Currency Derivative Business Perspective

MBA Business Finance Management Dissertation Ideas, Economics Projects Topics Thesis Ideas and Abstracts in PDF, DOC, PPT

Currency Derivative Business Perspective

Postby Anup V » Tue Aug 07, 2012 11:12 pm

This report laid down the framework for the launch of Exchange Traded Currency Futures in terms of the eligibility norms for existing and new Exchanges and their Clearing Corporations/Houses, eligibility criteria for members of such Exchanges/Clearing Corporations/Houses, product design, risk management measures, surveillance mechanism and other related issues.

The Regulatory framework for currency futures trading in the country, as laid down by the regulators, provide that persons resident in India are permitted to participate in the currency futures market in India subject to directions contained in the Currency Futures (Reserve Bank) Directions, 2008, which have come into force with effect from August 6, 2008.

Standardized currency futures have the following features:

a. USD INR, EUR INR, JPY INR and GDP INR contracts are allowed to be traded.

b. The size of each contract is - USD 1000, EUR 1000, GDP 1000 and JPY 1,00,000.

c. The contracts shall be quoted and settled in Indian Rupees.

d. The maturity of the contracts shall not exceed 12 months.

e. The settlement price shall be the Reserve Bank's Reference Rate on the last trading day.

The membership of the currency futures market of a recognised stock exchange has been mandated to be separate from the membership of the equity derivative segment or the cash segment. Banks authorized by the Reserve Bank of India under section 10 of the Foreign Exchange Management Act, 1999 as ‘AD Category - I bank' are permitted to become trading and clearing members of the currency futures market of the recognized stock exchanges, on their own account and on behalf of their clients, subject to fulfi lling certain minimum prudential requirements pertaining to net worth, non-performing assets etc.

NSE was the fi rst exchange to have received an in-principle approval from SEBI for setting up currency derivative segment. The exchange lunched its currency futures trading platform on 29th August, 2008. While BSE commenced trading in currency futures on 1st October, 2008, Multi-Commodity Exchange of India (MCX) started trading in this product on 7th October, 2008 Derivative Market Of Forex Currencies

The following Forex types will be reviewed in this part:

Currency futures

Currency forwards

Currency swaps

Currency options

Derivatives play an important and useful role in the economy, but they also pose several dangers to the stability of financial markets and the overall economy. Derivatives are often employed for the useful purpose of hedging and risk management, and this role becomes more important as financial markets grow more volatile. Derivatives are also used to commit fraud and to manipulate markets.

Derivatives are powerful tools that can be used to hedge the risks normally associated with production, commerce and finance. Derivatives facilitate risk management by allowing a person to reduce his exposure to certain kinds of risk by transferring those risks to another person that is more willing and able to bear such risks.

Today, derivatives are traded in most parts of the world, and the size of these markets is enormous. Data for 2002 by the Bank of International Settlements puts the amount of outstanding derivatives in excess of $151 trillion and the trading volume on organized derivatives exchanges at $694 trillion. By comparison, the IMF's figure for worldwide output, or GDP, is $32.1 trillion.
Anup V
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