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    Presented by-K.Bidyashree Singha

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    Heisnam Bidya
    Currency derivatives are contracts between buyers and sellers where the underlying assets are currencies. The value of currency derivatives is determined by the value of the currencies. They were first created in 1972 at the Chicago Mercantile Exchange and introduced in India in 2008 to trade on exchanges like NSE and MCX-SX. There are two main types: currency futures which are contracts to buy or sell currencies at a future date, and currency options which give the right but not obligation to buy or sell currencies. The document provides an example of a tea farmer using a forward contract currency derivative to hedge against risk of the rupee decreasing against the dollar before receiving payment from an importer in dollars.

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    Presented by-K.Bidyashree Singha

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    Heisnam Bidya
    48 views17 pages
    Currency derivatives are contracts between buyers and sellers where the underlying assets are currencies. The value of currency derivatives is determined by the value of the currencies. They were first created in 1972 at the Chicago Mercantile Exchange and introduced in India in 2008 to trade on exchanges like NSE and MCX-SX. There are two main types: currency futures which are contracts to buy or sell currencies at a future date, and currency options which give the right but not obligation to buy or sell currencies. The document provides an example of a tea farmer using a forward contract currency derivative to hedge against risk of the rupee decreasing against the dollar before receiving payment from an importer in dollars.

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    It will give a brief idea about currency derivative market

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    CD

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    Currency derivatives are contracts between buyers and sellers where the underlying assets are currencies. The value of currency derivatives is determined by the value of the currencies. They were first created in 1972 at the Chicago Mercantile Exchange and introduced in India in 2008 to trade on exchanges like NSE and MCX-SX. There are two main types: currency futures which are contracts to buy or sell currencies at a future date, and currency options which give the right but not obligation to buy or sell currencies. The document provides an example of a tea farmer using a forward contract currency derivative to hedge against risk of the rupee decreasing against the dollar before receiving payment from an importer in dollars.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    48 views17 pages

    Presented by-K.Bidyashree Singha

    Uploaded by

    Heisnam Bidya
    Currency derivatives are contracts between buyers and sellers where the underlying assets are currencies. The value of currency derivatives is determined by the value of the currencies. They were first created in 1972 at the Chicago Mercantile Exchange and introduced in India in 2008 to trade on exchanges like NSE and MCX-SX. There are two main types: currency futures which are contracts to buy or sell currencies at a future date, and currency options which give the right but not obligation to buy or sell currencies. The document provides an example of a tea farmer using a forward contract currency derivative to hedge against risk of the rupee decreasing against the dollar before receiving payment from an importer in dollars.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 17

    Presented byK.

    Bidyashree Singha

    Currency Derivative =Currency+Derivative

    What is Currency Derivative??


    It is the contract between the buyer and seller. Currency Derivatives are similar to many other Derivatives, Stocks, and Indices, etc. It is just that the underlying assets of Currency Derivatives are Currencies. The value of the Currencies determines the value of the Currency Derivatives.

    Currency Derivatives are efficient risk management tools in the Forex market.

    Introduction
    Currency derivative were first created at the Chicago

    Mercantile Exchange (CME) in 1972. Currency derivatives was introduced in India on 29th August,2008. Traded in NSE,USE,MCX-SX. The turnover at the end of the 1st trading day in India was 300Crore. Currency trading was permitted by RBI. Regulated by SEBI and RBI.

    Factors affecting currency rate:


    Economic data of India: GDP, Inflation.
    RBI regulated data: Repo, reverse repo rate, CRR,SLR.

    SENSEX/NIFTY movement.
    High FDI inflow/outflow.

    Average daily turnover(Rs.Cr)


    Series 1
    20,000 15,000 10,000 Series 1 5,000 0

    Types of currency derivative


    Currency Future:

    Currency Futures are a standardized foreign exchange derivative contracts traded on a recognized stock exchange to buy or sell one currency against another on a specified future date, at a price specified on the date of contract. Currency option: A Currency Option is a contract giving the right, not the obligation, to buy or sell a specific quantity of one foreign currency in exchange for another at a fixed price.

    Lets say there is a farmer who grows tea in India, which is exported to the USA.

    And there is an importer of tea in the USA.

    Lets assume the current rate of exchange is Rs. 55 for 1 USD.

    Let us also assume that the tea grower agrees to supply 10 quintals of tea to the importer at 10 dollars a quintal three months down the line upon harvesting. (1 Quintal = 100 kgs)

    It is important to understand that the importer buys tea at 10 dollars a quintal, no matter what the exchange rate is.

    The tea grower thinks that the rate of

    exchange, which is currently trading at Rs. 55 to a US dollar, could fall to Rs. 54 in 3 months.
    This would mean that while the

    importer would pay her 100 dollars ( $10 per quintal x 10 quintals = $ 100), as per their business deal, she would earn only Rs. 5400 ( $100 x Rs 54 per dollar) instead of Rs 5500 ( $100 x Rs 55 per dollar) thus incurring a loss of Rs. 100. ( Rs 5500 Rs 5400)

    In such a scenario, the tea grower

    goes to a currency trader and signs a forward contract which says that at the end of 3 months the currency trader would hedge her against a possible decrease in exchange rates.
    This means that, at the end of 3

    months, the currency trader would

    pay her Rs. 5500 for her 100 USD, no


    matter what the prevailing exchange rate.

    Now, lets look at 3 different scenarios:


    Say that after 3 months the rate of exchange remains Rs. 55 to a USD.

    In this case the farmer will take the 100 USD she has received from the importer & go to the currency trader. The trader will pay her Rs. 5500, as per the contract. So the tea grower makes Rs. 5500 in all.

    Now, lets look at the 2nd scenario: Say that after 3 months the rate of exchange reaches Rs. 56 to a USD (i.e. $100 = Rs 5600)

    In this case the farmers call was wrong. She will take the 100 USD she has received from the importer & go to the currency trader. The trader will pay her Rs. 5500, as per the contract and would sell off the 100 USD in the market for Rs. 5600, thus making a profit of Rs. 100.

    Now, lets look at the 3rd scenario:

    Say that after 3 months the rate of exchange drops to Rs. 54 to a USD. ($100 = Rs 5400)

    In this case the farmers call was right. She will take the 100 USD she has received from the importer & go to the currency trader.
    The trader will pay her Rs. 5500, as per the contract thus incurring a loss of Rs. 100.

    Thus, while the tea grower may not make any profit if the rupee becomes weaker against the dollar, she will

    definitely profit if the rupee appreciates & drops below Rs. 55.

    But at least she would have been at peace for the period of 3 months since she remained protected against any kind of fall in the rupee.

    Thank YOU

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