...Introduction: Globalization and integration of financial markets, coupled with the progressively increasing cross-border flow of funds, have transformed the intensity of market risk, which, in turn, has made the issues relating to hedging of such risk exposures very critical. The economic agents in India currently have a menu of over-the-counter (OTC) products, such as forwards, swaps and options, available to them for hedging their currency risk and the markets for these are quite deep and liquid. However, in the context of growing integration of the Indian economy with the rest of the world, as also the continued development of financial markets, a need has been felt to make available a wider choice of hedging instruments to the market participants to enable them to cope better with their currency risk exposures. India has been experiencing heightened cross-border flows in recent times with globalization and relaxations in the rules governing external transactions. The flows have been strong on both current and capital accounts. There has also been some increase in volatility in exchange rates due to global imbalances and changing dimensions of the capital flows. According to the Bank for International Settlements (BIS) Triennial Central Bank Survey 2007, the share of India with daily turnover at USD 34 billion (daily average) has increased from 0.3 per cent in 2004 to 0.9 per cent in 2007. The depth in the domestic foreign exchange market is validated by the BIS survey data. Currently...
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...it is an agreement to buy or sell an asset at a certain future time for a certain price. A forward contract is traded in the over-the-counter market, usually between two financial institutions or between a financial institution and one of its clients. * Collateralization in OTC Markets: two parties enter into a collateralization agreement where they value the contract each day using a pre-agreed valuation methodology. Then it works like Margin Account. * Futures Contracts: Like a forward contract, a futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future for a certain price. Unlike forward contracts, futures contracts are normally traded on an exchange. Closing out a position means entering into the opposite type of trade from the original one. * Contract Size: it is specified by the Exchange. If the contract size is too large, many investors who wish to take relatively small speculative positions will be unable to use the exchange. If the contract size is too small, trading may be expensive as there is a cost associated with each contract traded. * Price limits & Position limits: daily price movement limits (limit down and limit up) are specified by the exchange. Normally, trading ceases for the day once the contract is limit up or limit down. The purpose of daily price limits is to prevent large price movements from occurring because of speculative excesses. Position limits are the maximum number of contracts...
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...[pic] CHAPTER – I GRAND PROJECT ON CURRENCY DERIVATIVES NANCY SHAH – PROJECT TRAINEE CHAPTER 2 INTRODUCTION TO CURRENCY MARKETS 2.1 BASIC FOREIGN EXCHANGE DEFINITIONS 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 days from the date of trade. 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. For most major currencies, three business days or more after deal date would constitute a forward transaction 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. E.g. 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. Exchange rates are constantly changing, which means that the value of one currency in terms of the other is constantly in flux. Changes in rates are expressed as strengthening or weakening of one currency vis-à-vis the other currency...
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...exchange Identify why participants use derivative markets and how futures are used to hedge price risk Identify risks associated with using a futures contract hedging strategy Explain and illustrate the use of an FRA for hedging interest rate risk 19.1 Derivative contracts- futures and FRA • Future contracts and forward rate agreement (FRAs) are called derivatives because they derive their price form an underlying physical market product • A futures contract is the right to buy or sell a specific item at a specified future date at a price determined today • The risk management function of a derivative-based strategy is to lock-in price today that will apply at a future date. • Two main types of derivative contracts 1. commodity (e.g. gold, wheat and cattle) 2. Financial (e.g. shares, government securities and money market instruments) Hedging using futures contracts • Hedging involves transferring the risk of unanticipated changes in prices, interest rates or exchange rates to another party • The change in the market price of a commodity or security is offset by a profit or loss on the futures contract • Derivative contracts enable investors and borrowers to protect assets and liabilities against the risk of changes in interest rates, exchange rates and share prices • Basic futures strategy rule: conduct a transaction in the futures market today that corresponds with the proposed physical market transaction due at a later date. ***Example: A farmer...
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...SYNOPSIS OF FINANCIAL MANAGEMENT TRADING IN COMMODITIES SUBMITTED TO: SUBMITTED BY: MS.PALLAVI DAWRA DEEPAK JASLEEN NEHA TASHNEET INTRODUCTION Commodity trading in India is regulated by the Forward Markets Commission (FMC) headquartered at Mumbai, it is a regulatory authority which is overseen by the Ministry of Consumer Affairs and Public Distribution, Govt. of India. It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952. COMMODITY TRADINGCommodity markets are quite like equity markets. The commodity market also has two constituents i.e. spot market and derivative market. In case of a spot market, the commodities are bought and sold for immediate delivery. In case of a commodities derivative market, various financial instruments having commodities as underlying are traded on the exchanges. It has been seen that traditionally in India people have hedged their risks with Gold and Silver. | COMMODITY FUTURESCommodity future is a derivative instrument for the future delivery of a commodity on a fixed date at a particular price. The underlying in this case is a...
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...becomes the counterparty to each party. -margin: long or short position in a futures, deposit sufficient funds in a margin account. -In the stock market, "margin" means that a loan is made. The loan enables the investor to reduce the amount of his own money required to purchase the securities, thereby generating leverage or gearing. -In the futures market, by contrast, margin is the amount of money that must be put into an account by a party opening up a futures position. When a transaction is initiated, a futures trader puts up a certain amount of money to meet the initial margin requirement; how ever, the remaining money is not borrowed. The amount of money deposited is more like a down payment for the commitment to purchase the underlying at a later date. Alternatively, one can view this deposit as a form of good faith money, collateral, or a performance bond: The money helps ensure that the party fulfills his or her obligation.' -margin requirements stock: are set by federal regula tors. -In futures markets, margin requirements are set by the clearinghouses. -daily settlement/marking to market: the conversion of gains and losses on paper into actual gains and losses. As margin account balances change. -The maintenance margin requirement is lower than the initial margin requirement. If the money in the margin account at the end of the day falls below the maintenance margin require ment, the trader must...
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...United States, the most important market for foreign currency futures is the International Money Market (IMM) of Chicago, a division of the Chicago Mercantile Exchange. The best way to understand these contracts is to compare them with forward transactions. Like forward contracts, currency futures contracts are, in principle, contracts to deliver a given amount of currency on a given date and at a pre-specified price to be paid later on. Like forward contracts, futures contracts have a zero initial market value: neither the buyer nor the seller has to pay anything when a contract is initiated at the going market rate. However, futures contracts differ from forward contracts in many other respects. 5.1 Currency Futures Markets As we have seen before, forward contracts are held until maturity. At that point, a prespecified amount of currency is delivered at a pre-agreed price. However, only about 5 % of all futures contracts are settled by the physical delivery of foreign exchange between buyer and seller. Most often, buyers and sellers offset their original position prior to delivery date by taking an opposite position. The complete buy/sell or sell/buy is called a round turn. Customers usually pay a commission to their broker to execute a round turn and only a single price is quoted. Organized Markets: Futures are traded on organized exchanges, with specific rules about the terms of the contracts, and with an active secondary market. Futures prices are the result...
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......................................................................................5 INTRODUCTION TO DERIVATIVES ..................................................................................................5 1.1 DERIVATIVES DEFINED.......................................................................................................... 5 1.2 FACTORS DRIVING THE GROWTH OF DERIVATIVES................................................. 6 1.3 DERIVATIVE PRODUCTS ........................................................................................................ 7 1.4 PARTICIPANTS IN THE DERIVATIVES MARKETS ........................................................ 8 1.5 ECONOMIC FUNCTION OF THE DERIVATIVE MARKET ............................................ 8 1.6 EXCHANGE-TRADED VS. OTC DERIVATIVES MARKETS ........................................ 10 1.7 NSE' S DERIVATIVES MARKET ............................................................................................ 11 1.7.1 Participants and functions.................................................................................................11 1.7.2 Trading...
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...changed the world of finance as pervasively as the Internet has changed communications .Well they are everywhere nowadays. The most significant event in finance during the past decade has been the extraordinary development and expansion of financial derivatives. These instruments enhance the ability to differentiate risk and allocate it to those investors who are most able and willing to take it -- a process that has undoubtedly improved national productivity, growth and standards of living. Derivatives products provide certain important economic benefits such as risk management or redistribution of risk away from risk-averse investors towards those more willing and able to bear risk. Derivatives also help price discovery, i.e. the process of determining the price level for any asset based on supply and demand. All markets face various kinds of risks. This has induced the market par-ticipants to search for ways to manage risk. The derivatives are one ofthe categories of risk management tools. As this consciousness about risk management capacity of derivatives grew, the markets for derivatives de-veloped. Derivatives markets generally are an integral part of capital markets in developed as well as in emerging market economies. These instruments assist business growth by disseminating effective price signals concerning exchange rates, indices and reference rates or other assets and thereby render both cash and derivatives. This book provides basics about Derivatives...
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...Indian Capital Market Nidhi Bothra Payel Jain Vinod Kothari & Company What are Financial markets Financial market is a market where financial instruments are exchanged or traded and helps in determining the prices of the assets that are traded in and is also called the price discovery process. 1. Organizations that facilitate the trade in financial products. For e.g. Stock exchanges (NYSE, Nasdaq) facilitate the trade in stocks, bonds and warrants. 2. Coming together of buyer and sellers at a common platform to trade financial products is termed as financial markets, i.e. stocks and shares are traded between buyers and sellers in a number of ways including: the use of stock exchanges; directly between buyers and sellers etc. Financial markets may be classified on the basis of • • • • types of claims – debt and equity markets maturity – money market and capital market trade – spot market and delivery market deals in financial claims – primary market and secondary market Indian Financial Market consists of the following markets: • • • Capital Market/ Securities Market o Primary capital market o Secondary capital market Money Market Debt Market Primary capital market- A market where new securities are bought and sold for the first time Types of issues in Primary market • • • • • Initial public offer (IPO) (in case of an unlisted company), Follow-on public offer (FPO), Rights offer such that securities are offered to existing...
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... Commodity markets are important constituents of the financial market of any country. Similarly, commodity derivatives markets play a crucial role in price risk management as well as price discovery in any agriculture dominated economy like India. The present study is related with the derivative market in different commodities in India. The study has tried to describe about the various functions of commodity derivatives market like the players (hedgers, speculators, and arbitrages), the functions of a commodity exchange (NCDEX), clearing and settlement process and also the future potential of commodity derivatives. The role of the regulatory body (forward market commission) and its function is also being discussed. Also the recent development in the field of commodities derivative trading is also being discussed. This report also discuss the evolution of derivatives market in India and also deal with the derivatives like future, forward, swaps and options. Synopsis Commodity markets are an important constituent of the financial markets of any country. It is the market where a wide range of products, viz., precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors to hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market. Commodity...
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........................................4 O RIGIN OF DERIVATIVES ............................................................................................................4 DERIVATIVES IN I NDIA ..............................................................................................................5 TWO IMPORTANT TERMS .............................................................................................................6 Spot Market ........................................................................................................................................................7 Index ......................................................................................................................................................................7 1.4.1 1.4.2 CHAPTER 2: DEFINITIO NS OF BASIC DERIVATIVES ............................................................... 8 2.1 FORWARDS...............................................................................................................................8 Settlement of forward contracts ............................................................................................................9 Default risk in forward contracts .........................................................................................................10 2.1.1 2.1.2 2.2 2.3 FUTURES................................................................................................................................11 O PTIONS...
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...STOCK EXCHANGES IN INDIA Module Objectives The main objective of this module is to explain the structure of organized exchanges for trading in stocks, commodities and derivatives. The features of derivative instruments like forwards, futures, options and swaps are also described. Module Contents 5.1. Stock Exchanges 5.2. Commodity Exchanges 5.3. Derivatives 5.4. Currency Futures in India 5.1 Stock Exchanges in India 5.1.1 History and Development Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago. The earliest records of security dealings in India are meagre and obscure. The East India Company was the dominant institution in those days and business in its loan securities used to be transacted towards the close of the eighteenth century. By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers recognized by banks and merchants during 1840 and 1850. The 1850's witnessed a rapid development of commercial enterprise and brokerage business attracted many men into the field and by 1860 the number of brokers increased into 60. In 1860-61 the American Civil War broke out and cotton supply from United States of Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began (for...
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...(in years) 50 50 50 50 50 50 60 50 60 60 60 60 50 5 5 5 5 5 5 5 5 3 5 5 3 3 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 Financial Markets: A Beginners’ Module * 1500 Mutual Funds : A Beginners’ Module 1500 Currency Derivatives: A Beginner’s Module 1500 Equity Derivatives: A Beginner’s Module 1500 Interest Rate Derivatives: A Beginner’s 1500 Module Commercial Banking in India: A Beginner’s 1500 Module Securities Market (Basic) Module 1500 Capital Market (Dealers) Module * 1500 Derivatives Market (Dealers) Module * 1500 FIMMDA-NSE Debt Market (Basic) Module 1500 Investment Analysis and Portfolio 1500 Management Module NISM-Series-I: Currency Derivatives 1000 Certification Examination 1000 NISM-Series-II-A: Registrars to an Issue and Share Transfer Agents – Corporate Certification Examination NISM-Series-II-B: Registrars to an Issue and 1000 Share Transfer Agents – Mutual Fund Certification Examination NISM-Series-IV: Interest Rate Derivatives 1000 Certification Examination NISM-Series-V-A: Mutual Fund Distributors 1000 Certification Examination * NISM-Series-VI: Depository Operations 1000 Certification Examination NISM Series VII: Securities Operations and 1000 Risk Management Certification Examination Certified Personal Financial Advisor (CPFA) 4000 Examination NSDL–Depository Operations Module 1500 Commodities Market Module 1800 Surveillance in Stock Exchanges Module 1500 Corporate Governance Module 1500 Compliance Officers (Brokers) Module 1500 Compliance Officers...
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........................................4 O RIGIN OF DERIVATIVES ............................................................................................................4 DERIVATIVES IN I NDIA ..............................................................................................................5 TWO IMPORTANT TERMS .............................................................................................................6 Spot Market ........................................................................................................................................................7 Index ......................................................................................................................................................................7 1.4.1 1.4.2 CHAPTER 2: DEFINITIO NS OF BASIC DERIVATIVES ............................................................... 8 2.1 FORWARDS...............................................................................................................................8 Settlement of forward contracts ............................................................................................................9 Default risk in forward contracts .........................................................................................................10 2.1.1 2.1.2 2.2 2.3 FUTURES................................................................................................................................11 O PTIONS...
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