 – 56 * 100 * 1000 ) from the hereafters market and the attendant escape would be merely Rs 5,600,000.

In the short term, houses can do additions or losingss from fudging. But the basic intent of hedge is to protect against inordinate losingss. Firms besides tend to profit from cognizing precisely how much they will pay for the import order and avoid the uncertainness associated with future exchange rate motions.


Low Committees: A extremely competitory market keeps a check on securities firm, maintaining fees to bare lower limit.

No Middlemen: Futures/Options currency trading allows clients to merchandise straight on the exchange platform.

Standardized Lot Size: Tonss or contract sizes are determined and fixed by the exchanges.

Low Transaction Cost: The retail dealing cost ( the bid/ask spread ) is typically less than 0.1 per centum under normal market conditions.

About Instantaneous Minutess: High liquidness and low bid/ask spreads lead to immediate trades.

Affordability: Margins are really low and the contract size is really little. As per the specification of NSE, USD-INR currency hereafter contract, batch size is 1000 $ . Margin is 1.75 % .

Low Margins, High Leverage: Margins of 3-5 % addition purchase possibilities. These 2 factors increase the possible for doing higher net incomes ( and losingss ) .

On-line Entree: The coming of online ( Internet ) trading platforms helps you to merchandise at your convenience from your place, office or on the spell.

No 1 can corner the market: The Forex market is so huge and has so many participants that no individual entity, non even a cardinal bank, can command the market monetary value for an drawn-out period of clip. Even intercessions by mighty cardinal Bankss are going progressively ineffective and ephemeral. Therefore cardinal Bankss are going less and less inclined to step in to pull strings market monetary values.

Transparency: It is possible for everyone to verify trade inside informations on NSE if anyone have a uncertainty that the agent has tried to rip off.


The hereafters are besides disadvantageous in a few countries when compared to OTC market. The major disadvantages are:

Standardization: It is non possible to obtain a perfect hedge in footings of sum and timing.

Cost: Forwards have no upfront cost, while margining demands may efficaciously drive the cost of fudging in hereafters up.

Small tonss: By and large it is non possible to fudge little exposures.

Chapter – 6


Most important event in the field of finance during the past decennary has been the extraordinary development and enlargement of fiscal derived functions. These instruments enhance the ability to distinguish hazard and apportion it to those investors most able and willing to take it a procedure that has doubtless improved national productiveness growing and criterions of lifes.

Currency hereafters provide the safe and standardised contract to its investors and persons who are cognizant about the forex market or predict the motion of exchange rate so they will acquire the right platform for the trading in currency hereafter. Because of exchange traded future contract and its standardised nature gives counter party hazard minimisation.

Initially merely NSE had the permission but now BSE & A ; MCX-SX has besides started currency hereafter contracts. It shows that how currency future screens land in the comparison of the other available derivative instruments. Last month MCX-SX ranked top amongst all three with more than 50 % trades of currency hereafters contracts in India in sense of volumes and figure of contracts besides.

Not merely large concern houses, exporters and importers use this but persons who are interested and holding cognition about forex market they can besides put in currency hereafter.

Exchange between USD-INR markets in India is really large and along with it other currency contracts of Euro, Pound and Nipponese Hankerings are in the market and pulling the investors which is the ground behind higher growing rate of currency hereafters in India.

I am highly grateful to Dr H K Pradhan for supplying with an chance to this really insightful survey which has helped understand International Finance Management better.

Chapter – 7