What is Derivative?
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Futures Contract is a standardized exchange traded contract to buy or sell a certain underlying instrument at a certain date in the future at a specified price.
The underlying instrument in Currency future is a foreign exchange rate. The price of a future contract is expressed in terms of INR per unit of other currency e. Currency future contracts allow investors to hedge against foreign exchange risk. Currently Currency Futures are available on four currency pairs viz. Currency futures on USD-INR were introduced for trading and subsequently the Indian rupee was allowed to trade against other currencies such as euro, pound sterling and the Japanese yen.
Currency Derivatives segment of MSEI provides trading in derivative instruments like Currency Futures on four currency pairs, Currency and each of these currency contracts on MSEI has a life of 12 months from the month in which it is launched. Exchange-traded currency futures are used to hedge against the risk of rate volatilities in the foreign exchange markets. Here, we give two examples to illustrate the concept and mechanism of hedging:. Suppose an edible oil importer wants to import edible oil worth USDand places his import order on July 15,with the delivery date being 4 months ahead.
The hedging strategy for the importer, thus, would be:. A jeweller who is exporting gold jewellery worth USD 50, wants protection against possible Indian Rupee appreciation in Dec' 08, i. He wants to lock-in the exchange rate for the above transaction. His strategy would be:. The net receipt in INR for the hedged transaction would be: Trading in currency derivatives in india he not participated in futures market, he would have got only INR 2, Thus, he kept his sales unexposed to foreign exchange rate risk.
Suppose an Indian IT exporter receives an export order worth, say,from a European Telecom major with the delivery date being in 3 months time. At the time when contract is placed, the Euro is worth say Rs. This puts the value of the order, when placed, at Rs. However, if the domestic exchange rate appreciates significantly to Rs. To insure against such losses, trading in currency derivatives in india firm can, at the time it receives the order, can enter into Euro futures contract of each to sell at Rs.
Suppose on payment date the exchange rate is, say, Rs. Thus, overall the firm receives Rs. In the short term, firms can make gains or losses from hedging. But the basic purpose of hedging is to protect against excessive losses and to benefit from knowing exactly how much it was going to get from its export deal to avoid the uncertainty associated with future exchange rate movements.
An organic chemicals dealer in India placed an import order worth, say,with a German manufacturer. The current spot rate of Euro is, say, Rs. The importer is worried about sharp depreciation of Indian Rupee against Euro in coming months when the payment is due and brought Euro futures contract each on MSEI, say, at Rs. Suppose, at expiry date, Rupee depreciated to Rs.
But the basic purpose of trading in currency derivatives in india is to protect against excessive losses and to benefit from knowing exactly how much it was going to pay for the import order to avoid the uncertainty trading in currency derivatives in india with future exchange rate movements. Presently, all futures contracts on MSEI are cash settled. There are no physical contracts.
All trade on MSEI takes place on its nationwide electronic trading platform that can be accessed from dedicated terminals at locations of the members of the exchange. All participants on the MSEI trading platform have to participate only through trading members of the Exchange. Those who entered either by buying long or selling short a futures contract can close their contract obligations by squaring-off their positions at any time during the life of that contract by trading in currency derivatives in india opposite position in the same contract.
All contracts that remain open at expiry are settled in Indian rupees in cash at the reference rate specified by RBI. Market Activity Report csv.
Contract trading cycle 12 month trading cycle. Last trading day Two working days prior to the last business day of the expiry month at Final settlement day Last working day excluding Saturdays of the expiry month. The last working day will be the same as that for Interbank Settlements in Mumbai.
Base price Theoretical price on the 1st day of the contract. On all other days, DSP of the contract. Here, we trading in currency derivatives in india two examples to illustrate the concept and mechanism of hedging: The hedging strategy for the importer, thus, would be: Current Spot Rate 15th July ' Hedging against Indian Rupee appreciation Suppose an Indian IT exporter receives an export order worth, say,from a European Telecom major with the delivery date being in 3 months time.
Hedging against Indian Rupee depreciation An organic chemicals dealer in India placed an import order worth, say,with a German manufacturer. MSEI stands in as the counterparty for each transaction; so participants need not worry about default. In the event of a default, MSEI will step in and fulfil the obligations of the defaulting party, and then proceed to recover dues and penalties trading in currency derivatives in india them.
Participants will be relieved of their contract obligations to the extent they square off their positions. New York Institute o.
Market Watch Desktop Gadget. Monday to Friday 9: Two working days prior to the last business day of the expiry month at Last working day excluding Saturdays of the trading in currency derivatives in india month. Theoretical price on the 1st day of the contract.
DSP shall be calculated on the basis of the last trading in currency derivatives in india an hour weighted average price of such contract or such other price as may be decided by the relevant authority from time to time.
Purchases in spot market Sell USD 50, in spot market