|
FOREX MARKETS:
WORLD'S BIGGEST INDUSTRY IN FINANCIAL SERVICES
|
|
The foreign exchange (currency or FOREX or FX) market refers to the market for currencies.
Transactions in this market typically involve one party purchasing a quantity of
one currency in exchange for paying a quantity of another. The FX market is the
largest and most liquid financial market in the world, and includes trading between
large banks, central banks, currency speculators, corporates, governments, and other
institutions. This market is best suited for Bank, Companies, Importers, Exporters,
Currency hedgers and Retail.
|
|
|
|
MARKET SIZE
|
|
The foreign exchange market has acquired a distinct vibrancy as evident from the
range of products, participation, liquidity and turnover. The currency trading (FOREX)
market is the biggest and the fastest growing market globally. Its daily turnover
is more than 2.5 - 3 trillion dollars, which is far greater than the NASDAQ daily
turnover. The average daily turnover increased from US $ 23.7 Billion in March 2006
to US $ 33 Billion in March 2007. As such, it has been referred to as the market
closest to the ideal perfect competition, notwithstanding market manipulation by
central banks.
Just like how Markets are places to trade goods, the same goes with FOREX Markets.
The FOREX goods are the currencies of various countries which are traded. You buy
Euro, by paying US dollars, or you buy Dollar by paying INR or you sell Japanese
Yens for Canadian dollars. That's all!
Largest globally traded currencies are US $ (86%), Euro (37%), Japanese Yen (16.5%),
Pound Sterling (15%), Swiss Franc (6.8%), Australian $ (6.7%), (April 2007 % Daily
Share).
|
|
|
|
WHAT'S UNIQUE ABOUT THIS SEGMENT AND WHY FOREX?
|
|
n
|
Large trading volumes, huge liquidity and hence greater transparency.
|
|
n
|
Large number of, and variety of, traders in the market.
|
|
n
|
Large geographical dispersion - Market is spread and influences the World economy
|
|
n
|
Internationally long trading hours: OTC markets operate 24 hours a day except on
weekends
|
|
n
|
The variety of factors that affect exchange rates.
|
|
n
|
The low margins of profit compared with other markets of fixed income (but profits
can be high due to very large trading volumes)
|
|
n
|
Leveraged Market - Very low margins applicable to take a position
|
|
n
|
Opportunity for Importers / Exporters to hedge Payables / Receivables and lock in
their FOREX rates.
|
|
|
|
|
FOREX FUTURES – EXCHANGE TRADED
|
|
Exchange-traded FOREX futures contracts were introduced in 1972 at the Chicago Mercantile
Exchange and are actively traded relative to most other futures contracts. FOREX
trading increased by 38% between Apr '05 and Apr '06 and has more than doubled since
2001, largely due to the growing importance of foreign exchange as an asset class
and an increase in fund management assets, particularly of hedge funds and pension
funds.
|
|
|
|
INDIAN SCENARIO
|
|
Indian FOREX market has undergone many changes – with increased fluctuations
in the exchange rate. This has attracted the attention of many policy makers and
investors.
Excessive fluctuations and volatility disturbs:-
|
|
n
|
Currency price discovery
|
|
n
|
Export Performance
|
|
n
|
Stability and sustainability of Current Account Balance and Balance sheets
|
|
|
With a view to upgrade Indian FOREX market to International standards, a well –
developed FOREX derivative market (both OTC and Exchange traded), RBI submitted
the report in April 2008, recommending the introduction of exchange traded currency
futures.
|
|
|
|
WHY FUTURES MARKET OVER THE OTC MARKET?
|
|
OTC MARKET - FORWARDS
|
|
n
|
Minimum traded quantity is higher compared to futures
|
|
n
|
Contracts are settled only on expiration at the forward price
|
|
n
|
There are no Margin Depostis
|
|
n
|
Counter Party Risk prevails, as there is no daily settlement and no margins.
|
|
n
|
Not much price transparency in terms of buyer and seller quotes
|
|
n
|
Real time price access not easily available
|
|
n
|
Need to provide relevant supporting and documentation for Hedging currency in the
OTC Markets
|
|
|
|
|
EXCHANGE TRADED - FUTURES
|
|
n
|
Minimum tradable quanity is 1000 Dollar. This opens the opportunities for all classes
of investors whether small or large to participate
|
|
n
|
There is a daily Mark to Market settlement hence indicating a more transparent and
efficient accounting systems
|
|
n
|
Very low % of margin deposit. This protects both the parties of trade.
|
|
n
|
100% Counter Party risk is eliminated as the presence of a clearing corporation
guarantees the elimination of the counter party default risk
|
|
n
|
Complete price transparency for buying as well as selling. Also instant trade confirmation
through the electronic trade platform
|
|
n
|
Real time, price access can be made available from any location in India on internet.
|
|
n
|
No such export – import documents or supporting required to be shown in order
to take position in the Futures market. Hence it is hassle free.
|
|
|
|
|
INDIAN CURRENCY FUTURES STRUCTURE
|
|
Currently, the currency derivative market in India offers only futures contract
to trade. Options and Interest rate swaps are currently not permitted. Currency
Futures trading is regulated by SEBI-RBI. Currency Futures are operational on MCX-SX
/ NSE / BSE-CDX. Currently FII's and NRI's are NOT permitted to trade.
|
|
|
|
HOW TO BE A PART OF THE CURRENCY DERIVATIVE MARKET?
|
|
n
|
Open a Currency Trading account with Sushil Financial Services Pvt. Ltd.
|
|
n
|
Make available the required margin for taking position either Long / Short.
Margins may vary from contract to contract and from time to time as decided by the
exchanges.
|
|
n
|
Receive research reports & views on the currency through SMS, E-Mail & Odin
Flash.
|
|
n
|
Take position on the futures exchange. Currently all contracts are only cash settled.
|
|
n
|
There is a daily Mark – to – Market (MTM) settlement, hence incase of
open position, arrange for the payments of any MTM debits, if markets move against
the open position.
|
|
|
|
|
BASIC PRODUCT DESIGN
|
|
n
|
Underlying: Currently only US Dollar – INR would be permitted initially.
|
|
n
|
Trading Hours: Monday – Friday from 9:00 am – 5:00 pm
|
|
n
|
Size of the Contract: Minimum Contract size US $ 1000 – Tick Size: Quarter
Paisa (0.0025)
|
|
n
|
Quotation: Futures would be quoted in INR; however outstanding position would be
in Dollar terms.
|
|
n
|
Available Contracts: Monthly expiry contracts from 1 to 12 months available.
|
|
n
|
Settlement: Cash settled in Indian Rupee. Final Settlement Price is RBI Reference
Rate on contract expiry date.
|
|
n
|
Final Settlement Day: Contract expiry on last working day (Excluding Saturdays)
of the month.
|
|