currency fut,irfs, co
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Currency FuturesCurrency Futures
Currency OptionsCurrency Options
Interest rate FuturesInterest rate Futures
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DefinitionDefinition
A contract to exchange one currency foranother currency at a specified dateand a specified rate in the future.
Internationally, currency futures can becash settled or settled by deliveringthe respective obligation of the seller
and buyer.NSE, BSE, MCX-SX offer currency
futures on USD/INR, EUR/INR,
GBP/INR, JPY/INR
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Contract SpecificationContract Specification
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Symbol USD/INR
Instrument type FUTCUR
Unit of trading 1 (1 Unit denotes 1000 USD)
Underlying USD
Tick Size Re. 0.0025
Trading hours Monday to Friday(9.00 A.M to 5.00 P.M)
Contract Trading Cycle 12 months
Last Trading day 2 days prior to the last business day of the expiry month at12 noon
Final settlement day Last working day (excl. Saturday)
Base Price Theoretical price on the 1st day of the contract
Price operating range Tenure up to 6 months + 3% of base priceTenure greater than 6 months + 5% of base price
Settlement Daily settlement T+1Final Settlement T+2
Mode of settlement Cash settled in Rupees
Final settlement price RBI Reference Rate
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Profit or loss calculationProfit or loss calculation
Depends on tick size and contract size Ex: purchase price: Rs.42.2500
Price increase by one tick : +0.0025 ReNew Price: Rs.42.2525Value of 1 tick on each contract is
Rs.2.50 (1000*0.0025) So if trader buys 5 contracts and the
price moves by 4 ticks he makesRs.50
Rs.2.50*4*5 = Rs.50
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ExampleExample
On 1st
August 2009, Indian importerenters into a contract to import 2000barrels of oil with payment to bemade in USD on 1st Dec 2009.
Price of each barrel of oil is $80/barrel
Spot price Rs45/$
The importer has the risk that USD
might strengthen over next 4 months
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Date Spot Market Futures market
1st
Aug 2009 Current Cost2000*80*45 = Rs.72,00,000 Dec USD contract is at Rs.45.50. so price percontract is 1000*45.50 = 45,500Contracts required to hedge= (2000*80)/1000 =160. Thus buy 160 contracts for 45,500*160 =Rs.72,80,000
1st Dec 2009 Spot Rate is Rs.47.25. Buy USD1,60,000 to make payment forimport.Cost 1,60,000*47.25 =Rs.75,60,000
Sell 160 contracts at RBI reference rate ofRs.48/$Value of the contract= 160*1000*48 = Rs. 76,80,000
Analysis Importer paid Rs75,60,000 for oil i.eRs.75,60,000-Rs.72,00,000 =Rs.3,60,000 more
Profit on futures contractRs.76,80,000-Rs.72,80,000 = Rs.4,00,000
Payment byimporter on due
date
Rs.75,60,000 Rs.4,00,000(gain) = Rs.71,60,000
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Currency OptionsCurrency Options
Elements of currency options
Strike Price/Exercise Price the price at
which the contract is honored. Spot rate current market price of the
underlying
Expiration Date/maturity date thedate on which the contract expires
Premium price paid to get the right
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Call option and put options American option option that can be
exercised at any time up to the expiration
date Ex: Individual securities options
European option option that can beexercised only on the expiration date.
Ex: Index options Intrinsic value
Time value
On 30th July 2010, SEBI allowed Currency
option trading for USD/INR. Yet to take off inIndia
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Interest Rate Futures (IRF)Interest Rate Futures (IRF)
The underlying for IRF are bonds
Underlying bonds in India is a notional
Government Bond which may notexist in reality
In India RBI and SEBI have defined thecharacteristics
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Contract Specification
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Symbol 10YGS7
Instrument Type FUTIRD
Unit of trading 1 lot 1 lot is equal to notional bonds of FV Rs. 2 Lakhs
Underlying 10 year Notional Coupon bearing Government of India(GOI) Security. (Notional coupon 7% with semiannualCompounding)Tick Size Rs.0.0025 or 0.25 paisa
Trading days Monday to Friday9.00 AM to 5.00 PM
Contract Trading Cycle4 fixed quarterly contracts for entire year, expiring inMarch, June, September and December
Quotation Similar to quoted price of GOI securities up to 4 decimalswith 30/360 day count convention
Last trading day 2 business days proceeding the last business day of thedelivery month
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Conversion FactorConversion Factor
Brings the notional bond on par with thetheoretical bond available for trading
To facilitate delivery it is necessary tomake bonds comparable with eachother and with the notional bond.
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Invoice priceInvoice price
Futures are traded in clean price termsi.e accrued interest is not included inthe traded futures price.
But for the purpose of settlement dirtyprice is taken into account whichincludes accrued interest.
Invoice price = (Futures Settlement price*Conversion
Factor) + accrued Interest
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ExampleExample
For a futures contract on bonds withface value of Rs. 100
Futures settlement price is Rs.90,conversion factor for the bond to bedelivered is 1.3800 and accruedinterest on this bond at the time ofdelivery is Rs.3.
The cash received by the party with theshort position and paid by party withlong position is (1.3800*90) +3 =
Rs.127.20
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Cheapest to deliverCheapest to deliver
The short position holders of IRFs areallowed to decide which bond theywould like to give to the buyers onthe settlement date.
The sellers normally choose that bondfrom the basket which is either
Least expensive IlliquidWhich gives maximum profit or
minimum loss
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