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Currency Derivatives

Currency Derivatives

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.g. US Dollars. Currency future contracts allow investors to hedge against foreign exchange risk. Currently Currency Futures are available on four currency pairs viz. US Dollars (USD-INR), Euro (EUR-INR), Great Britain Pound (GBP-INR) and Japanese Yen (JPY-INR).

Current Market Reports

About Currency Derivatives

MSE Exchange launched its currency futures trading platform on October 07, 2008. 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.

Products Specification

Currency Derivatives segment of MSE provides trading in derivative instruments like Currency Futures on four currency pairs, Currency and each of these currency contracts on MSE has a life of 12 months from the month in which it is launched

Contract Specifications For USD - INR (Future)

Symbol USDINR Instrument Type FUTCUR
Unit of trading 1 (1unit denotes 1000 USD) Underlying USD
Quotation/Price Quote Rs. per USD Tick size 0.25 paise or INR 0.0025
Trading hours Monday to Friday
9:00 a.m. to 5:00 p.m.
Contract trading cycle 12 month trading cycle.
Last trading day Two working days prior to the last business day of the expiry month at 12:30 p.m. 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. Price operating range Tenure upto 6 months
+/-3 % of base price
Tenure greater than 6 months
+/- 5% of base price
Position limits Position Limit Settlement Daily settlement: T + 1
Final settlement: T + 2
Mode of settlement Cash settled in Indian Rupees Daily settlement price (DSP) DSP shall be calculated on the basis of the last half an hour weighted average price of such contract or such other price as may be decided by the relevant authority from time to time.
Final settlement price (FSP) RBI reference rate

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:

Example 1:

Suppose an edible oil importer wants to import edible oil worth USD 100,000 and places his import order on July 15, 2008, with the delivery date being 4 months ahead. At the time when the contract is placed, in the spot market, one USD was worth say INR 44.50. But, suppose the Indian Rupee depreciates to INR 44.75 per USD when the payment is due in October 2008, the value of the payment for the importer goes up to INR 4,475,000 rather than INR 4,450,000. The hedging strategy for the importer, thus, would be:

Current Spot Rate (15th July '08):
Buy 100 USD - INR Oct '08 Contracts on 15th July '08
44.5000
(1000 * 44.5500) * 100 (Assuming the Oct '08 contract is trading at 44.5500 on 15th July, '08)
Sell 100 USD - INR Oct '08 Contracts in Oct '08 Profit/Loss (futures market) 44.7500
1000 * (44.75 – 44.55) * 100 = 20,000
Purchases in spot market @ 44.75 Total cost of hedged transaction 44.75 * 100,000
100,000 * 44.75 – 20,000 = INR 4,455,000

Example 2:

A jeweller who is exporting gold jewellery worth USD 50,000, wants protection against possible Indian Rupee appreciation in Dec' 08, i.e. when he receives his payment. He wants to lock-in the exchange rate for the above transaction. His strategy would be:

One USD - INR contract size USD 1,000
Sell 50 USD - INR Dec '08 Contracts (on 15th Jul '08) 44.6500
Buy 50 USD - INR Dec '08 Contracts in Dec '08 44.3500
Sell USD 50,000 in spot market @ 44.35 in Dec '08 (Assume that initially Indian rupee depreciated , but later appreciated to 44.35 per USD as foreseen by the exporter by end of Dec '08) Profit/Loss from futures (Dec '08 contract) 50 * 1000 *(44.65 – 44.35)
= 0.30 *50 * 1000
= INR 15,000

The net receipt in INR for the hedged transaction would be:
50,000 *44.35 + 15,000 = 2,217,500 + 15,000 = 2,232,500.

Had he not participated in futures market, he would have got only INR 2,217,500. Thus, he kept his sales unexposed to foreign exchange rate risk.

Contract Specifications for Euro-INR

Symbol USDINR Instrument Type FUTCUR
Unit of trading 1 (1unit denotes 1000 USD) Underlying USD
Quotation/Price Quote Rs. per USD Tick size 0.25 paise or INR 0.0025
Trading hours Monday to Friday
9:00 a.m. to 5:00 p.m.
Contract trading cycle 12 month trading cycle.
Last trading day Two working days prior to the last business day of the expiry month at 12:30 p.m. 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. Price operating range Tenure upto 6 months
+/-3 % of base price
Tenure greater than 6 months
+/- 5% of base price
Position limits Position Limit Settlement Daily settlement: T + 1
Final settlement: T + 2
Mode of settlement Cash settled in Indian Rupees Daily settlement price (DSP) DSP shall be calculated on the basis of the last half an hour weighted average price of such contract or such other price as may be decided by the relevant authority from time to time.
Final settlement price (FSP) RBI reference rate

Hedging against Indian Rupee appreciation

Suppose an Indian IT exporter receives an export order worth, say, 100,000 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.64.05 in the spot market, while on MSE a futures contract for an expiry date that matches with order payment date is trading, say, at Rs.64. This puts the value of the order, when placed, at Rs.6,405,000. However, if the domestic exchange rate appreciates significantly (to Rs.63.20) when the order is paid for (which is one month after the delivery date), the firm would receive only Rs.6,320,000 rather than Rs.6,405,000.

To insure against such losses, the firm can, at the time it receives the order, can enter into 100 Euro futures contract of 1000 each to sell at Rs.64 a Euro, which involves contracting to sell a foreign currency on expiry date at the agreed exchange rate. Suppose on payment date the exchange rate is, say, Rs.63.20, the exporter would receives only Rs.6,320,000 on selling the Euro in the spot market, but gains Rs. 80,000 (i.e. 64 - 63.20 * 100 * 1000) in the futures market. Thus, overall the firm receives Rs.6,400,000 and protects itself from the sharp appreciation of domestic currency against Euro.

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.

Hedging against Indian Rupee depreciation

An organic chemicals dealer in India placed an import order worth, say, 100,000 with a German manufacturer. The current spot rate of Euro is, say, Rs.64.05 and at this rate the value of the order is Rs.6,405,000. The importer is worried about sharp depreciation of Indian Rupee against Euro in coming months when the payment is due and brought 100 Euro futures contract (1000 each) on MSE, say, at Rs.64 a Euro. Suppose, at expiry date, Rupee depreciated to Rs.65 the importer would have to pay Rs.6,500,000, but he would gain Rs.100,000 (i.e. Rs.65 - 64 * 100 * 1000) from the futures market and the resultant outflow would be only Rs.6,400,000.

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 pay for the import order to avoid the uncertainty associated with future exchange rate movements.

Contract Specifications for Pound Sterling-INR

Symbol USDINR Instrument Type FUTCUR
Unit of trading 1 (1unit denotes 1000 USD) Underlying USD
Quotation/Price Quote Rs. per USD Tick size 0.25 paise or INR 0.0025
Trading hours Monday to Friday
9:00 a.m. to 5:00 p.m.
Contract trading cycle 12 month trading cycle.
Last trading day Two working days prior to the last business day of the expiry month at 12:30 p.m. 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. Price operating range Tenure upto 6 months
+/-3 % of base price
Tenure greater than 6 months
+/- 5% of base price
Position limits Position Limit Settlement Daily settlement: T + 1
Final settlement: T + 2
Mode of settlement Cash settled in Indian Rupees Daily settlement price (DSP) DSP shall be calculated on the basis of the last half an hour weighted average price of such contract or such other price as may be decided by the relevant authority from time to time.
Final settlement price (FSP) RBI reference rate

Hedging against Indian Rupee appreciation

Suppose an Indian IT exporter receives an export order worth, say, 100,000 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.64.05 in the spot market, while on MSE a futures contract for an expiry date that matches with order payment date is trading, say, at Rs.64. This puts the value of the order, when placed, at Rs.6,405,000. However, if the domestic exchange rate appreciates significantly (to Rs.63.20) when the order is paid for (which is one month after the delivery date), the firm would receive only Rs.6,320,000 rather than Rs.6,405,000.

To insure against such losses, the firm can, at the time it receives the order, can enter into 100 Euro futures contract of 1000 each to sell at Rs.64 a Euro, which involves contracting to sell a foreign currency on expiry date at the agreed exchange rate. Suppose on payment date the exchange rate is, say, Rs.63.20, the exporter would receives only Rs.6,320,000 on selling the Euro in the spot market, but gains Rs. 80,000 (i.e. 64 - 63.20 * 100 * 1000) in the futures market. Thus, overall the firm receives Rs.6,400,000 and protects itself from the sharp appreciation of domestic currency against Euro.

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.

Hedging against Indian Rupee depreciation

An organic chemicals dealer in India placed an import order worth, say, 100,000 with a German manufacturer. The current spot rate of Euro is, say, Rs.64.05 and at this rate the value of the order is Rs.6,405,000. The importer is worried about sharp depreciation of Indian Rupee against Euro in coming months when the payment is due and brought 100 Euro futures contract (1000 each) on MSE, say, at Rs.64 a Euro. Suppose, at expiry date, Rupee depreciated to Rs.65 the importer would have to pay Rs.6,500,000, but he would gain Rs.100,000 (i.e. Rs.65 - 64 * 100 * 1000) from the futures market and the resultant outflow would be only Rs.6,400,000.

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 pay for the import order to avoid the uncertainty associated with future exchange rate movements.

Contract Specifications for Japanese Yen - INR

Symbol USDINR Instrument Type FUTCUR
Unit of trading 1 (1unit denotes 1000 USD) Underlying USD
Quotation/Price Quote Rs. per USD Tick size 0.25 paise or INR 0.0025
Trading hours Monday to Friday
9:00 a.m. to 5:00 p.m.
Contract trading cycle 12 month trading cycle.
Last trading day Two working days prior to the last business day of the expiry month at 12:30 p.m. 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. Price operating range Tenure upto 6 months
+/-3 % of base price
Tenure greater than 6 months
+/- 5% of base price
Position limits Position Limit Settlement Daily settlement: T + 1
Final settlement: T + 2
Mode of settlement Cash settled in Indian Rupees Daily settlement price (DSP) DSP shall be calculated on the basis of the last half an hour weighted average price of such contract or such other price as may be decided by the relevant authority from time to time.
Final settlement price (FSP) RBI reference rate

Hedging against Indian Rupee appreciation

Suppose an Indian IT exporter receives an export order worth, say, 100,000 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.64.05 in the spot market, while on MSE a futures contract for an expiry date that matches with order payment date is trading, say, at Rs.64. This puts the value of the order, when placed, at Rs.6,405,000. However, if the domestic exchange rate appreciates significantly (to Rs.63.20) when the order is paid for (which is one month after the delivery date), the firm would receive only Rs.6,320,000 rather than Rs.6,405,000.

To insure against such losses, the firm can, at the time it receives the order, can enter into 100 Euro futures contract of 1000 each to sell at Rs.64 a Euro, which involves contracting to sell a foreign currency on expiry date at the agreed exchange rate. Suppose on payment date the exchange rate is, say, Rs.63.20, the exporter would receives only Rs.6,320,000 on selling the Euro in the spot market, but gains Rs. 80,000 (i.e. 64 - 63.20 * 100 * 1000) in the futures market. Thus, overall the firm receives Rs.6,400,000 and protects itself from the sharp appreciation of domestic currency against Euro.

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.

Hedging against Indian Rupee depreciation

An organic chemicals dealer in India placed an import order worth, say, 100,000 with a German manufacturer. The current spot rate of Euro is, say, Rs.64.05 and at this rate the value of the order is Rs.6,405,000. The importer is worried about sharp depreciation of Indian Rupee against Euro in coming months when the payment is due and brought 100 Euro futures contract (1000 each) on MSE, say, at Rs.64 a Euro. Suppose, at expiry date, Rupee depreciated to Rs.65 the importer would have to pay Rs.6,500,000, but he would gain Rs.100,000 (i.e. Rs.65 - 64 * 100 * 1000) from the futures market and the resultant outflow would be only Rs.6,400,000.

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 pay for the import order to avoid the uncertainty associated with future exchange rate movements.

How it works

  • Presently, all futures contracts on MSE are cash settled. There are no physical contracts.
  • All trade on MSE 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 MSE trading platform have to participate only through trading members of the Exchange.
    • Participants have to open a trading account and deposit stipulated cash/collaterals with the trading member.
  • MSE stands in as the counterparty for each transaction; so participants need not worry about default.
    • In the event of a default, MSE will step in and fulfil the obligations of the defaulting party, and then proceed to recover dues and penalties from them.
  • 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 taking opposite position in the same contract.
    • A long (buy) position holder has to short (sell) the contract to square off his/her position or vice versa
    • Participants will be relieved of their contract obligations to the extent they square off their positions.
  • All contracts that remain open at expiry are settled in Indian rupees in cash at the reference rate specified by RBI.

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