Currency Derivatives - ICICI Direct
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Currency Derivatives
What is a Currency Derivative?
“Currency” is a generally accepted medium of exchange for goods and services and circulated within an economy.
Each currency of a country is valued with other currency, the net ratio is called “Foreign Exchange Rate”.
”Derivatives” is a financial product which is based on a derived asset called underlying. Underlying can be Securities,
Stock Market Index, Currency, Bullion, Commodity etc.
“Currency Derivative” is a contract between buyer & seller agreeing to exchange certain currency at a fixed price in
the future date
Futures and Options are the major exchange traded Currency derivatives instruments
Derivatives are mainly used for Directional Trading, Hedging and Arbitrage
2
Currency Derivatives: A History
Globally, Currency derivatives were first introduced on Chicago Mercantile Exchange (CME) in 1972
CME is the largest regulated FX market and offers 41 individual FX futures & 31 options contracts on 19 currencies
In India, NSE introduced Currency Derivatives on August 29, 2008 with the launch of USDINR Currency Futures
NSE launched trading in other currency pairs like Euro-INR, Pound Sterling-INR and Japanese Yen-INR in March 2010
NSE introduced Interest Rate futures trading in Aug 2009 on same platform while Currency Options was introduced in Oct 2010
BSE launched Currency and Interest Rate Derivatives Trading on November 28, 2013
NSE introduced, Cross Currency Futures and Options on EUR-USD. GBP-USD and USD-JPY on February 27, 2018
The total turnover on NSE in last ten years, increased from 1.6 Trillion in FY2009 to 100 Trillion in FY2020
3
Indian F&O Turnover Market Share (2017-18)
Interest
Commodity 3.3% Rate 0.3%
Currency 5.3%
Equity 91.1%
Source: SEBI Annual Report 2017-18
In Indian derivative market, currency derivative share is only 5.3% which reflects the potential
and opportunity in Indian Currency market.
4
Currency Derivative Exchanges in India
Currently India has three National level Currency Derivative Exchanges;
National Stock Exchange (NSE): August 29, 2008
Bombay Stock Exchange (BSE): November 28, 2013
Metropolitan Stock Exchange of India (MSE): October 7, 2008
5
How is currency quoted ?
Each currency is quoted / paired / valued with another currency
• Quote of USD/INR = 75.00 means for every 1 USD paid, INR 75.00 will be received
• Quote of EUR/USD = 1.2745 means for every 1 Euro paid, 1.2745 USD will be received
6
Understanding Currency Appreciation & Depreciation
Currency appreciation mean, increase in value of domestic currency against foreign currency.
In other words it can buy more units of foreign currency than earlier.
On the other side Currency depreciation mean, fall in the value of domestic currency against
foreign currency and can buy less units of foreign currency than earlier.
Example: If the price of USD/INR falls from 76 to 75, then INR would be said to have appreciated in value as
you would now need less INR to buy the same number of USD. On other side, in same case USD would have
depreciated as less INR would be remitted with same number of USD.
7
Understanding Currency Appreciation & Depreciation
INR
USD USDINR Depreciates
Appreciates 76
USDINR
75
USD USDINR INR
Depreciates 74 Appreciates
9Who are affected by Currency Prices ?
9Fundamental Factors effecting Exchange Rate
10Impact of Economic Events on USDINR
Events Likely to General Trend for Impact on Impact on
Impact USDINR Demand / Supply of USD USD INR
Negative Trade Balance
Demand for USD increases Appreciates Depreciates
(Imports are greater than exports)
Increase in Exports of India Excess inflow of USD into the country Depreciates Appreciates
Increase in global prices Demand for USD increases
Appreciates Depreciates
of commodities due to costlier imports
FII inflow / NRI forex
Increase in USD inflow Depreciates Appreciates
remittance is increasing
FII are buying back USD Excessive USD Outflow Appreciates Depreciates
RBI is Selling USD to
Supply of USD Increases Depreciates Appreciates
meet demand for the Dollar
RBI is buying USD to absorb
Absorption of excess USD liquidity Appreciates Depreciates
excess USD due to forex inflows
11NSE Future Contract Specifications
Symbol USDINR EURINR GBPINR JPYINR
Unit of Trading 1000 USD 1000 Euro 1000 GBP 100000 Japanese Yen
Quotation In INR for 1 USD In INR for 1 Euro In INR for 1 GBP In INR for 100 JPY
Tick size 0.25 Paisa or INR 0.0025 (4 decimals)
Trading hours Monday to Friday, 9:00 AM to 5:00 PM
Contract trading cycle 12 month trading cycle
Expiry (Last trading) day Two working days prior to the last business day of the expiry month at 12.30 PM
Final settlement day Last working day (excluding Saturdays) of the expiry month (Mumbai Interbank)
Settlement Daily settlement: T+1. Final settlement: T+2 (Cash Settled in INR)
Price Band +/‐3% for contracts with tenure upto 6 months & +/‐5% for greater than 6 months
Daily settlement price Calculated on the basis of the last half an hour weighted average price
Final settlement price RBI Reference Rate
Quantity Freeze Per Order 10,001 lots or greater
Initial margin SPAN Based Margin (2% - 5% in ICICIdirect)
Source: www.nseindia.com
12NSE Option Contract Specifications
Symbol USDINR EURINR GBPINR JPYINR
Unit of Trading 1000 USD 1000 Euro 1000 GBP 100000 Japanese Yen
Quotation In INR for 1 USD In INR for 1 Euro In INR for 1 GBP In INR for 100 JPY
Tick size 0.25 Paisa or INR 0.0025 (4 decimals)
Trading hours Monday to Friday, 9:00 AM to 5:00 PM
12- In-the-money, 12 Out-of-the-money & 1- Near-the-Money – (25 CE and 25 PE) with
Strike Price
Strike Price Interval of INR 0.25
3 serial monthly contracts followed by 3 quarterly contracts of cycle (March / June / Sep
Contract trading cycle / Dec). For Weekly USDINR Options- 11 serial weekly contracts expiring on Friday,
excluding expiry week wherein monthly contracts expires on a Friday
Expiry (Last trading) day Two working days prior to the last business day of the expiry month at 12.30 PM
Final settlement day Last working day (excluding Saturdays) of the expiry month (Mumbai Interbank)
Settlement Daily settlement: T+1. Final settlement: T+2 (Cash Settled in INR)
Price Band +/‐3% for contracts with tenure upto 6 months & +/‐5% for greater than 6 months
Daily settlement price Calculated on the basis of the last half an hour weighted average price
Final settlement price RBI Reference Rate
Source: www.nseindia.com
Quantity Freeze Per Order 10,001 lots or greater
13Margin Requirements in Currency Futures
Contract Initial Margin %
Currency Pair Quantity Lot Size LTP Margin Per Lot
Value (On 29th May 2020)
USDINR 1 Lot 1000 75.7900 75790 4.00% 3032
EURINR 1 Lot 1000 84.3700 84370 4.50% 3797
GBPINR 1 Lot 1000 93.4700 93470 5.00% 4674
100000
JPYINR 1 Lot (100 Yen= 70.6775 70678 5.00% 3534
70.6775)
In Currency Future, in normal scenario required initial margin (IM) is in the range of 2.5% to 5%
14Equity Derivatives vs Currency Derivatives
CMP ICICIdirect Position
Future Contract Contract Margin on Fund No. on
Derivatives (29th May IM Value in
Underlying Lot Value Contract Available Contracts
2020) (29th May 2020) Lakhs
Equity NIFTY 75 9580 718500 19.80% 142263 300000 2.1 15.1
Derivative ICIBAN 1375 539.2 741400 33.93% 251557.02 300000 1.2 8.9
USDINR 1000 75.79 75790 4.00% 3031.6 300000 99.0 75
Currency
Derivatives 100000
JPYINR (100 Yen=
70.6775) 70.6775 70677.5 5.00% 3533.875 300000 84.9 60
As compared to Equity Derivatives margin requirement is around one fifth in Currency derivatives.
15Equity Derivatives vs Currency Derivatives
Equity Derivatives Currency Derivatives
• Underlying is Equity Scripts like ITC • Underlying is Currency Pair like USDINR
• Hundreds of Scrips • Limited number of Currency Pair
• Contract value between 5 lakh to 10 lakh • Smaller contract value (Like USDINR ~76000/-)
• Higher Initial Margin (15% - 50%) • Lower Initial Margin (2% - 5%)
• Market Timings till 3.30 PM • Market Timings till 5.00 PM
• High Volatility • Limited Volatility
• High risky as volatility is higher • Low risky as volatility is lower
• Contracts available up to three months only • Contracts available up to twelve months
• Multiple factors impacting scrips • Connected to Domestic & International Market
• Higher taxes: STT and Higher Stamp Duty (0.002% / 0.003%) • No STT / CTT and Very low Stamp Duty (0.0001%) on Buy Side
16Example: Payoff using Currency Future Trading
On 1st May 2020, ABC with the view of appreciation in USDINR initiates Buy position in
100,000 USDINR May 2020 Future. USDINR at 76. Expiry Date: 27th May 2019
Trade Execution: Case I Case II
• USDINR Buy Price: 76.00 per $ Assume USDINR on Expiry- Assume USDINR on Expiry-
• No of Lots (100,000/1000): 100 78.00 (RBI Ref Rate) 74.50 (RBI Ref Rate)
• Contract Value for $100,000 = Profit: Loss:
Rs. 76,00,000 (76.00*100000)
= (78.00-76.00)*100,000 = (76.0-74.50)*100,000
= INR 200,000 = INR -150,000
USDINR on Expiry Buy value at @ 76.00 Sell value on Expiry Profit/Loss on Expiry
74.50 76,00,000 74,50,000 -1,50,000
75.00 76,00,000 75,00,000 -1,00,000
75.50 76,00,000 75,50,000 -50,000
76.00 76,00,000 76,00,000 0
76.50 76,00,000 76,50,000 50,000
77.00 76,00,000 77,00,000 1,00,000
77.50 76,00,000 77,50,000 1,50,000
78.00 76,00,000 78,00,000 2,00,000
17Brokerage and Other Costs involved
Brokerage: Rs. 20 Per Order and only Rs. 2 Per Lot
Please Note: Per order maximum brokerage would be Rs. 500 per order
Other Cost:
No STT or CTT
Taxes and Regulatory charges: SEBI Fee, Exchange Transaction Charges, Stamp Duty & GST
o Exchange Turnover Charges: 0.0009%
o SEBI Turnover Charges: 0.00005% (Till 31st March 2021)
o GST on Brokerage, Exchange & SEBI Turnover Charges: 18%
o Stamp Duty: 0.0001% on Buy side (Rs. 10 per crore on Buy side)
18Currency Future BEP Analysis @ Rs. 20 Per Order & only Rs 2 Per Lot
Particular Value Tic Movement Per Tick Value Profit / Loss (Rs.)
No. of Lots Traded 20 1 Tic (0.0025)
2.5 -128.50
Lots Size 1000
Future LTP 75 2 Tic (0.0050)
5 -78.50
Turnover (Buy & Sell both side) 3000000
3 Tic (0.0075)
Per Order Brokerage Rs. 20 7.5 -28.50
Per Lot Brokerage Rs. 2 4 Tic (0.0100)
10 21.50
Brokerage (A) 120.00
Exchange Transaction Charges (B) 0.0009% 8 Tic (0.0200) 20
27.00 221.50
SEBI Turnover Charge ( C) 0.0001% 3.00
12 Tic (0.0300) 30 421.50
GST on ABC (D) 18% 27.00
Stamp Duty (E) Buy Side Only 0.0001% 1.50 16 Tic (0.0400) 40 621.50
Total Expense (A+B+C+D+E) 178.50
20 Tic (0.0500) 50 821.50
Per Lot Expense in Rs. 8.93
19Currency Option BEP Analysis @ Rs. 20 Per Order & only Rs 2 Per Lot
Premium in Rs. 0.0100 0.0500 0.2000 0.5000 1.0000
No. of Lots Traded 30 30 30 30 30
Lots Size 1000 1000 1000 1000 1000
Turnover (Buy & Sell both side) 600 3000 12000 30000 60000
Brokerage (A) @ Rs. 20 Per Order and only Rs. 2 Per Lot 160.00 160.00 160.00 160.00 160.00
Exchange Transaction Charges (B) 0.035% 0.2100 1.0500 4.2000 10.5000 21.0000
SEBI Turnover Charge ( C) 0.00010% 0.0006 0.0030 0.0120 0.0300 0.0600
GST: 18% on A+B+C (D) 18% 28.8379 28.9895 29.5582 30.6954 32.5908
Stamp Duty (E) Buy Side Only 0.0001% 0.0003 0.0015 0.0060 0.0150 0.0300
Total Expense (A+B+C+D+E) 189.0488 190.0440 193.7762 201.2404 213.6808
Per Lot Expense in Rs. 6.3016 6.3348 6.4592 6.7080 7.1227
1 Tic (0.0025) Profit/Loss 2.5 -114.0 -115.0 -118.8 -126.2 -138.7
2 Tic (0.0050) Profit/Loss 5 -39.0 -40.0 -43.8 -51.2 -63.7
3 Tic (0.0075) Profit /Loss 7.5 36.0 35.0 31.2 23.8 11.3
4 Tic (0.0100) Profit /Loss 10 111 110 106 99 86
8 Tic (0.0200) Profit /Loss 20 411 410 406 399 386
10 Tic (0.0250) Profit /Loss 25 561 560 556 549 536
20ICICI Direct Currency Research
• Live intraday recommendations in iClick-2-Gain
• Daily Currency Report
• Weekly / Monthly / Specific Currency Report
21Disclaimer
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