“THE RETAIL INVESTORS IN EXCHANGE TRADED CURRENCY

FUTURES SEGMENT IN INDIA”

FOR NATIONAL STOCK EXCHANGE, CHENNAI

Submitted By

BALAMURUGAN V
(215109068)

Master of Business Administration

DEPARTMENT OF MANAGEMENT STUDIES

NATIONAL INSTITUTE OF TECHNOLOGY
(DEEMED UNIVERSITY)
Tiruchirappalli-620015

SEPTEMBER 2010
 “THE RETAIL INVESTORS IN EXCHANGE TRADED CURRENCY
FUTURES SEGMENT IN INDIA”
FOR NATIONAL STOCK EXCHANGE, CHENNAI

Submitted By
BALAMURUGAN V
(215109068)
Master of Business Administration

A report submitted in partial fulfillment of the requirements of

MBA Program of

DoMS, NIT Tiruchirapalli

Distribution List:

NATIONAL STOCK EXCHANGE OF INDIA LIMITED

[Mumbai and Chennai (RO)]

Dr. PUNNIYAMOORTHY (Head of the Department, DoMS NIT Trichy)

Dr. SENTHIL ARASU (Professor, DoMS NIT Trichy)

SEPTEMBER 2010
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 BONAFIDE CERTIFICATE

This is to certify that the report on project work titled “The Retail Investors in Exchange Traded
Currency Futures Segment in India” for “National Stock Exchange, Chennai” is a bonafide
record of work done by

Mr. BALAMURUGAN V
(215109068)

Studying MBA (Master of Business Administration) in Department of Management Studies,

National Institute of Technology, Tiruchirappalli, during the academic year 2009- 2011

Dr. Senthil Arasu Dr. M. Punniyamoorthy

Internal Guide Head of Department
Department of Management Studies Department of Management Studies
National Institute of Technology, National Institute of Technology,
Tiruchirappalli Tiruchirappalli

Project Viva-voce held on …………………………………………..

Internal Examiner External Examiner

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 ACKNOWLEDGEMENT

I would in the first place like to express my heartfelt gratitude to Ms. Sunitha Anand, Chief

Manager, Southern Regional Office, National Stock Exchange of India Limited, and Prof. Dr.

Punniyamoorthy, Head of the Department, Department of Management Studies-NIT

Tiruchirappalli, for giving me an opportunity to do this project.

I express my sincere gratitude to thank Mr. Anish Kumar, Assistant Manager, National Stock

Exchange of India Limited, Chennai for supporting and assisting me throughout the project.

I would also like to express my deep gratitude to Dr. Senthil Arasu, Professor, Department of

Management Studies-NIT Tiruchirappalli, for providing constructive feedback and approval

for this project.

I thank all the employees of National Stock Exchange of India Limited both in Chennai and

Mumbai for their continuing support and for providing me information whenever needed during

the course of the project.

Finally I thank all the Clients who took their precious time to respond to my Questionnaire

Balamurugan V

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Table of Contents

ABSTRACT....................................................................................................................................7
1. NATIONAL STOCK EXCHANGE OF INDIA LIMITED.......................................................8
1.1 About the Company:..............................................................................................................8
1.2 Promoters.............................................................................................................................10
1.3 Corporate Structure..............................................................................................................10
1.4 NSE Group...........................................................................................................................12
2. PROJECT OBJECTIVES AND METHODOLOGY...............................................................13
2.1 Introduction:........................................................................................................................13
2.2 Need for the Study:..............................................................................................................14
2.3 Literature Review:...............................................................................................................14
2.4 Objective of the Project:......................................................................................................15
2.5 Research Methodology........................................................................................................15
2.6 Limitations of the Study:.....................................................................................................16
3. INTRODUCTION TO CURRENCY MARKETS....................................................................17
3.1 Basic Foreign Exchange Definitions...................................................................................17
3.2 Exchange Rate Mechanism..................................................................................................17
3.3 Major Currencies of the World............................................................................................18
3.4 Overview of International Currency Markets......................................................................19
3.5 Factors Affecting Exchange Rates.......................................................................................20
4. EXCHANGE TRADED CURRENCY FUTURES...................................................................22
4.1 Currency Futures.................................................................................................................22
4.2 Futures Terminology...........................................................................................................22
4.3 Pricing of Currency Futures.................................................................................................23
4.4 Currency Futures versus Forward Contracts.......................................................................24
4.5 Market Players.....................................................................................................................24
5 – TRADING IN CURRENCY FUTURES.................................................................................25
5.1 Exchanges in India for trading Currency Futures................................................................25
5.2 Contracts Specifications......................................................................................................25
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 5.3 Types of Orders...................................................................................................................27
5.4 Trading System....................................................................................................................28
5.5 Client - Broker Relationship................................................................................................29
6 – CLEARING AND SETTLEMENT MECHANISM...............................................................30
6.1 Clearing Entities..................................................................................................................30
6.2 Clearing Mechanism............................................................................................................30
6.3 Settlement Mechanism.........................................................................................................31
7 – RETAIL INVESTORS STRATEGIES USING CURRENCY FUTURES............................32
7.1 Speculative Retail Investors................................................................................................32
7.1.1 Long Position in Futures...............................................................................................32
7.1.2 Short Position in Futures..............................................................................................33
7.2 Retail Hedging.....................................................................................................................33
7.2.1 Retail Hedging – Remove Forex risk while trading in Commodity Market................33
7.2.2 Retail Hedging – Remove Forex Risk while Investing Abroad...................................34
7.2.3 Retail Hedging – Long Futures Hedge Exposed to the Risk of a stronger USD..........35
7.3 ARBITRAGE:.....................................................................................................................35
7.4 TRADING SPREADS USING CURRENCY FUTURES:.................................................36
8. ANALYSIS AND INTERPRETATION...................................................................................37
8.1Primary Data – Analysis:......................................................................................................37
8.1.1 Survey Findings:...........................................................................................................54
8.2 Secondary Data - Analysis:.................................................................................................56
8.2.1 Volume in Currency Futures & Forward OTC Market................................................56
8.2.2 Participation pattern in the two markets.......................................................................58
8.2.3 Volume of new currency pairs......................................................................................60
9. CONCLUSIONS AND SUGGESTIONS:................................................................................61
10. REFERENCES:.......................................................................................................................63
11. ANNEXURES:........................................................................................................................64
11. ANNEXURES:

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 ABSTRACT

This study on currency futures for National Stock Exchange of India Limited has been
undertaken primarily to identify the expectation of retail investors towards currency futures
market, to identify the profile of retail investors in currency futures, and to create awareness
among the investors about the usage and benefits of this hedging instrument.

The research was conducted among different segments of the investors. They are

1) Male & Female investors

2) Finance & Non-finance professionals
3) Different Age groups

Each of the class had their opinion on the usage and benefits of currency futures market. The
market research covered major parts of Chennai and few investors from Mumbai, Cochin,
Coimbatore and Hyderabad. Clients were reached through trading members. Likert scale has
been used to carry out the survey research.

Methodology
In this research study stratified random sampling was used in a way that the samples were
divided into three strata and in each stratum simple random sampling was followed. The data
was collected by the way of a questionnaire. A total number of 50 respondents were approached
for the study.

Faculty Guide: Prof. Senthil Arasu Company Guide: Mr. Anish Kumar

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 1. NATIONAL STOCK EXCHANGE OF INDIA LIMITED
1.1 About the Company:

NATIONAL STOCK EXCHANGE OF INDIA LIMITED (NSE)

The National Stock Exchange of India Limited has genesis in the report of the High Powered
Study Group on Establishment of New Stock Exchanges, which recommended promotion of a
National Stock Exchange by financial institutions (FIs) to provide access to investors from all
across the country on an equal footing.

Based on the recommendations, NSE was promoted by leading Financial Institutions at

the behest of the Government of India and was incorporated in November 1992 as a tax-paying
company unlike other stock exchanges in the country.

On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in
April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June
1994.

The Capital Market (Equities) segment commenced operations in November 1994 and operations
in Derivatives segment commenced in June 2000.

Mission

NSE's mission is setting the agenda for change in the securities markets in India. The NSE was
set-up with the main objectives of:

• Establishing a nation-wide trading facility for equities, debt instruments and hybrids,

• Ensuring equal access to investors all over the country through an appropriate
communication network,

• Providing a fair, efficient and transparent securities market to investors using electronic
trading systems,

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 • Enabling shorter settlement cycles and book entry settlements systems, and

• Meeting the current international standards of securities markets.

The standards set by NSE in terms of market practices and technology has become industry
benchmarks and is being emulated by other market participants.

NSE is more than a mere market facilitator. It's that force which is guiding the industry towards
new horizons and greater opportunities.

NSE Logo

The logo of the NSE symbolizes a single nationwide securities trading facility ensuring equal
and fair access to investors, trading members and issuers all over the country. The initials of the
Exchange viz., N, S and E have been etched on the logo and are distinctly visible.

The logo symbolizes use of state of the art information technology and satellite connectivity to
bring about the change within the securities industry. The logo symbolizes vibrancy and
unleashing of creative energy to constantly bring about change through innovation.

1.2 Promoters
NSE has been promoted by leading financial institutions, banks, insurance companies and other
financial intermediaries:

• Industrial Development Bank of India Limited

• Industrial Finance Corporation of India Limited

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 • Life Insurance Corporation of India

• State Bank of India

• ICICI Bank Limited

• IL & FS Trust Company Limited

• Stock Holding Corporation of India Limited

• SBI Capital Markets Limited

• Bank of Baroda

• Canara Bank

• General Insurance Corporation of India

• National Insurance Company Limited

• The New India Assurance Company Limited

• The Oriental Insurance Company Limited

• United India Insurance Company Limited

• Punjab National Bank

• Oriental Bank of Commerce

• Indian Bank

• Union Bank of India

• Infrastructure Development Finance Company Ltd.

1.3 Corporate Structure

NSE is one of the first demutualised stock exchanges in the country, where the ownership and
management of the Exchange is completely divorced from the right to trade on it.

Though the impetus for its establishment came from policy makers in the country, it has been set
up as a public limited company, owned by the leading institutional investors in the country.

From day one, NSE has adopted the form of a demutualised exchange - the ownership,
management and trading is in the hands of three different sets of people.

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NSE is owned by a set of leading financial institutions, banks, insurance companies and other
financial intermediaries and is managed by professionals, who do not directly or indirectly trade
on the Exchange. This has completely eliminated any conflict of interest and helped NSE in
aggressively pursuing policies and practices within a public interest framework.

The NSE model however, does not preclude, but in fact accommodates involvement, support and
contribution of trading members in a variety of ways.

Its Board comprises of senior executives from promoter institutions, eminent professionals in the
fields of law, economics, accountancy, finance, taxation, etc, public representatives, nominees of
SEBI and one full time executive of the Exchange.

While the Board deals with broad policy issues, decisions relating to market operations are
delegated by the Board to various committees constituted by it. Such committees include
representatives from trading members, professionals, the public and the management.

The day-to-day management of the Exchange is delegated to the Managing Director who is
supported by a team of professional staff.

1.4 NSE Group

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 NSCCL NCCL NSETECH

DotEx Intl. Ltd.

IISL

S.NO SYMBOL ABBREVATION

1 NSCCL NATIONAL SECURITIES CLEARING CORP. LIMITED
2 NCCL NATIONAL COMMODITY CLEARING LIMITED
3 NSE TECH NATIONAL STOCK EXCHANGE INFOTECH SERVICES
LIMITED
4 IISL INDIA INDEX SERVICES AND PRODUCTS LIMITED
5 NSE IT NATIONAL STOCK EXCHANGE IT
6 DotEx DOTEX INTERNATIONAL LIMITED

2. PROJECT OBJECTIVES AND METHODOLOGY

2.1 Introduction:
Structural reforms in the India foreign exchange market started from the early 90’s. Exchange
rate regime came to an end by March 1993 when it was fully floated. India took a revolutionary
step in the direction of current account convertibility by permitting market-determined exchange
rate of Rupee. Over the past few years, India has initiated some excellent measures in a phased
wise manner to speed up the liberalization process.

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In order to facilitate the market participants in managing the exchange rate volatility, RBI
(Reserve Bank of India) set up a joint working committee to explore the feasibilities of
introducing currency futures. Joint working committee of RBI and SEBI (Securities and
Exchange Board of India) finalized the guidelines for exchange-traded currency futures in April
2008. Based on the guidelines, RBI framed the directives on currency futures trading on
recognized stock exchanges and new exchanges and published it through a circular RBI/2008-
2009/122 dated 6th August 2008.

In India, until recently, the Forex Trading or Trading in Foreign Exchange was restricted to very
large players such as Banks, Financial Institutions, Foreign Institutional Investors, Multi
National Corporations and Export Houses. After the introduction of Exchange Traded Currency
Futures in August 2008, lots of retail investors and traders have taken a fancy to Forex Trading
especially with the easy accessibility of online currency futures trading. Exchange Traded
Currency Futures was first introduced in India by NSE, followed by MCX-SX and BSE.

With the increase in the popularity of Currency Futures Trading, many retail investors and
traders are eager to try their hands at Forex Trading. However, trading in foreign exchange, be it
through forex markets or through currency futures involves risk of loss of capital and therefore it
makes sense for the retail investors to do their homework properly before they decide to indulge
in Currency Trading.

2.2 Need for the Study:

➢ Retail Investors should understand the usage and benefits of this hedging instrument to
reduce their foreign exchange exposure risk
➢ As many investors have started thinking to diversify their investment options, it is time
for them to look at investing in exchange traded currency futures
➢ Identifying the expectation of retail investors towards currency market will help the
regulators of the currency market to take some necessary measures which will influence
their active participation
➢ Identifying the profile of the retail investors and their sources of information for
investment in currency futures will help the Trading members to attract new clients

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 ➢ As the volume of Currency futures has grown significantly, it is time now to identify the
interest level of investors towards trading Currency options, if it is introduced.

2.3 Literature Review:

Literature suggests that major research is conducted in the area of analyzing the individual
investor’s behavior as a whole to find out their investment portfolio. Several studies done by
academicians in India have brought out the relationship between the demographics such as
Gender, Age and risk tolerance level of individuals. Majority of the research concluded saying
that Indian investors are low risk tolerant. Even there are few studies done by academicians to
analyze the investors perception towards Mutual fund, Commodity trading. Nilanjan Ghosh,
Madhoo Pavaskar, Hashim D tried to explain the Currency futures with respective to corporate,
Banks, and Export houses. But, so far there is hardly any major research conducted on analyzing
the retail investor’s behavior towards currency market in India.

Previous researches have brought the investor’s characteristics based on their investment size.
Few researches have concluded saying that investors started looking for multiple investment
options as the average income of an Indian is continuously improving. This present study makes
an attempt to understand the expectation of retail investors towards the hedging instrument,
Currency Futures and also to identify the profile of the retail investors who are investing in
exchange traded currency futures.

2.4 Objective of the Project:

Primary Objectives

➢ To identify the expectations of retail investors towards Exchange traded currency futures
➢ To identify the profile of the retail investors investing in currency futures
➢ To find their preferred sources of information for investment in currency futures
➢ To analyze the participation pattern of investors in Futures and Forward market

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 Secondary Objectives

➢ To create awareness about the usage and benefits of currency futures as a hedging
instrument among other investors
➢ To find out whether investors are interested in trading Currency options, if it is
introduced in Exchanges

2.5 Research Methodology

In this research study stratified random sampling was used in a way that the samples have been
divided into three strata and in each stratum simple random sampling was followed. The data
would be collected by way of a questionnaire. A total number of 50 respondents were
approached for the study. The research was conducted among different segments of the
investors. They are

1) Male & Female investors

2) Finance & Non-finance professionals
3) Different Age groups

Likert scale has been used to carry out the survey research. A questionnaire containing a cover
page and 15 questions was prepared and were given to 50 respondents. The Cover page includes
the demographic details of the Investors. Questionnaire is attached as an Annexure.

The market research covered major parts of Chennai and few investors from Mumbai, Cochin,
Coimbatore and Hyderabad. Mostly clients were reached through the following trading
members.
i) Saravana Stocks Broking Pvt. Ltd
ii) Sugal & Damani Stock Broking Pvt. Ltd
iii) Chona Stock Brokers Pvt. Ltd

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 iv) Navia Markets Pvt. Ltd
v) Mahalakshmi Shares Pvt. Ltd
vi) Karvy Stock Broking Pvt. Ltd

Secondary data were collected from SEBI, RBI, NSE, MCX, BSE websites. It is also collected
from various journals and magazines.

2.6 Limitations of the Study:

➢ Time constraint will be one of the limitations of the study

➢ Data regarding Participant Share of investors in Futures market and Forward Market
is not available after Aug 09.
➢ The sample size taken is small and may not be sufficient to predict the result with
100% accuracy
➢ This study is based on the assumption that perceptions are true and factual although at
times that may not be the case.

3. INTRODUCTION TO CURRENCY MARKETS

3.1 Basic Foreign Exchange Definitions

Base Currency / Terms Currency: In foreign exchange markets, the base currency is the first
currency in a currency pair. The second currency is called as the terms currency. Exchange rates
are quoted in per unit of the base currency.
Example: The expression US Dollar–Rupee, tells you that the US Dollar is being quoted in terms
of the Rupee. The US Dollar is the base currency and the Rupee is the terms currency.

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Spot: Foreign exchange spot trading is buying one currency with a different currency for
immediate delivery. The standard settlement convention for Foreign Exchange Spot trades is
T+2 days, i.e., two business day from the date of trade. An exception is the USD/CAD (USD–
Canadian Dollars) currency pair which settles T+1. Rates for days other than spot are always
calculated with reference to spot rate.

Forward Outright: A foreign exchange forward is a contract between two counterparties to

exchange one currency for another on any day after spot. In this transaction, money does not
actually change hands until some agreed upon future date. The duration of the trade can be a few
days, months or years.

Swaps: A foreign exchange swap is a simultaneous purchase and sale, or sale and purchase, of
identical amounts of one currency for another with two different value dates.

3.2 Exchange Rate Mechanism

“Foreign Exchange” refers to money denominated in the currency of another nation or a group of
nations. Any person who exchanges money denominated in his own nation’s currency for money
denominated in another nation’s currency acquires foreign exchange. A foreign exchange
transaction is a shift of funds or short-term financial claims from one country and currency to
another. Thus, within India, any money denominated in any currency other than the Indian
Rupees (INR) is, broadly speaking, “foreign exchange.” Foreign Exchange can be cash, funds
available on credit cards and debit cards, traveler’s cheques, bank deposits, or other short-term
claims.

The exchange rate is a price - the number of units of one nation’s currency that must be
surrendered in order to acquire one unit of another nation’s currency. In the spot market, there is
an exchange rate for every other national currency traded in that market, as well as for various
composite currencies or constructed monetary units such as the Euro or the International

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Monetary Fund’s “SDR”. Apart from the spot rates, there are additional exchange rates for other
delivery dates in the forward markets.

The market price is determined by the interaction of buyers and sellers in that market, and a
market exchange rate between two currencies is determined by the interaction of the official and
private participants in the foreign exchange rate market. For a currency with an exchange rate
that is fixed, or set by the monetary authorities, the central bank or another official body is a
participant in the market, standing ready to buy or sell the currency as necessary to maintain the
authorized pegged rate or range. But in countries like the United States, which follows a
complete free floating regime, the authorities are not known to intervene in the foreign exchange
market on a continuous basis to influence the exchange rate. The market participation is made up
of individuals, non-financial firms, banks, official bodies, and other private institutions from all
over the world that are buying and selling US Dollars at that particular time.

3.3 Major Currencies of the World

US Dollar: The US Dollar is by far the most widely traded currency. In part, the widespread use
of the US Dollar reflects its substantial international role as “investment” currency in many
capital markets, “reserve” currency held by many central banks, “transaction” currency in many
international commodity markets, “invoice” currency in many contracts, and “intervention”
currency employed by monetary authorities in market operations to influence their own exchange
rates. In addition, the widespread trading of the US Dollar reflects its use as a “vehicle” currency
in foreign exchange transactions, a use that reinforces its international role in trade and finance.

The Euro: Like the US Dollar, the Euro has a strong international presence and over the years
has emerged as a premier currency, second only to the US Dollar.

The Japanese Yen: The Japanese Yen is the third most traded currency in the world. It has a
much smaller international presence than the US Dollar or the Euro. The Yen is very liquid
around the world, practically around the clock.

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The British Pound: Until the end of World War II, the Pound was the currency of reference.
The nickname Cable is derived from the telegrams used to update the GBP/USD rates across the
Atlantic. The currency is heavily traded against the Euro and the US Dollar, but it has a spotty
presence against other currencies.

The Swiss Franc: The Swiss Franc is the only currency of a major European country that
belongs neither to the European Monetary Union nor to the G-7 countries. Although the Swiss
economy is relatively small, the Swiss Franc is one of the major currencies, closely resembling
the strength and quality of the Swiss economy and finance. Switzerland has a very close
economic relationship with Germany, and thus to the Euro zone.

3.4 Overview of International Currency Markets

During the past quarter century, the concept of a 24-hour market has become a reality.
Somewhere on the planet, financial centers are open for business; banks and other institutions are
trading the US Dollar and other currencies every hour of the day and night, except on weekends.
In financial centers around the world, business hours overlap; as some centers close, others open
and begin to trade. The foreign exchange market follows the sun around the earth. Business is
heavy when both the US markets and the major European markets are open -that is, when it is
morning in New York and afternoon in London. In the New York market, nearly two-thirds of
the day’s activity typically takes place in the morning hours. Activity normally becomes very
slow in New York in the mid-to late afternoon, after European markets have closed and before
the Tokyo, Hong Kong, and Singapore markets have opened.

Given this uneven flow of business around the clock, market participants often will respond less
aggressively to an exchange rate development that occurs at a relatively inactive time of day, and
will wait to see whether the development is confirmed when the major markets open. Some
institutions pay little attention to developments in less active markets. Nonetheless, the 24-hour
market does provide a continuous “real-time” market assessment of the ebb and flow of
influences and attitudes with respect to the traded currencies, and an opportunity for a quick

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judgment of unexpected events. With many traders carrying pocket monitors, it has become
relatively easy to stay in touch with market developments at all times.

3.5 Factors Affecting Exchange Rates

Fundamental factors: The fundamental factors are basic economic policies followed by the
government in relation to inflation, balance of payment position, unemployment, capacity
utilization, trends in import and export, etc. Normally, other things remaining constant the
currencies of the countries that follow sound economic policies will always be stronger.
Similarly, countries having balance of payment surplus will enjoy a favorable exchange rate.
Conversely, for countries facing balance of payment deficit, the exchange rate will be adverse.

Technical factors:
Interest rates: Rising interest rates in a country may lead to inflow of hot money in the country,
thereby raising demand for the domestic currency. This in turn causes appreciation in the value
of the domestic currency.
Inflation rate: High inflation rate in a country reduces the relative competitiveness of the export
sector of that country. Lower exports result in a reduction in demand of the domestic currency
and therefore the currency depreciates.
Exchange rate policy and Central Bank interventions: Exchange rate policy of the country is the
most important factor influencing determination of exchange rates. For example, a country may
decide to follow a fixed or flexible exchange rate regime, and based on this, exchange rate
movements may be less/more frequent. Further, governments sometimes participate in foreign
exchange market through its Central bank in order to control the demand or supply of domestic
currency.

Political factors:
Political stability also influences the exchange rates. Exchange rates are susceptible to political
instability and can be very volatile during times of political crises.

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 4. EXCHANGE TRADED CURRENCY FUTURES

4.1 Currency Futures

A futures contract is a standardized contract, traded on an exchange, to buy or sell a certain
underlying asset or an instrument at a certain date in the future, at a specified price. When the
underlying asset is a commodity, e.g. Oil or Wheat, the contract is termed a “commodity futures
contract”. When the underlying is an exchange rate, the contract is termed a “currency futures
contract”.

Internationally, currency futures can be cash settled or settled by delivering the respective
obligation of the seller and buyer. All settlements, however, unlike in the case of OTC markets,

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go through the exchange. Currency futures are a linear product, and calculating profits or losses
on Currency Futures will be similar to calculating profits or losses on Index futures.

4.2 Futures Terminology

Spot Price: The price at which an asset trades in the spot market. In the case of USD/INR, spot
value is T + 2.
Futures price: The price at which the futures contract trades in the futures market.
Contract cycle: The period over which a contract trades. The currency futures contracts on the
SEBI recognized exchanges have one-month, two-month, and three-month up to twelve-month
expiry cycles. Hence, these exchanges will have 12 contracts outstanding at any given point in
time.
Value Date/Final Settlement Date: The last business day of the month will be termed the Value
date / Final Settlement date of each contract.
Expiry date: It is the date specified in the futures contract. All contracts expire on the last
working day (excluding Saturdays) of the contract months. The last day for the trading of the
contract shall be two working days prior to the final settlement date or value date.
Contract size: The amount of asset that has to be delivered in one contract. It is also called as lot
size. In the case of USD/INR it is USD 1000.

Cost of carry: The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry. This measures (in commodity markets) the storage
cost plus the interest that is paid to finance or ‘carry’ the asset till delivery less the income earned
on the asset. For equity derivatives carry cost is the rate of interest.
Initial margin: The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin.
Marking-to-market: In the futures market, at the end of each trading day, the margin account is
adjusted to reflect the investor's gain or loss depending upon the futures closing price. This is
called marking-to-market.

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4.3 Pricing of Currency Futures

According to the interest rate parity theory, the currency margin is dependent mainly on the
prevailing interest rate (for investment for the given time period) in the two currencies. The
forward rate can be calculated by the following formula:

Where, F and S are future and spot currency rate. Rh and Rf are simple interest rate in the home
and foreign currency respectively. Alternatively, if we consider continuously compounded
interest rate then forward rate can be calculated by using the following formula:

Where rh and rf are the continuously compounded interest rate for the home currency and
foreign currency respectively, T is the time to maturity and e = 2.71828 (exponential). If the
following relationship between the futures rate and the spot rate does not hold, then there will be
an arbitrage opportunity in the market. This will force the futures rate to change so that the
relationship holds true.
4.4 Currency Futures versus Forward Contracts

Basis Forward OTC Market Exchange Traded Futures

Accessibility Credit Dependent High
Price Transparency Low High
Liquidity Subject to credit limits High
Agreements Customized Standard
Exposure to your Clearing Corporation
Credit Exposure
counterparty (bank) guarantees all trades
Margins (Collateral) Usually not required Required
Daily MTM No Yes
Execution Bank Trading Member / Bank
Underlying Exposure Required Not required

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4.5 Market Players

Hedgers: They trade with an objective to minimize the risk of their underlying exposure in Cash
Market. They willingly bear some costs in order to achieve protection against unfavorable price
changes.
Speculators: They use currency futures to bet on the future direction of the markets. They take
calculated risks but the objective is to gain when the prices move as per their expectation. Based
on the duration for which speculators hold a position they are further be classified as scalpers
(very short time, may be defined in minutes), day traders (one trading day) and position traders
(for a long period may be a week, a month or a year).
Arbitrageurs: They try to make risk-less profit by simultaneously entering into transactions in
two or more markets or two or more contracts. They profit from market inefficiencies by making
simultaneous trades that offset each other thereby making their positions risk-free. For example,
they try to benefit from difference in currency rates in two different markets. They also try to
profit from taking a position in the cash market and the futures market.

5 – TRADING IN CURRENCY FUTURES

5.1 Exchanges in India for trading Currency Futures

NSE: On 29th August 2008, Mr. P. Chidambaram, Honorable Union Finance Minister set off a
new chapter in the history of Indian Financial Markets when he inaugurated exchange traded
currency futures on NSE exactly at 9.00 am. NSE was the first exchange to introduce Currency
Futures in India.

BSE: CDX (Currency Derivative Exchange), currency derivative segment of BSE (Bombay
Stock Exchange), launched currency futures trading from 1st October. Mr. C. B. Bhave,
Chairman of SEBI (Securities Exchange Board of India) inaugurated currency futures trading on
BSE CDX.

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MCX – SX: It is a venture of FTIL. MCX SX is the second exchange in India after NSE that has
been permitted to launch exchange-traded currency futures in India.

5.2 Contracts Specifications

Symbol USDINR EURINR GBPINR JPYINR

Instrument Type FUTCUR FUTCUR FUTCUR FUTCUR
1 - 1 unit
1 - 1 unit 1 - 1 unit 1 - 1 unit denotes
denotes 100000
Unit of trading denotes 1000 denotes 1000 1000 POUND
JAPANESE
USD. EURO. STERLING.
YEN.
The exchange The exchange The exchange The exchange
Underlying / Order rate in Indian rate in Indian rate in Indian rate in Indian
Quotation Rupees for Rupees for Rupees for Rupees for 100
US Dollars Euro. Pound Sterling. Japanese Yen.
Tick size Rs.0.25 paisa or INR 0.0025
Monday to Friday
Trading hours
9:00 a.m. to 5:00 p.m.
Contract trading cycle 12 month trading cycle.
Two working days prior to the last business day of the expiry
Last trading day
month at 12 noon.
Last working day (excluding Saturdays) of the expiry month.
Final settlement day The last working day will be the same as that for Interbank
Settlements in Mumbai.
Quantity Freeze 10,001 or greater
Theoretical Theoretical
Theoretical price Theoretical price
price on the price on the
on the 1st day of on the 1st day of
1st day of the 1st day of the
the contract. the contract.
Base price contract. contract.
On all other On all other
On all other On all other
days, DSP of the days, DSP of the
days, DSP of days, DSP of
contract. contract.
the contract. the contract.
Price Tenure up to
+/-3 % of base price.
operating 6 months
range
Tenure +/- 5% of base price.
greater than 6

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 months
higher of 6% higher of 6%
higher of 6% of higher of 6% of
of total open of total open
total open total open
Clients interest or interest or
interest or GBP 5 interest or JPY
USD 10 EURO 5
million 200 million
million million
higher of higher of
15% of the 15% of the higher of 15% of higher of 15% of
Trading total open total open the total open the total open
Position
Members interest or interest or interest or GBP interest or JPY
limits
USD 50 EURO 25 25 million 1000 million
million million
higher of higher of
15% of the 15% of the higher of 15% of higher of 15% of
total open total open the total open the total open
Banks
interest or interest or interest or GBP interest or JPY
USD 100 EURO 50 50 million 2000 million
million million
Initial margin SPAN Based Margin
0.3% of
1% of MTM 0.5% of MTM 0.7% of MTM
MTM value
Extreme loss margin value of gross value of gross value of gross
of gross open
open position open position open position
position
Rs.400 for
spread of 1
Rs.700 for Rs.600 for
month Rs.1500 for
spread of 1 spread of 1
Rs.500 for spread of 1
month month
spread of 2 month
Rs.1000 for Rs.1000 for
months Rs.1800 for
spread of 2 spread of 2
Calendar spreads Rs.800 for spread of 2
months months
spread of 3 months
Rs.1500 for Rs.1500 for
months Rs.2000 for
spread of 3 spread of 3
Rs.1000 for spread of 3
months and months and
spread of 4 months and more
more more
months and
more
Daily settlement : T + 1
Settlement
Final settlement : T + 2
Mode of settlement Cash settled in Indian Rupees
Daily settlement price Calculated on the basis of the last half an hour weighted average

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(DSP) price.
Exchange rate Exchange rate
published by RBI published by
in its Press RBI in its Press
Final settlement price RBI reference RBI reference Release Release
(FSP) rate rate captioned RBI captioned RBI
reference Rate reference Rate
for US$ and for US$ and
Euro Euro

5.3 Types of Orders

The system allows the trading members to enter orders with various conditions attached to them
as per their requirements. These conditions are broadly divided into the following categories:
• Time conditions
• Price conditions
Several combinations of the above are allowed thereby providing enormous flexibility to the
users. The order types and conditions are summarized below.

• Time conditions
Day order: A day order, as the name suggests is an order which is valid for the day on which it is
entered. If the order is not executed during the day, the system cancels the order automatically at
the end of the day.

Immediate or Cancel (IOC): An IOC order allows the user to buy or sell a contract as soon as
the order is released into the system, failing which the order is cancelled from the system. Partial
match is possible for the order, and the unmatched portion of the order is cancelled immediately.

• Price conditions
Market price: Market orders are orders for which no price is specified at the time the order is
entered (i.e. price is market price). For such orders, the trading system determines the price.

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Limit price: An order to a broker to buy a specified quantity of a security at or below a specified
price or to sell it at or above a specified price (called the limit price). This ensures that a person
will never pay more for the futures contract than whatever price is set as his/her limit. It is also
the price of orders after triggering from stop-loss book.

Stop-loss: This facility allows the user to release an order into the system, after the market price
of the security reaches or crosses a threshold price e.g. if for stop-loss buy order, the trigger is
Rs. 42.0025, the limit price is Rs. 42.2575 , then this order is released into the system once the
market price reaches or exceeds Rs. 42.0025. This order is added to the regular lot book with
time of triggering as the time stamp, as a limit order of Rs. 42.2575.
Thus, for the stop loss buy order, the trigger price has to be less than the limit price and for the
stop- loss sell order; the trigger price has to be greater than the limit price.

5.4 Trading System

The trading system at NSE is called as NEAT -CDS (National Exchange for Automated Trading
- Currency Derivatives Segment) which supports an order driven market and provides complete
transparency of trading operations.
The NEAT-CDS system supports an order driven market, wherein orders match automatically.
Order matching is essentially on the basis of security, its price and time. All quantity fields are in
contracts and price in Indian rupees. The exchange notifies the contract size and tick size for
each of the contracts traded on this segment from time to time. When any order enters the trading
system, it is an active order. It tries to find a match on the opposite side of the book. If it finds a
match, a trade is generated. If it does not find a match, the order becomes passive and sits in the
respective outstanding order book in the system.

5.5 Client - Broker Relationship

A client of a trading member is required to enter into an agreement with the trading member
before commencing trading. A client is eligible to get all the details of his or her orders and
trades from the trading member. A trading member must ensure compliance particularly with
relation to the following while dealing with clients:

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· Filling of 'Know Your Client' form
· Execution of Client Broker agreement
· Bring risk factors to the knowledge of client by getting acknowledgement of client on RDD
· Timely execution of orders as per the instruction of clients in respective client codes.
· Collection of adequate margins from the client
· Maintaining separate client bank account for the segregation of client money.
· Timely issue of contract notes as per the prescribed format to the client
· Ensuring timely pay-in and pay-out of funds to and from the clients
· Resolving complaint of clients if any at the earliest
· Sending the periodical statement of accounts to clients
· Not charging excess brokerage
· Maintaining unique client code as per the regulations.

6 – CLEARING AND SETTLEMENT MECHANISM

6.1 Clearing Entities

Clearing and settlement activities in the Currency Derivatives segment are undertaken by a
Clearing Corporation with the help of the following entities:

Clearing members: In the Currency Derivatives segment trading-cum-clearing member, clear

and settle their own trades as well as trades of other trading members (TMs). Besides, there is a
special category of members, called professional clearing members (PCM) who clear and settle
trades executed by TMs. The members clearing their own trades and trades of others, and the
PCMs are required to bring in additional security deposits in respect of every TM whose trades
they undertake to clear and settle.

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Clearing banks: Funds settlement takes place through clearing banks. For the purpose of
Settlement all clearing members are required to open a separate bank account with the Clearing
Corporation designated clearing bank for Currency Derivatives segment.

6.2 Clearing Mechanism

The clearing mechanism essentially involves working out open positions and obligations of
clearing (trading cum- clearing/professional clearing) members. This position is considered for
exposure and daily margin purposes. The open positions of Clearing Members (CMs) are arrived
at by aggregating the open positions of all the TMs and all custodial participants clearing through
him, in contracts in which they have traded. A TM's open position is arrived at as the summation
of his proprietary open position and clients' open positions, in the contracts in which he has
traded. While entering orders on the trading system TMs are required to identify the orders,
whether proprietary (if they are their own trades) or client (if entered on behalf of clients)
through 'Pro/Cli' indicator provided in the order entry screen. Proprietary positions are calculated
on net basis (buy - sell) for each contract. Clients Positions are arrived at by summing together
net (buy - sell) positions of each individual client. A TM's open position is the sum of proprietary
open position, client open long position and client open short position.
6.3 Settlement Mechanism

Mark-to-Market settlement (MTM Settlement):

All futures contracts for each member are marked to market to the daily settlement price of the
relevant futures contract at the end of each day. The profits/losses are computed as the difference
between:
1. The trade price and the day's settlement price for contracts executed during the day but not
squared up.
2. The previous day's settlement price and the current day's settlement price for brought forward
contracts.
3. The buy price and the sell price for contracts executed during the day and squared up.

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The CMs who have a loss are required to pay the mark-to-market (MTM) loss amount in cash
which in turn is passed on to the CMs who have made a MTM profit. This is known as daily
mark-to-market settlement. CMs are responsible to collect and settle the daily MTM
profits/losses incurred by the TMs and their clients clearing and settling through them. Similarly,
TMs are responsible to collect/pay losses/profits from/to their clients by the next day. The pay-in
and pay-out of the mark-to-market settlement are affected on the day following the trade day. In
case a futures contract is not traded on a day, or not traded during the last half hour, a 'theoretical
settlement price' is computed.
After completion of daily settlement computation, all the open positions are reset to the daily
settlement price. Such positions become the open positions for the next day.

Final settlement for futures

On the last trading day of the futures contracts, after the close of trading hours, the Clearing
Corporation marks all positions of a CM to the final settlement price and the resulting profit/loss
is settled in cash. Final settlement loss/profit amount is debited/ credited to the relevant CM's
clearing bank account on T+2 working day following last trading day of the contract (Contract
expiry Day).

7 – RETAIL INVESTORS STRATEGIES USING CURRENCY

FUTURES

7.1 Speculative Retail Investors

Speculators play a vital role in the futures markets. Futures are designed primarily to assist
hedgers in managing their exposure to price risk; however, this would not be possible without the
participation of speculators. Speculators, or traders, assume the price risk that hedgers attempt to
lay off in the markets. In other words, hedgers often depend on speculators to take the other side
of their trades (i.e. act as counter party) and to add depth and liquidity to the markets that are
vital for the functioning of a futures market. The speculators therefore have a big hand in making
the market.

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7.1.1 Long Position in Futures
Long position in a currency futures contract without any exposure in the cash market is called a
speculative position. A Retail Investor will hold a Long position in futures for speculative
purpose by buying futures contract in anticipation of strengthening of the exchange rate (which
actually means buy the base currency (USD) and sell the terms currency (INR) and he want the
base currency to rise in value so that would sell it back at a higher price). If the exchange rate
strengthens before the expiry of the contract then the trader makes a profit on squaring off the
position, and if the exchange rate weakens then the trader makes a loss.

7.1.2 Short Position in Futures

Short position in a currency futures contract without any exposure in the cash market is called a
speculative transaction. A Retail Investor can hold a Short position in futures for speculative
purposes means selling a futures contract in anticipation of decline in the exchange rate (which
actually means sell the base currency (USD) and buy the terms currency (INR) and he want the
base currency to fall in value so that he would buy it back at a lower price). If the exchange rate
weakens before the expiry of the contract, then the trader makes a profit on squaring off the
position, and if the exchange rate strengthens then the trader makes loss.

7.2 Retail Hedging

A hedger has an Overall Portfolio (OP) composed of (at least) 2 positions:
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 i. Underlying position
ii. Hedging position with negative correlation with underlying position

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

7.2.1 Retail Hedging – Remove Forex risk while trading in Commodity Market
Example: Let’s say with gold trading on COMEX at USD 900/Troy Ounce (Oz) with USD/INR
at 40.00, an active commodity investor, realizing the underlying fundamentals, decides that it’s a
good time to sell gold futures. On the basis of this perspective, he decides to sell 1 Indian Gold
Future contract @ Rs. 11,580/10 gm.

Let’s say after 20 days, as per his expectation, gold prices did decline drastically on COMEX
platform and gold was now trading at USD 800/oz, a fall of 11.11%. However, in India gold
future was trading @ Rs. 11,317/10 gm, which is a profit of 2.27%. This is because during the
same period the INR has depreciated against the USD by 10% and the prevalent exchange rate
was 44.00.

Had the USD/INR exchange rate remained constant at 40.00, the price after 20 days on the
Indian exchange platform would have been Rs. 10,290 and thus profit realization would have
been the same 11%.

Let’s presume the same Indian investor pre-empted that there is good probability that the INR
will weaken given the then market fundamentals and has decided to hedge his exposure on an
exchange platform using currency futures. Since he was concerned that the value of USD will

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rise, he decides go long on currency futures, it means he buys a USD/INR futures contract. This
protects the investor because strengthening of USD would lead to profit in the long futures
position, which would effectively ensure that his loss in the commodity trading would be
mitigated.

7.2.2 Retail Hedging – Remove Forex Risk while Investing Abroad

Example: Let’s say when USD/INR at 44.20, an active stock market investor decides to invest
USD 200,000 for a period of six months in the S&P 500 Index with a perspective that the market
will grow and his investment will fetch him a decent return. In Indian terms, the investment is
about Rs. 8,840,000.

Let’s say that after six months, as per his anticipation, the market wherein he has invested has
appreciated by 10% and now his investment of USD 200,000 stands at USD 220,000. Having
earned a decent return the investor decides to square off all his positions and bring back his
proceeds to India. The current USD/INR exchange rate stands at 40.75 and his investment of
USD 220,000 in Indian term stands at Rs. 8,965,000. Thus fetching him a meager return of
1.41% as compared to return of 10% in USD, this is because during the same period USD has
depreciated by 7.81% against the INR and therefore the poor return. Consequently, even after
gauging the overseas stock market movement correctly he is not able to earn the desired overseas
return because he was not able to capture and manage his currency exposure.

Let’s presume the same Indian investor pre-empted that there is good probability that the USD
will weaken given the then market fundamentals and has decided to hedge his exposure on an
exchange platform using currency futures. Since he was concerned that the value of USD will
fall he decides go short on currency futures, it means he sells a USD/INR futures contract. This
protects the investor because weakening of USD would lead to profit in the short futures
position, which would effectively ensure that his loss in the investment abroad mitigated.

7.2.3 Retail Hedging – Long Futures Hedge Exposed to the Risk of a stronger USD
Example: On 1st March 2010, an employee decides to enroll for CFA-USA December 2010
exam for which he needs to make a payment of USD 1,000 on 15th September, 2008. On 1st
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March, 2010 USD/INR rate of 40.26, the price of enrolment in INR works out to be Rs. 40,260.
The candidate has the risk that the USD may strengthen over the next six months causing the
enrolment to cost more in INR hence decides to hedge his exposure on an exchange platform
using currency futures. Since he is concerned that the value of USD will rise, he decides go long
on currency futures; it means he purchases a USD/INR futures contract. This protects the
candidate because strengthening of USD would lead to profit in the long futures position, which
would effectively ensure that his loss in the physical market would be mitigated.

7.3 ARBITRAGE:

Arbitrage means locking in a profit by simultaneously entering into transactions in two or more
markets. If the relation between forward prices and futures prices differs, it gives rise to arbitrage
opportunities. Difference in the equilibrium prices determined by the demand and supply at two
different markets also gives opportunities to arbitrage.
Retail Investors hardly do arbitraging as they have less accessibility to forward OTC market.

7.4 TRADING SPREADS USING CURRENCY FUTURES:

Spread refers to difference in prices of two futures contracts. A good understanding of spread
relation in terms of pair spread is essential to earn profit. Considerable knowledge of a particular
currency pair is also necessary to enable the trader to use spread trading strategy.

Spread movement is based on following factors:

• Interest Rate Differentials
• Liquidity in Banking System
• Monetary Policy Decisions (Repo, Reverse Repo and CRR)
• Inflation

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Intra-Currency Pair Spread: An intra-currency pair spread consists of one long futures and one
short futures contract. Both have the same underlying but different maturities.

Inter-Currency Pair Spread: An inter–currency pair spread is a long-short position in futures on

different underlying currency pairs. Both typically have the same maturity.

Example: A person is an active trader in the currency futures market. In June 2010, he gets an
opportunity for spread trading in currency futures. He is of the view that in the current
environment of high inflation and high interest rate the premium will move higher and hence
USD will appreciate far more than the indication in the current quotes, i.e. spread will widen. On
the basis of his views, he decides to buy September currency futures at 47.00 and at the same
time sell July futures contract at 46.80; the spread between the two contracts is 0.20.

Let’s say after 30 days the spread widens as per his expectation and now the July futures contract
is trading at 46.90 and September futures contract is trading at 47.25, the spread now stands at
0.35. He decides to square off his position making a gain of Rs. 150 (0.35 – 0.20 = 0.15 x $1000)
per contract.

8. ANALYSIS AND INTERPRETATION

8.1Primary Data – Analysis:

1) Age Group

Age group No of Respondents

18-25 years 5
26-35 years 12
36-45 years 19
> 45 years 14
Total 50

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2) Occupation

Occupation No of Respondents
Businessman 22
Professional 9
Salaried 16
Students 3
Total 50

3) Gender

Gender No. of Respondents

Male 48
Female 2

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 Total 50

4) Qualification

Qualification No. of Respondents

Higher Secondary 8
Under Graduate 23
Post Graduate 19
Total 50

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5) No. of Years in Trading

No. of years trading No. of Respondents

< 1 year 4
1 - 3 year 11
3 - 6 years 16
> 6 years 19
Total 50

6) Investment Objective

Investment Objective No. of Respondents

Safety 28
Liquidity 4
Profitability 18
Total 50

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7) Most Traded Currency

Most traded Currency No. of Respondents

USDINR 37
EURINR 7
GBPINR 5
JPYINR 1
Total 50

8) View on Currency Options

View on Currency Options No. of Respondents

Yes
No
Total

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9) Discrimination in Forward OTC:

Likert Scale No. of Respondents

Strongly Agree 12
Somewhat Agree 18
Neutral 14
Somewhat Disagree 6
Strongly Disagree 0
Total 50

Mean = [(12*5) + (18*4) + (14*3) + (6*2) + (1*0)]/50 = 3.72

10) View on Margin Requirement and Mark To Market Settlement

Likert Scale No. of Respondents

Strongly Agree 4
Somewhat Agree 9
Neutral 18
Somewhat Disagree 11
Strongly Disagree 8
Total 50

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Mean = [(4*5) + (9*4) + (18*3) + (11*2) + (8*1)]/50) = 2.8

11) View on FII’s & NRI’s

Likert Scale No. of Respondents

Strongly Agree 18
Somewhat Agree 11
Neutral 7
Somewhat Disagree 8
Strongly Disagree 6
Total 50

Mean = [(18*5) + (11*4) + (7*3) + (8*2) + (6*1)]/50 = 3.54

12) View on Currency Futures Contract Max. Period

Likert Scale No. of Respondents

Strongly Agree 24
Somewhat Agree 10
Neutral 9
Somewhat Disagree 5
Strongly Disagree 2
Total 50

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Mean = [(24*5) + (10*4) + (9*3) + (5*2) + (2*1)]/50 = 3.98

13) Growing Opportunity for Retail Investors

Likert Scale No. of Respondents

Strongly Agree 8
Somewhat Agree 14
Neutral 11
Somewhat Disagree 9
Strongly Disagree 8
Total 50

Mean = [(8*5) + (14*4) + (11*3) + (9*2) + (8*1)]/50 = 3.10

14) Purpose of Currency Futures

Purpose of Currency Futures No. of Respondents

Hedging 24
Speculation 8
Arbitrage 0
Both Hedging & Speculation 15
Both Hedging & Arbitrage 3
Both Speculation & Arbitrage 0
Total 50

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Hedging

30% 48%
 Speculation
6%

16% Arbitrage

15) Exchange Traded for Currency Futures

Exchange Traded No. of Respondents

NSE 24
MCX-SX 22
BSE 0
Both NSE & MCX-SX 4
Both NSE & BSE 0
Both MCX-SX & BSE 0
Total 50

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 NSE

48%

Cross Table Findings using SPSS: 8%

MCX-SX
16) Most Traded Currency Vs Occupation:

0%
44%
BSE

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17) Most Traded Currency Vs Age Group

18) Most Traded Currency Vs Trading Experience:

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19) Most Traded Currency Vs Purpose:

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8.1.1 Survey Findings:

➢ It was found that majority of the respondents were under the age group 36-45 years
( nearly 38%). Age groups 36-45 years and > 45 years together constitute 66%. (Chart1,
Page 36)

➢ Majority of the respondents 44% were businessmen, salaried respondents constitute 32%,
professional were 18% and students were 6% respectively. (Chart 2, Page 37)

➢ Insurance has been the most preferred investment avenue among the respondents 38%.
22% of the respondents were of the opinion that investment in equity, Futres & Options
would give them higher return as compared to other financial instruments due to its
volatility and risk component. 26% of the respondents feel that investing in Mutual funds
is a much safer option. Gold and Real estate constitute 8% and 6% respectively.

➢ Majority of the respondents 56% feel that safety is their main objective behind any type
of investment. 36% of the respondents are primarily oriented towards profitability. 8% of
the respondents are of the view that liquidity should be maintained. (Chart 6, Page 41)

➢ It was found that investors in Currency Futures are predominantly male with 96%. (Chart
3, Page 38)

➢ It was observed that average Annual Income of the examined clients was above 5 lakhs
p.a. Most of them were High Net worth Individuals.

➢ Majority of the Respondents 46% were Under Graduates, Post Graduates were 38% and
people with Higher Secondary level were only 16%. Overall, Investors in Currency
Futures are highly qualified persons with different profiles like Chartered Accountants,
IT Professionals, and Professors. (Chart 4, Page 39)

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➢ It was observed that Investors in Currency Futures have high experience in trading stock
markets. 38% of the respondents are experienced more than 6 years in trading, 32% of
the people have 3-6 years experience, 22% of the people have 1-3 years experience and
8% of the people are experienced less than 1 year. (Chart 5, Page 40)

➢ As per the survey, it was found that respondents 74% are trading in US dollar, since it is
the most traded currency in the international market. Second preference was given to
euro. (Chart 7, Page 42)

➢ 68% have responded ‘YES’ for trading in Currency Options, if it is introduced in the
exchanges. (Chart 8, Page 43)

➢ 60% of the respondents feel that there is discrimination in forward over-the-counter

market as it is mainly dominated by exporters and importers. Retail investors have very
limited role to play in forward market. They prefer to trade in Currency Futures as it is
easily accessible and highly transparent. (Chart 9, Page 44)

➢ Investors have mixed views about Margin Requirement and Mark to Market Settlement.
36% have remained Neutral. (Chart 10, Page 45)

➢ 58% of the respondents are of the view that allowing (FII) Foreign Institutional Investors
and (NRI) Non Resident Indian to access Currency Futures market is advantageous.
Currency futures volume can be increased substantially if FII’s and NRI’s are allowed to
trade in futures market. (Chart 11, Page 46)

➢ 68% of the respondents believe that maximum tenor period of 1 year for currency futures
contract is sufficient to hedge the foreign exchange rate risk. (Chart12, Page 47)

➢ 44% of the respondents feel that there is growing opportunity for Retail Investors in
currency market. Many Investors feels that more awareness should be created about this
hedging instrument. (Chart 13, Page 48)

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 ➢ 48% of the respondents use it for hedging, 16% of the people are using it to speculate.
The most important fact which comes out is 30% of the examined investors are using it
for both hedging and speculation depending upon the market situation. (Chart14, Page49)

➢ 48% of the respondents trade through NSE, 44% through MCX and 8% through both
NSE and MCX. (Chart 15, Page 50)

➢ Except Businessmen, others are not trading much in JPYINR. (Chart 16, Page 51)

➢ People who have more than six years experience in trading are trading across all the
currencies. (Chart 18, Page 52)

➢ As per survey, retail investors are speculating only in USDINR. (Chart 19, Page 52)

➢ Many have rated TV (Electronic Media), Newspapers and Magazines as the preferred
sources for information related to their investments.

8.2 Secondary Data - Analysis:

8.2.1 Volume in Currency Futures & Forward OTC Market

Table below examines the data on futures and forward markets in India, the share of currency
futures turnover to the OTC currency forward turnover. However, it may be noted that currency
futures traded on exchanges is only on the pair USD/INR while the OTC currency forward
turnover is made up of other currency pairs as well.

Exchange (NSE
Futures Market +MCX-SX)
Forward Market Volume turnover
Month & Year
Volume ( $ Billions) ( $ Billions) NSE & as % of currency
MCX forwards OTC
turnover
November 2008 87.77 6.3 7.19
December 2008 89.6 9.38 10.50

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 January 2009 65.66 9.89 15.09
February 2009 61.29 12.92 21.10
March 2009 92.04 19.4 21.13
April 2009 73.24 15.4 21.07
May 2009 75.1 25.74 34.31
June 2009 76.21 29.92 39.26
July 2009 65.35 38.08 58.27
August 2009 62.62 37.32 59.60
September 2009 62.22 45.3 72.80
October 2009 79.78 64.78 81.19
November 2009 93.32 68.64 73.55
December 2009 64.97 83.85 128.29
January 2010 72.47 123.71 170.70

Interpretation:
From the above table and chart, it is clear that the total turnover in Currency Futures have grown
significantly and completely overtaken the total turnover in Forward market. This shows that
there is enough strength of the domestic players in this segment to challenge FII participation.
FII’s and NRI’s should be allowed to trade in Currency Futures, because their participation in
currency futures trading will lead to further rise in volumes and improvement in market depth.
Also Indian market participants have clearly grown in carrying out sophisticated trades using
options; therefore it is high time that Currency Options trading should kick-start in India. The
Retail participation will also rise significantly once Currency Options are introduced.

8.2.2 Participation pattern in the two markets

Percentage Share of Participants in Futures Market

Trading by non banks constitutes a major portion of total turnover followed by trading by retail
and banks. The participant wise share is given in the below table
Month Retail Banks Non Banks
Nov-08 27.74 12.35 59.91

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 Dec-08 30.22 13.33 56.45
Jan-09 35.1 13.1 51.8
Feb-09 34.54 11.63 53.83
Mar-09 35.68 10.52 53.81
Apr-09 34.15 12.69 53.16
May-09 28.16 12.53 59.31
Jun-09 27.18 13.16 59.66
Jul-09 24.27 12.52 63.21
Aug-09* 23.74 11.53 64.73
*Data available only till Aug 09

Percentage Share of Participants at OTC

In case of OTC currency forward market, the transactions can be classified mainly into interbank
transactions and merchant transactions. The Percentage share is given in the below table

Month Interbank Merchants

Nov-08 37.02 62.98
Dec-08 82.58 17.42
Jan-09 36.13 63.87
Feb-09 37.2 62.8
Mar-09 85.63 14.37
Apr-09 51.91 48.09
May-09 37.68 62.32
Jun-09 58.81 41.18
Jul-09 69.34 30.66
Aug-09* 69.7 30.3
*Data available only till Aug 09

Interpretation:
From the above table, it is observed that the share of the two in total currency forward
transactions does not follow any visible trend. However, it appears that as a hedging tool,

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merchants are probably switching over to futures market as reflected in reduced % share in their
trades of forwards.

In NSE, currently the retail participation in Currency Futures trading is approximately around 23
- 26%.

8.2.3 Volume of new currency pairs

The Introduction of new currency pairs in the exchanges has increased the overall turnover.
Below table shows the overall turnover (NSE & MCX) of non-USD currencies since its
inception in Feb, 2010

Interpretation
Of all the three new Currency pairs, it is EURINR which contributes the major portion to the
overall volume. The contribution of GBPINR and JPYINR to the overall volume is minimal. In
this scenario, introduction of any other new currency pair in the near future is not required.

9. CONCLUSIONS AND SUGGESTIONS:

The expectations and suggestions given by the retail investors are consolidated as below.

➢ The participation of retail investors should be increased through promotional activities,

road shows and seminars to create awareness about the usage and benefits of this hedging
instrument.

➢ Liberalization in terms of changes in the contract size would attract more retail
participation.

➢ Extending the trading hours for Currency Futures in the exchanges could help encourage
larger participation from the Commodity Investors.

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 ➢ Foreign Institutional Investors (FII) and Non-Resident Indian (NRI) are excluded from
the currency futures market and their inclusion as participants can help in stepping up
volumes significantly.

➢ Also Indian market participants have clearly grown in carrying out sophisticated trades
using options; therefore it is high time that Currency Options trading should kick-start in
India. The Retail participation will also rise significantly once Currency Options are
introduced.

➢ Though few clients have suggested currencies like Canadian dollar, Australian dollar,
most of them feel that introduction of any new currency pair in the exchanges is not
required in the near future.

➢ Calendar spread cost can be reduced to increase the participation and turnover.

➢ As most of the Clients are High Net worth Individuals, Trading members should target
these customers who are investing in other derivative products. Especially, young Indian
Professionals who work in abroad should be educated about this hedging instrument to
save their abroad earnings.

➢ As per Survey, Majority of the respondents preferred TV (Electronic Media) and

Newspapers as their sources for investments information. Investors should also be
reached through regional media channels and vernacular newspapers, magazines.

The currency derivatives segment on the NSE has witnessed consistent growth both in traded
value and open interest since its inception. The total turnover in the segment has increased
incredibly from $3bn in October 2008 to $ 75bn in May 2010. The average daily turnover

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reached $3.5bn in May 2010. Given the enormous growth of this segment, one can understand
RBI and SEBI’s cautious approach towards currency market and introduction of new products in
the exchanges. Careful measures and proper roadmap in next few years would make rupee fully
convertible, which is the dream of every Indian.

10. REFERENCES:

➢ NCFM – Currency Derivative module – by NSE

➢ NISM – Workbook for NISM Series – 1: Currency derivatives

➢ http://www.fedai.org.in/

➢ http://www.nseindia.com/

➢ http://www.mcx-sxindia.com/

➢ http://www.rbi.org.in/scripts/statistics

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 ➢ http://www.bseindia.com/

➢ http://www.business-standard.com/india/

➢ http://economictimes.indiatimes.com/

➢ http://www.sebi.gov.in/boardmeetings/128/currency.pdf

11. ANNEXURES:

QUESTIONNAIRE FOR CLIENTS (CURRENCY SEGMENT)

Name :

Age :

Gender :

Qualification :

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Occupation :

Annual Income :

Number of years trading :

Contact Number (optional) :

E-Mail ID :

1) Rank your preferred investment mode from 1to 6?

Investment Rank
Insurance
Mutual funds
Gold
Real Estate
Equity
Futures & Options

2) What is your investment objective?

○ Safety
○ Liquidity
○ Profitability

1) Which currency do you trade the most?

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○ US dollar
○ Euro
○ British Pound
○ Japanese Yen

1) What is the volume of trade (monthly volume) which you do on an average in currency
futures?

2) For what purpose you use currency futures derivative contract (Mark all that applies)
□ Hedging
□ Speculation
□ Arbitrage

What is your purpose of hedging?

1) Through which stock exchange, you trade Currency Futures (Mark all that applies)
□ NSE
□ MCX-SX
□ BSE

1) Will you trade, if Currency Options are introduced in the exchanges?

○ Yes
○ No
1) Should SEBI introduce any currency pair in the near future?
○ Yes
○ No

If yes, mention the currency pair ………………………

Write the numbers for the corresponding questions (9 to 13)

Strongly Somewhat Strongly
Somewhat Neutral
Q.No Details Agree Disagree Disagree
Agree (4) (3)
(5) (2) (1)
Do you find discrimination in
9
forward OTC market?
Do you find the margin
requirement and settlement of
daily mark-to-market
10 differences cumbersome (in
currency futures), since there
is no such requirement in
OTC trades?
11 Do you think, SEBI should

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 allow FII’s and NRI’s to
participate in currency futures
& options?
Do you think maximum (1
12 year period) in currency
futures contract is sufficient?
Do you think that there is
13 growing opportunity for retail
traders in currency futures?

14) Your rating on the below sources of information to invest in currency futures?

Excellent – 5, Good – 4, Average – 3, Below Average – 2, Poor – 1

Sources Rank
Electronic Media (TV)
Newspapers/Magazines
Broker/Financial advisor
Internet
Friends/Peers

15) What do you expect from the exchange with respect to currency futures trading? (write in
few lines)

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