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    Currency Future

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    Arvind Shukla
    Currency futures allow traders to buy or sell currencies like dollars and rupees at predetermined exchange rates in the future. They are traded on organized exchanges with standardized contract sizes and delivery dates. Traders must put up an initial margin with a broker and maintain a minimum balance, with profits and losses settled daily. Currency futures can be used to hedge currency risk for importers and exporters by locking in future exchange rates, though imperfect hedges may remain from mismatches. Speculators can also profit from anticipating exchange rate movements by taking positions in currency futures.

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    Currency Future

    Uploaded by

    Arvind Shukla
    21 views14 pages
    Currency futures allow traders to buy or sell currencies like dollars and rupees at predetermined exchange rates in the future. They are traded on organized exchanges with standardized contract sizes and delivery dates. Traders must put up an initial margin with a broker and maintain a minimum balance, with profits and losses settled daily. Currency futures can be used to hedge currency risk for importers and exporters by locking in future exchange rates, though imperfect hedges may remain from mismatches. Speculators can also profit from anticipating exchange rate movements by taking positions in currency futures.

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    Currency futures allow traders to buy or sell currencies like dollars and rupees at predetermined exchange rates in the future. They are traded on organized exchanges with standardized contract sizes and delivery dates. Traders must put up an initial margin with a broker and maintain a minimum balance, with profits and losses settled daily. Currency futures can be used to hedge currency risk for importers and exporters by locking in future exchange rates, though imperfect hedges may remain from mismatches. Speculators can also profit from anticipating exchange rate movements by taking positions in currency futures.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    21 views14 pages

    Currency Future

    Uploaded by

    Arvind Shukla
    Currency futures allow traders to buy or sell currencies like dollars and rupees at predetermined exchange rates in the future. They are traded on organized exchanges with standardized contract sizes and delivery dates. Traders must put up an initial margin with a broker and maintain a minimum balance, with profits and losses settled daily. Currency futures can be used to hedge currency risk for importers and exporters by locking in future exchange rates, though imperfect hedges may remain from mismatches. Speculators can also profit from anticipating exchange rate movements by taking positions in currency futures.

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    of 14

    PRODUCTS

    Currency future
    CURRENCY FUTURE

    2
    CONCEPT

     : Currency futures are contracts to buy or sell one currency (only


    dollar-rupee as of now) against another at a specified price and date
    in the future
     The trading period will range from one month to 12 months and the
    contract will be settled on the basis of RBI's reference rate on the
    last trading date
     An Indian resident would be required to open an exchange-traded
    currency futures account with a recognized broker.
     The minimum trading amount will be $1000. The trading period
    will range from one month to 12 months and the contract will be
    settled on the basis of RBI's reference rate on the last trading date

    3
    MEANING
     It is a derivative instrument
     Definition is the same as currency forward

     Forwards are traded over the counter

     Futures are traded in organised exchanges (NSE)

     Futures are transacted through brokers

     Traded only in a limited number of currencies (only


    dollar-rupee as of now).

    4
    FEATURES
     Standardised terms
     Clearing house

     Margin system

     Closing of futures

    5
    STANDARDISED TERMS
     Contract size is standardised

     Date of delivery is predetermined

     Third Wednesday of Jan, March, April, June, July, Sept.,


    Oct., Dec.

    6
    CLEARING HOUSE
     Each exchange has a clearing house
     Clearing house arranges for delivery of asset and
    payment of money
     Clearing house becomes the counter party to the original
    parties
     Original parties: buyer and seller
     Clearing house becomes counter party to buyer (to
    deliver the asset)
     Clearing house becomes the counter party to the seller
    (to make payment)

    7
    MARGIN SYSTEM

     There are 3 types of margins


     Initial margin, maintenance margin and variation margin
     Initial margin to be paid upfront
     Balance is marked to the market every day
     Maintenance margin to be maintained throughout the
    duration of the contract
     Variation margin (shortfall in margin) to be remitted
    promptly

    8
    CLOSING OF FUTURES

     Forward contract is settled on delivery date by


    delivery of asset and payment of money
     Futures can be closed:
     Exchange of asset and cash on delivery date
     Cash settlement through a reverse trade on any day

     Hedgers prefer exchange of asset; speculators


    prefer cash settlement

    9
    HEDGING WITH CURRENCY FUTURES
     Importer buys the required currency futures contract
     Thus “locks in” a price for the purchase of foreign
    currency
     Hedges (avoids) risk due to exchange rate fluctuations
     Exporter sells the expected currency futures contract
     “locks in” a price for the sale
     Hedges risk due to exchange rate fluctuations

    10
    IMPERFECTIONS IN HEDGING WITH CURRENCY
    FUTURES

     Maturity mismatch
     Mismatch in maturity date of futures contract and
    date of cash transaction
     Size mismatch
     Mismatch between size of futures contract and size of
    cash transaction
     Maturity and size mismatch
     Hedging with currency futures may not result in
    perfect hedge
    11
    SPECULATION WITH CURRENCY FUTURES
     Fluctuations in exchange rates used to reap speculative profits
     Spot rate: USD = Rs.46.40
     1 month future rate: USD = Rs.46.60
     Expected spot rate on maturity: USD = Rs. 46.75
     Dealer buys one currency futures contract of size 100,000 USD
     Value of contract: Rs.46,60,000; Margin deposit: Rs.4,66,000
     If exchange rate move up to Rs.46.75 as anticipated, dealer gains
    profit of Rs.15,000 (100,000* Re.0.15)
     Rate of return: (15000/466,000)(12)(100) = 38.63%

    12
    SPECULATION THROUGH CASH TRANSACTION
     Spot rate: USD = Rs.46.40
     Dealer buys 100,000 USD at spot rate
     Investment required: Rs.46,40,000
     If exchange rate moves upto Rs.46.75 within a month,
    dealer gains profit of Rs.35,000 (100,000* Re.0.35)
     Rate of return: (35000/46,40,000)(12)(100) = 9.05%
     Speculation with currency futures - larger returns on
    smaller investment

    13
    THANK YOU
    14

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