1. PSG Institute of Management -20101 Currency futures –Introduction to currency market Type of currencies –Base and counter currencies USD-INR GBP-INR Japanese yen –USD First currency – Base currency Second currency – Counter /terms /qoute currency

2. Exchange rate regimes Exchange Rate FixedFloating PSG Institute of Management -20102

3. Fixed and Floating exchange rates Govt action towards buying and selling of domestic currency-in open market Buying at value is coming down Selling at value is going up Self correcting mechanism Demand and supply of the currency Demand for currency is low-import is costlier and export is cheaper When exports- payment leads to appreciation of domestic currency PSG Institute of Management -20103

4. Factors –Exchange rates Fundamental factors : inflation, BOP, unemployment, capacity utilisation, trends in import and exports-BOP surplus- Favourable exchange rate and vice versa Technical factors : Interest rates,Inflation rate and Exchange rate policy Political factors Speculation-over valuation PSG Institute of Management -20104

5. Important reasons for Rupee Depreciation PSG Institute of Management -2010 5

6. Quotes Direct quote : in the expression of USD ;1USD =INR 45.000 Indirect quote : in the expression of terms currency ; 1INR=.021 USD PSG Institute of Management -20106

7. Tick size NSE tick size :.0025 Value of one on each contract =Rs 2.5 Example 4 ticks improvement and 5 contracts Bid price – willing of the buyer to pay Ask price- willing of the price to sell Spread PSG Institute of Management -2010 7

8. Highlight –Forex Futures Contract PSG Institute of Management -20108

9. Currency Future-Contract cycle PSG Institute of Management -20109

10. Contract specification Last trading day :Two working days prior to final settelment Settlement :Cash settlement Final settlement price: The reference rate fixed by RBI two working days prior to the final settlement date will be used for final settlement. PSG Institute of Management -201010

11. RBI Reference rate PSG Institute of Management -201011

12. Currency futures contract trading process Trader seller Trader Buyer Member Broker Member Broker Clearing house PSG Institute of Management -201012

13. Pricing of futures contract-interest rate parity A theory in which the interest rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate. Interest rate parity plays an essential role in foreign exchange markets, connecting interest rates, spot exchange rates and foreign exchange rates. F/S= (1+Rh)/(1+Rf) F=S *e (rh-rf)*r PSG Institute of Management -201013

14. Example problems Assume on March10,2002 annual interest rate was 10% p.a on indian rupees and US dollar was 7% per annum. The spot Re/$ exchange rate was 44 using the above futures,calculate the theoretical futures price on one year forward exchange rate PSG Institute of Management -201014

15. Interest rate parity theory Spot rate Rs48.000 per USD 2years Interest rate in India 7% Interest rate in USA 5% 49.50 50.25 PSG Institute of Management -201015