2. A Foreign exchange derivative is a financial derivative where the
underlying is a particular currency and/or its exchange rate These
instruments are used either for currency speculation and arbitrage
or for hedging foreign exchange risk. For detail see:
• Forex/Currency Forwards
• Forex /Currency Swaps
• Forex/Currency Futures
• Forex/Currency Options
NSE was the first 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.
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.
Currency Options was introduced on October 29, 2010.
3. Currency Forwards
It is a customized contract between two parties
for purchase/sale of a specified amount of
currency at a specified price to be delivered at
a specified date in the future.
Currency Futures
It is a standardized contract between the parties
through recognized futures exchange to buy
or sell currency of standardized quantity for
specified price on a specified future date.
4. • Futures are exchange-traded contracts to sell
or buy financial instruments or physical
commodities for a future delivery at an agreed
price. There is an agreement to buy or sell a
specified quantity of financial instrument
commodity in a designated future month at a
price agreed upon by the buyer and seller.To
make trading possible, BSE specifies certain
standardized features of the contract.
5. • A currency future, also known as FX future, is a futures
contract to exchange one currency for another at a
specified date in the future at a price (exchange rate)
that is fixed on the purchase date.
• On NSE the price of a future contract is in terms of INR
per unit of other currency e.g. US Dollars.
• Currency future contracts allow investors to hedge
against foreign exchange risk.
• Currency Derivatives are available on four currency
pairs viz. US Dollars (USD), Euro (EUR), Great Britain
Pound (GBP) and Japanese Yen (JPY).
• Currency options are currently available on US Dollars.
6. Features
• Standardized Contract….. Quality, quantity, price, time
period, daily price limits etc.
• Through recognized futures exchanges.. Derivatives
segment of NSE/BSE
• Clearing house involvement… National Securities
Clearing Corporation Ltd. (NSCCL) at NSE and Indian
Clearing Corporation Limited (ICCL)
• Margins… Initial, Maintenance and Variation
• Mark to Market
• Trading by member… exchange brokers
• Provide liquidity and reduction to counter party risk
• Better price discovery
• Regulation by … Acts, SEBI, FCRA etc.
7. Basis Currency Forwards Currency Futures
Contract Customised Standardized
Regulation By and Large self regulated Exchange/C.H. etc.
Operation Traded directly On exchange
Credit/counterparty risk Exists for parties Exists for C.H.
Liquidity Poor High
Price discovery and Party difficult Better
Marking to Market Not applied Done settlement
Margins Not kept Required by parties
8. Currency Options
• It is an agreement whereby the writer
(seller/exchange) of the options contract gives
the right (but not the obligation) to the buyer
of the options contract, to buy or sell specified
amount of currency at a strike price on/before
the specified date.
• The buyer of the options contract pays
premium to the seller, which is non-
refundable.
9. Features of the Options contract
• Parties –Option Buyer and seller
• Main two types- Call (Right to buy) and Put (Right
to sell)
• Premium- paid by buyer at the time of entering
the contract.
• Strike Price- on which currencies are agreed to be
exchanged or predetermined price.
• Maturity/expiration date
• Execution –American (exercise of right on any
date), European (only on maturity date)
• Exchange traded and OTC-traded.
10. Execution of the Options contract
• In the money- When it is advantageous for
buyer to exercise his right.
For call option- when on maturity date, Spot
price> Strike price
For Put option- e< strike price
• Out of money- not advantageous
Call Option- e<SP
Put Option- e>SP
• At the money
e=SP