Transcript Currency futures –Introduction to currency market

Currency futures –Introduction to
currency market
• Type of currencies –Base and counter
currencies
• USD-INR
• GBP-INR
• Japanese yen –USD
• First currency – Base currency
• Second currency – Counter /terms /qoute
currency
PSG Institute of Management -2010
1
Exchange rate regimes
Exchange
Rate
PSG Institute of Management -2010
Fixed
Floating
2
Fixed and Floating exchange rates
• Govt action towards
buying and selling of
domestic currency-in
open market
• Buying at value is
coming down
• Selling at value is going
up
• Self correcting
mechanism
• Demand and supply of
the currency
• Demand for currency is
low-import is costlier
and export is cheaper
• When exportspayment leads to
appreciation of
domestic currency
PSG Institute of Management -2010
3
Factors –Exchange rates
• Fundamental factors : inflation, BOP,
unemployment , capacity utilisation ,
trends in import and exports-BOP surplusFavourable exchange rate and vice versa
• Technical factors : Interest rates ,Inflation
rate and Exchange rate policy
• Political factors
• Speculation-over valuation
PSG Institute of Management -2010
4
Important reasons for Rupee
Depreciation
PSG Institute of Management -2010
5
Quotes
• Direct quote : in the expression of USD ;1USD
=INR 45.000
• Indirect quote : in the expression of terms
currency ; 1INR=.021 USD
PSG Institute of Management -2010
6
Tick size
•
•
•
•
•
•
NSE tick size :.0025
Value of one on each contract =Rs 2.5
Example 4 ticks improvement and 5 contracts
Bid price – willing of the buyer to pay
Ask price- willing of the price to sell
Spread
PSG Institute of Management -2010
7
Highlight –Forex Futures Contract
PSG Institute of Management -2010
8
Currency Future-Contract cycle
PSG Institute of Management -2010
9
Contract specification
• Last trading day :Two working days prior to
final settelment
• Settlement :Cash settlement
• Final settlement price: The reference rate
fixed by RBI two working days prior to the final
settlement date will be used for final
settlement .
PSG Institute of Management -2010
10
RBI Reference rate
PSG Institute of Management -2010
11
Currency futures contract trading
process
Trader
Buyer
Trader
seller
Member
Member
Broker
Broker
Clearing house
PSG Institute of Management -2010
12
Pricing of futures contract-interest rate
parity
• A theory in which the interest rate differential between two
countries is equal to the differential between the forward
exchange rate and the spot exchange rate. Interest rate parity
plays an essential role in foreign exchange markets,
connecting interest rates, spot exchange rates and foreign
exchange
rates.
F/S= (1+Rh)/(1+Rf)
• F=S *e(rh-rf)*r
PSG Institute of Management -2010
13
Example problems
• Assume on March10,2002 annual interest
rate was 10% p.a on indian rupees and US
dollar was 7% per annum . The spot Re/$
exchange rate was 44 using the above futures
,calculate the theoretical futures price on one
year forward exchange rate
PSG Institute of Management -2010
14
Interest rate parity theory
•
•
•
•
•
•
Spot rate Rs48.000 per USD
2years
Interest rate in India 7%
Interest rate in USA 5%
49.50
50.25
PSG Institute of Management -2010
15