| Welcome to Currency Derivatives Trading |
Indian investors can now add one more 'investment option' to their portfolio – Currency Derivatives. Regulatory approval from RBI and SEBI was recently made available (Aug 2008) and this allows exchanges in India to launch currency derivatives for trading, similar to equity / commodities derivatives trading.
With the launch of currency derivatives in India through stock exchanges, there would be a dynamic shift in currency trading and hedging. An Indian entity would be able to take positions on the external value of the rupee without having an underlying foreign currency exposure. It would enhance overall efficiency of the currency market through transparency in pricing, increasing investor base and categories, enhancing opportunities to invest and eliminating counter-party risk.
FAQs to understand the basics of this market:
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| Q) Who can use / participate currency derivatives trading ?
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A) As per current regulation, the following entities can participate in this market:
1. Indian Residents
2. Corporates registered in India (particularly those that involve dealing in foreign currency due to their business nature)
3. Domestic / Indian Financial Institutions and Banks
As of now, the regulation does not allow Foreign Institutional Investors (FII) and Non-Resident Indian (NRI) to participate in this market. |
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| Q) What is the contract size / specification?
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A) A contract will have the following basic specifications, USDINR example has been taken here:
1. Size - US Dollar 1,000
2. Minimum price fluctuation / tick size – Rupee 0.0025 or Paise 0.25
3. Period / term of contract – for 12 near calendar months
4. Expiry date & time – last business day of the month
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| Q) What are market timing for trading in currency derivatives?
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| A) Market time would be from IST 9 am to IST 5 pm. |
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| Q) How will the order placement mechanism work?
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| A) Order will be market driven just like in an equity market (prioritized on time & rate basis). |
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| Q) How would the Risk Management System work in currency derivatives trading for a client?
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A) A client would need to have adequate margin for any order / trade. Basic margin requirement calculation will take into account:
- Standardized Portfolio Analysis of Risk (SPAN),
- Initial margin
- Minimum Initial margin of 1.75% on day of trade and thereafter 1%
- Calendar spread margin defined by exchange(s) at Rs 250/-
- Any additional margin, if & as notified by the exchange
- Extreme Loss Margin
- 1% of value of gross open positions
- Any additional margin, if & as notified by the exchange
- Position Limits
- 6% of total open interest or US Dollar 5 million, whichever is higher
- Member-broker specified margin
- As per any requirement of the member-broker, client to need to have additional margin as specified by the member-broker
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| Q) How will daily billing be done?
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A) Daily billing will be done, based on client trades and open position, the financial ledger of client account for mark-to-market (MTM) loss / profit along with margin requirements (similar to equity derivatives). Client would have to make up for such requirements upfront or by the day end (of each billing cycle) as per specification of the member-broker. The daily clearing and settlement process would take into account – daily trades, position computation, daily settlement price for outstanding position contract(s) and MTM.
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| Q) How will settlement of the contract take place?
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| A) An Open contract will be settled on the relevant expiry date (as per contract specification) in cash (in Indian rupee) at the relevant RBI reference rate. The final / expiry day clearing and settlement process would take into account final day settlement price for outstanding position contract(s). |
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| Q) How can a participant register for trading in currency derivatives in India?
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| A) The eligible participant will have to register with member-broker who is registered on Indian Stock Exchange and allowed to register clients for trading in currency derivatives. Registration process of the member-broker would need to be followed by the participant. Also, the participant would have to adhere to relevant trading terms of the member-broker and the stock exchange. |
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