Bonanza Portfolio LTD., Ahmedabad: A Project Report On

Bonanza Portfolio Ltd, Ahmedabad.
Bonanza Portfolio Ltd., Ahmedabad
A Project Report
On
Scope and Limitation of Currency Derivative in India
For the partial fulfilment of the requirement of MBA programme
Submitted To:-
Kalol Institute of Management
Kalol
Submitted By:-
Chitrang Patel
Enrolment No: - 097250592005
Kalol Institute of Management, Kalol
Kalol Institute of Management, Kalol (2009-11)Page 1

Project Title: Scope and Limitation of Currency Derivative in India
Company Name: Bonanza Portfolio Limited
Address: 403-406 Shital Varsha Arcade,

Nr. Girish Cold Drink Cross Roads,
C.G. Road, Ahmedabad
Phone No.: 79-30014300
Website: www.bonanzaonline.com
Department: Derivatives Division
Project Guide: Mr. Ashish Mishra,

Manager Currency
Mobile: 9898884357
E- mail: ashish_mishra_79@yahoo.com

ACKNOWLEDGEMENT
I hereby take the opportunity to express my wholehearted thankfulness to Bonanza Portfolio

Limited, Ahmedabad. Summer Internship Programme at Bonanza Portfolio Limited,
Ahmedabad has been very fruitful and I have heartily enjoyed work allotted to me.
Successful completion of the project is indebted to the support of all the members of
derivative department of Bonanza Portfolio Limited, involved directly or indirectly with the
project. This association has provided me with a comprehensive insight into the currency
derivative market.
I would like to express my gratitude to my project guide Mr. Ashish Mishra, Manager
Currency, Bonanza Portfolio Limited, who gave me an opportunity to pursue project with the
organization.
I would like to place on record my indebtedness to Lecturer Bhumi Parekh, Faculty Guide,
Kalol Institute Of Management, Kalol, for encouraging me and showing confidence in me to
take up as guide for my project, and other faculty members (Especially in the area of finance)
at the institute, who trained me not only to understand the business environment but also to
adapt to the demanding needs of the business community.
Chitrang Patel
Roll No:-157-A
Enrollment No:- 097250592005

DECLARATION
I, the undersigned, Mr.Chitrang Patel student of M.B.A. hereby declare that project work
presented here is my own work and has been carried out under supervision of Mr. aashish
Mishra(Manager-Currency) and Miss Bhumi Parekh (Lecturer of Kalol Institute of
Management) and has not been submitted to any other university for any examination.
Signature of Student
Chitrang Patel
Kalol Institute of Management
M.B.A.
Gujarat Technological University

Executive Summary
The project is a comprehensive study of scope and limitation of currency derivative in India.
Bonanza Portfolio Limited is a leading Financial Services & Brokerage company working
since 1994. It has spread its trustworthy tentacles all over the country with more than 1025
outlets spread across 340 cities. Especially its services in derivatives are best among
competitors.
As Indian derivative market developed with time, the numbers of users of derivatives has
grown up rapidly. The variety of derivatives instruments available for trading is also
expanding. Still there is scope for development. This project is a study of the customers or
users of their derivatives and find out suitable products according to customers need. For
this purpose a survey is prepared and sent to respondents and then an analysis of the
response is done.
There are many legal binding for derivatives in India as well. Reserve Bank of India has
made many regulations regarding derivative contracts. Further regulatory reform will help
the markets grow faster. For example, Indian commodity derivatives have great growth
potential but government policies have resulted in the underlying spot/physical market being
fragmented (e.g. due to lack of free movement of commodities and differential taxation within
India).
As Indian derivatives markets grow more sophisticated, greater investor awareness will
become essential. The firms providing these services are bound to understand the customer
needs devote resources to develop the business processes and fulfil them.
The project report also covers the people use currency derivatives, product, trading process,
advantage, limitations, and suggestion in currency derivatives.

TABLE OF CONTENT
Sr. Particular Page

No. No.
1. Industry Profile 7
2. Company Profile 14
3. Brief Overview Of the Foreign Exchange Market In India 17
3.1- Purpose …………………………………………………………………… 18
3.2- Foreign Exchange Spot (Cash) Market …………………………………... 19
3.3- Foreign Exchange Quotations ……………………………………………. 20
4 Introduction about Currency Derivatives 22
4.1- Definition and Uses of Derivatives ………………………………………. 22
4.2- Rise of Derivatives market ……………………………………………….. 22
4.3- Exchange-Traded and Over-the-Counter Derivative Instruments.............. 23
4.4- Concept of Currency Derivative …………………………………………. 24
4.5- Types of Currency Derivative Instrument ………………………………. 24
4.6- Development of Derivative Markets in India ……………………………. 27
4.7- Derivatives Users in India ……………………………………………….. 28
4.8- Why Use of Currency Derivatives ……………………………………….. 30
6 Accounting of Currency Derivatives 33
7. Regulatory Framework 35
7.1- Evolution of a legal framework for derivatives trading in India …………. 35
7.2- International regulation of derivatives markets …………………………... 38
7.3- RBI Regulations ………………………………………………………….. 39
8. Foreign Exchange Risk Management 43
8.1- Necessity of managing foreign exchange risk ……………………………. 43
8.2- Foreign Exchange Risk Management Framework ……………………….. 44
8.3- Factors affecting the decision to hedge foreign currency risk ……………. 46
9. Report On Project Work 47
9.1- Title of the Project: ……………………………………………………….. 47
9.2- Objectives of the Project: ………………………………………………… 47
9.3- Research Methodology and Data Collection ……………………………... 47
9.4- Primary Data Analysis ……………………………………………………. 49
10. Findings & suggestions 57
11. Conclusion 58
12. Annexure 60
11.1-Questionnaire …………………………………………………………… 60

INDUSTRY PROFILE
The Indian broking industry is one of the oldest trading industries that have been around
even before the establishment of the BSE in 1275. Despite passing through a number of
changes in the post liberalization period, the industry has found its way towards sustainable
growth. With the purpose of gaining a deeper understanding about the role of the Indian
stock broking industry in the country’s economy, we present in this section some of the
industry insights gleaned from analysis of data received through primary research.
For the broking industry, we started with an initial database of over 1,800 broking firms that
were contacted, from which 464 responses were received. The list was further short listed
based on the number of terminals and the top 210 were selected for profiling. 394 responses,
that provided more than 85% of the information sought have been included for this analysis
presented here as insights. All the data for the study was collected through responses
received directly from the broking firms. The insights have been arrived at through an
analysis on various parameters, pertinent to the equity broking industry, such as region,
terminal, market, branches, sub brokers, products and growth areas.
Some key characteristics of the sample 394 firms are:
 On the basis of geographical concentration, the West region has the maximum
representation of 52%. Around 24% firms are located in the North, 13% in the South
and 10% in the East
 3% firms started broking operations before 1950, 65% between 1950-1995 and 32%
post
1995
 On the basis of terminals, 40% are located at Mumbai, 12% in Delhi, 8% in
Ahmedabad, 7% in Kolkata, 4% in Chennai and 29% are from other cities
 From this study, we find that almost 36% firms trade in cash and derivatives and 27%
are into cash markets alone. Around 20% trade in cash, derivatives and commodities
 In the cash market, around 34% firms trade at NSE, 14% at BSE and 52% trade at
both exchanges. In the derivative segment, 48% trade at NSE, 7% at BSE and 45% at
both, whereas in the debt market, 31% trade at NSE, 26% at BSE and 43% at both
exchanges
 Majority of branches are located in the North, i.e. around 40%. West has 31%, 24%
are located in South and 5% in East
 In terms of sub-brokers, around 55% are located in the South, 29% in West, 11% in
North and 4% in East
 Trading, IPOs and Mutual Funds are the top three products offered with 90% firms
offering trading, 67% IPOs and 53% firms offering mutual fund transactions
 In terms of various areas of growth, 84% firms have expressed interest in expanding
their institutional clients, 66% firms intend to increase FII clients and 43% are
interested in setting up JV in India and abroad
 In terms of IT penetration, 62% firms have provided their website and around 94%
firms have email facility.

Terminals
Almost 52% of the terminals in the sample are based in the Western region of India,
followed by 25% in the North, 13% in the South and 10% in the East. Mumbai has got the
maximum representation from the West, Chennai from the South, New Delhi from the North
and Kolkata from the East.
Mumbai also has got the maximum representation in having the highest number of
terminals. 40% terminals are located in Mumbai while 12% are from Delhi, 8% from
Ahmedabad, 7% from Kolkata, 4% from Chennai and 29% are from other cities in India.
Branches & Sub-Brokers
The maximum concentration of branches is in the North, with as many as 40% of all
branches located there, followed by the Western region, with 31% branches. Around 24%
branches are located in the South and East constitutes for 5% of the total branches of the
total sample.
In case of sub-brokers, almost 55% of them are based in the South. West and North follow,
with 30% and 11% sub-brokers respectively, whereas East has around 4% of total sub-
brokers.

Financial Markets
The financial markets have been classified as cash market, derivatives market, debt market
and commodities market. Cash market, also known as spot market, is the most sought after
amongst investors. Majority of the sample broking firms are dealing in the cash market,
followed by derivative and commodities. 27% firms are dealing only in the cash market,
whereas 35% are into cash and derivatives. Almost 20% firms trade in cash, derivatives and
commodities market. Firms that are into cash, derivatives and debt are 7%. On the other
hand, firms into cash and commodities are 3%, cash & debt market and commodities alone
are 2%. 4% firms trade in all the markets.
In the cash market, around 34% firms trade at NSE, 14% at BSE and 52% trade at both
exchanges. In the equity derivative market, 48% of the sampled broking houses are members
of NSE and 7% trade at BSE, while 45% of the sample operate in both stock exchanges.
Around 4% of total sub-broker.

Financial Markets
The financial markets have been classified as cash market, derivatives market, debt market
and commodities market. Cash market, also known as spot market, is the most sought after
amongst investors. Majority of the sample broking firms are dealing in the cash market,
followed by derivative and commodities. 27% firms are dealing only in the cash market,
whereas 35% are into cash and derivatives. Almost 20% firms trade in cash, derivatives and
commodities market. Firms that are into cash, derivatives and debt are 7%. On the other
hand, firms into cash and commodities are 3%, cash & debt market and commodities alone
are 2%. 4% firms trade in all the markets.
In the cash market, around 34% firms trade at NSE, 14% at BSE and 52% trade at both
exchanges. In the equity derivative market, 48% of the sampled broking houses are members
of NSE and 7% trade at BSE, while 45% of the sample operate in both stock exchanges.
Around 43% of the broking houses operating in the debt market, trade at both exchanges
with 31% and 26% firms uniquely at NSE and BSE respectively.

Company name Total Sub No.of No. of City

terminals brokers employees branches
Angel broking ltd 5081 2408 1800 66 Mumbai
Bonanza portfolio 2177 536 1200 380 Delhi
ltd
Geojit portfolio ltd 2410 109 2100 383 Kochi
ICICI securities ltd 1051 587 1833 270 Mumbai
Indiabulls 2700 NA 8922 475 New delhi
securities ltd
Motilal oswal 4179 638 2000 60 Mumbai
securities ltd
SMC global 3132 800 1000 800 New delhi
securities ltd
Details of Big Broker Houses
Company name Total terminals Sub brokers No.of employees No. of City
branches
Angel broking ltd 5081 2408 1800 66 Mumbai
Bonanza portfolio ltd 2177 536 1200 380 Delhi
Geojit portfolio ltd 2410 109 2100 383 Kochi
ICICI securities ltd 1051 587 1833 270 Mumbai
Indiabulls securities 2700 NA 8922 475 New delhi
ltd
Motilal oswal 4179 638 2000 60 Mumbai
securities ltd
SMC global securities 3132 800 1000 800 New delhi
ltd

Market Structure
Indian securities market is fairly large as compared to several other emerging markets. There
are 22 stock exchanges in the country, though the entire liquidity is shared between the
country’s two national level exchanges namely, the National Stock Exchange of India and
the Bombay Stock Exchange Ltd. The regional stock exchanges are in pursuit of business
models that make them viable and vibrant. Meanwhile, these exchanges have become
members of the national level exchanges through formation of subsidiaries whose business
is showing continuous growth and progress.
The number of brokers in various stock exchanges rose from 6,711 in 1994-95 to 9,335 in
FY06. The number of brokers in all the exchanges together peaked to 10,213 in the year
FY01 but gradually declined thereafter when the regional stock exchanges began to lose
business in the light of wide ranging market structure reforms introduced since then. In
FY01, when the markets were in upswing, several regional stock exchanges were generating
business owing to the availability of deferral products, such Badla and different settlement
calendars prevailing at that time in these exchanges. For instance in FY01, the Delhi Stock
Exchange registered cash market turnover of Rs 838.71 bn; Uttar Pradesh Stock Exchange,
Rs 247.47 bn, Ludhiana Stock Exchange Rs 97.32 bn, Pune Stock Exchange Rs 61.71 bn as
against Rs 13,395.11 bn of the turnover at the National Stock Exchange and Rs 10,000.32 bn
turnover at the Bombay Stock Exchange. With the abolition of the deferral products and
introduction of uniform T+2 settlement cycle, the liquidity in these exchanges flowed to the
national level system consisting of NSE and BSE.

Indian Stock Markets: Growth of Market Structure (In Number)
Source: Securities and Exchange Board of India
Sub-brokers are an important constituent of Indian stock markets. Sub-brokers work under
brokers with specified limits for trading and risk management. Sub -brokers are term as
useful part in the value chain since they provide active interface with a large number of
investors across the country and also extend the reach and access of the services of the
brokerage firms. With the rapid growth of securities trading and deepening of the stock
markets, the number of sub-brokers nearly doubled in the last ten years from 9,957 in FY01
to 23,479 in FY06.
Exchange-wise Brokers and Sub-Brokers in Indian Stock Exchanges 2005-06
Source: Securities and Exchange Board of India

COMPANY PROFILE
Bonanza a leading Financial Services & Brokerage House working diligently since 1994 can
be described in a single word as a "Financial Powerhouse". With acknowledged industry
leadership in execution and clearing services on Exchange Traded Derivatives and cash
market products. Bonanza has spread its trustworthy tentacles all over the country with more
than 1025 outlets spread across 340 cities.
It provides an extensive smorgasbord of services in equity, commodities, currency

derivatives, wealth management, distribution of third party products etc.
1.1. Products and Services:-
 Primary Brokerage Services

 Equity
 Equity Derivatives
 Commodity
 Depository Services
 Fixed Income
 Mutual Fund
 IPO
 Insurance
 Investment Management
 Professional Fund Management
 Other Services
 Dedicated portfolio manager contact
 Expert initial and on-going advice
 Continual fund monitoring
In depth reporting on portfolio performance, including graphs & charts.

Mission & Vision:-
“We believe in making money, not mistake.”

“We owe that to you, for trusting us”
Bonanza - it's a windfall:-
One core Mission is clients' wealth generation through professional advice backed by
thorough research and in-depth analysis. We offer a single point access to the vast world of
Financial services. Our strengths included diverse product name, state-of-the-art technology
& vast network across India.
Proven and accredited leaders in the Financial services business, Bonanza provides you the
unique opportunity to trade offline and online while cutting across all geographic barriers.
 Strategic tie-up that provide latest technology for access and processing
 Trading over 425 locations across 160 cities in India.
 24 hour access to Account Information via the net or Electronic File transfer (FTP)
facilities.
 Corporate Agents for life & Non-life Insurance|(both foreign/private state owned
insurance companies)
 One of the largest distributors of leading Mutual Funds in India
Achievements of Bonanza Portfolio Ltd:-
(1) Top Equity Broking House in Terms of Branch Expansion 2007.
(2) 3rd in Term of Number of Trading Account For 2008*.
(3) 6th in term trading Terminals in for Two Consecutive years 2007& 2008*.
(4) 9th in term of Sub Brokers for 2007*( as per the Studies Carried out by “DUN &
BRADSTREET” for top Equity Broking Firm)
(5) Awards by BSE “Major Volume Drivers 2006-2007 & 2004-2005”.

(6) Nominated among the top 3for the Best Financial Advisor Awards 2008 in the
Category of National Distributors-retail instituted by CNBC-TV18.
(7) Awarded by CNBC channel.
(8) Bonanza has 6th position in terms of terminal in India through Economic Times.
(9) Provide 24 hours back office.
(10) More than 100 franchises in Gujarat in short time.
Membership:-
(1) National Stock Exchange of India(NSEIL)
(2) The Bombay Stock Exchange(BSE)
(3) Multi Commodity Exchange(MCX)
(4) National Commodity & Derivatives Exchange Ltd(NCDEX)
(5) National multi commodity exchange(NMCE)
(6) Depository Participant for Equity(NSDL/CDSL)
(7) Depository participant for commodity
(8) Dubai Gold & Commodity Exchange(DGCX)
(9) SEBI Authorized PMS
(10) Registered Distributor with AMFI
Core Value of Bonanza Portfolio Ltd.:-
 Customer satisfaction through providing quality services effectively and efficiently

“Smile it enhance your face value” is a service quality stressed on periodic customer
service audits.”
 Maximization of Stakeholder value
 Success through Team Work Integrity and people.

Brief Overview of the Foreign Exchange Market in India
During the early 1990s, India embarked on a series of structural reforms in the foreign
exchange market. The exchange rate regime, that was earlier pegged, was partially floated in
March 1992 and fully floated in March 1993. The unification of the exchange rate was
instrumental in developing a market-determined exchange rate of the rupee and was an
important step in the progress towards total current account convertibility, which was
achieved in August 1994.
Although liberalization helped the Indian forex market in various ways, it led to extensive
fluctuations of exchange rate. This issue has attracted a great deal of concern from policy-
makers and investors. While some flexibility in foreign exchange markets and exchange rate
determination is desirable, excessive volatility can have an adverse impact on price
discovery, export performance, sustainability of current account balance, and balance sheets.
In the context of upgrading Indian foreign exchange market to international standards, a well-
developed foreign exchange derivative market (both OTC as well as Exchange-traded) is
imperative.
With a view to enable entities to manage volatility in the currency market, RBI on April 20,
2007 issued comprehensive guidelines on the usage of foreign currency forwards, swaps and
options in the OTC market.
At the same time, RBI also set up an Internal Working Group to explore the advantages of
introducing currency futures.
The Report of the Internal Working Group of RBI submitted in April 2008, recommended the
introduction of Exchange Traded Currency Futures.
Subsequently, RBI and SEBI jointly constituted a Standing Technical Committee to analyze
the Currency Forward and Future market around the world and lay down the guidelines to
introduce Exchange Traded Currency Futures in the Indian market.
The Committee submitted its report on May 29, 2008. Further RBI and SEBI also issued
circulars in this regard on August 06, 2008.

Currently, India is a USD 34 billion OTC market, where all the major currencies like USD,
EURO, YEN, Pound, Swiss Franc etc. are traded. With the help of electronic trading and
efficient risk management systems, Exchange Traded Currency Futures will bring in more
transparency and efficiency in price discovery, eliminate counterparty credit risk, provide
access to all types of market participants, offer standardized products and provide transparent
trading platform. Banks are also allowed to become members of this segment on the
Exchange, thereby providing them with a new opportunity.
Source :-( Report of the RBI-SEBI standing technical committee on exchange traded
currency futures) 2008.
Purpose
The foreign exchange market is the mechanism by which currencies are valued relative to one
another, and exchanged. An individual or institution buys one currency and sells another in a
simultaneous transaction. Currency trading always occurs in pairs where one currency is sold
for another and is represented in the following notation: EUR/USD or CHF/YEN. The
exchange rate is determined through the interaction of market forces dealing with supply and
demand.
Foreign Exchange Traders generate profits, or losses, by speculating whether a currency will
rise or fall in value in comparison to another currency. A trader would buy the currency
which is anticipated to gain in value, or sell the currency which is anticipated to lose value
against another currency. The value of a currency, in the simplest explanation, is a reflection
of the condition of that country's economy with respect to other major economies. The Forex
market does not rely on any one particular economy. Whether or not an economy is
flourishing or falling into a recession, a trader can earn money by either buying or selling the
currency. Reactive trading is the buying or selling of currencies in response to economic or
political events, while speculative trading is based on a trader anticipating events.

Foreign Exchange Spot (Cash) Market
The foreign exchange spot market trades in different currencies for both spot and forward
delivery. Generally they do not have specific location, and mostly take place primarily by
means of telecommunications both within and between countries.
It consists of a network of foreign dealers which are generally banks, financial institutions,
large concerns, etc. The large banks usually make markets in different currencies.
In the spot exchange market, the business is transacted throughout the world on a continual
basis. So it is possible to transaction in foreign exchange markets 24 hours a day. The
standard settlement period in this market is 48 hours, i.e., 2 days after the execution of the
transaction.
The spot foreign exchange market is similar to the OTC market for securities. There is no
centralized meeting place and no fixed opening and closing time. Since most of the business
in this market is done by banks, hence, transaction usually do not involve a physical transfer
of currency, rather simply book keeping transfer entry among banks.
Exchange rates are generally determined by demand and supply force in this market. The
purchase and sale of currencies stem partly from the need to finance trade in goods and
services. Another important source of demand and supply arises from the participation of the
central banks which would emanate from a desire to influence the direction, extent or speed
of exchange rate movements.

Foreign Exchange Quotations
Foreign exchange quotations can be confusing because currencies are quoted in terms of
other currencies. It means exchange rate is relative price.
For example,
If one US dollar is worth of Rs. 45 in Indian rupees then it implies that 45 Indian rupees will
buy one dollar of USA, or that one rupee is worth of 0.022 US dollar which is simply
reciprocal of the former dollar exchange rate.
EXCHANGE RATE
Direct Indirect
The number of units of domestic The number of unit of foreign
Currency stated against one unit currency per unit of domestic
Of foreign currency. Currency.
Re/$ = 45.7250 ( or ) Re 1 = $ 0.02187
$1 = Rs. 45.7250
There are two ways of quoting exchange rates: the direct and indirect.
Most countries use the direct method. In global foreign exchange market, two rates
are quoted by the dealer: one rate for buying (bid rate), and another for selling (ask or
offered rate) for a currency. This is a unique feature of this market. It should be noted
that where the bank sells dollars against rupees, one can say that rupees against dollar. In
order to separate buying and selling rate, a small dash or oblique line is drawn after the
dash.

For example,
If US dollar is quoted in the market as Rs 46.3500/3550, it means that the forex dealer is
ready to purchase the dollar at Rs 46.3500 and ready to sell at Rs 46.3550. The difference
between the buying and selling rates is called spread.
It is important to note that selling rate is always higher than the buying rate.
Traders, usually large banks, deal in two way prices, both buying and selling, are called
market makers.

Introduction about Currency Derivative
Definition and Uses of Derivatives
A derivative security is a financial contract whose value is derived from the value of
underlying assets, such as a stock price, a commodity price, an exchange rate, an interest rate,
or even an index of prices. Rather than trade or exchange the underlying asset itself,
derivative traders enter into an agreement to exchange cash or assets over time based on the
underlying asset. A simple example of a futures contract is an agreement to exchange the
underlying asset at a future date.
Derivatives are often highly leveraged, such that a small movement in the underlying value
can cause a large difference in the value of the derivative.
Derivatives may be traded for a variety of reasons. A derivative enables a trader to hedge
some pre-existing risk by taking positions in derivatives markets that offset potential losses in
the underlying or spot market. In India, most derivatives users describe themselves as hedgers
(Fitch Ratings, 2004) and Indian laws generally require that derivatives be used for hedging
purposes only. Another motive for derivatives trading is speculation (i.e. taking positions to
profit from anticipated price movements). In practice, it may be difficult to distinguish
whether a particular trade was for hedging or speculation, and active markets require the
participation of both hedgers and speculators.
A third type of trader, called arbitrageurs, profit from discrepancies in the relationship of spot
and derivatives prices, and thereby help to keep markets efficient.
Rise of Derivatives market
The global economic order that emerged after World War II was a system where
many less developed countries administered prices and centrally allocated resources. Even
the developed economies operated under the Bretton Woods system of fixed exchange rates.
The system of fixed prices came under stress from the 1970s onwards. High inflation
and unemployment rates made interest rates more volatile. The Bretton Woods system was

dismantled in 1971, freeing exchange rates to fluctuate. Less developed countries like India
began opening up their economies and allowing prices to vary with market conditions.
Price fluctuations make it hard for businesses to estimate their future production costs and
revenues. Derivative securities provide them a valuable set of tools for managing this risk. It
results to evolution of Indian derivatives markets, the popular derivatives instruments, and the
main users of derivatives in India.
Exchange-Traded and Over-the-Counter Derivative Instruments
OTC (over-the-counter) contracts, such as forwards and swaps, are bilaterally

negotiated between two parties. The terms of an OTC contract are flexible, and are often
customized to fit the specific requirements of the user. OTC contracts have substantial credit
risk, which is the risk that the counterparty that owes money defaults on the payment. In
India, OTC derivatives are generally prohibited with some exceptions: those that are
specifically allowed by the Reserve Bank of India (RBI) or, in the case of commodities
(which are regulated by the Forward Markets Commission), those that trade informally in
“havala” or forwards markets.
An exchange-traded contract, such as a futures contract, has a standardized format

that specifies the underlying asset to be delivered, the size of the contract, and the logistics of
delivery. They trade on organized exchanges with prices determined by the interaction of
many buyers and sellers. In India, two exchanges offer derivatives trading: the Bombay Stock
Exchange (BSE) and the National Stock Exchange (NSE). However, NSE now accounts for
virtually all exchange-traded derivatives in India, accounting for more than 95% of volume in
2007-2008. Contract performance is guaranteed by a clearinghouse, which is a wholly owned
subsidiary of the NSE. Margin requirements and daily marking-to-market of futures positions
substantially reduce the credit risk of exchange-traded contracts, relative to OTC contracts.

Concept of Currency Derivative
A currency derivative is a contract between the seller and the buyer, whose value is to be
derived from the underlying asset, the currency amount. A derivative based on currency
exchange rates is a future contract which stipulates the rate at which a given currency can be
exchanged for another currency as at a future date.
A currency derivative is a product with benefits, such as:
Access to a new asset class for trading to all Resident Indians
 Arbitrage opportunity for entities, who can access onshore and non-deliverable
forward markets
 Volatility and multiplier make it a significant trading option for traders
 Hedging current exposure:
 Importers and exporters can hedge future payables and receivables

 Borrowers can hedge Foreign Currency loans for interest or principal
payments
 Hedge for offshore investment for Resident Indians
Types of Currency Derivative Instrument
A derivative is a financial contract whose value is derived from the value of some other
financial asset, such as a stock price, a commodity price, an exchange rate, an interest rate, or
even an index of prices. The main role of derivatives is that they reallocate risk among
financial market participants, help to make financial markets more complete. This section
outlines the hedging strategies using derivatives with foreign exchange being the only risk
assumed.

 Forwards: A forward is a made-to-measure agreement between two parties to

buy/sell a specified amount of a currency at a specified rate on a particular date in the
future. The depreciation of the receivable currency is hedged against by selling a
currency forward. If the risk is that of a currency appreciation (if the firm has to buy
that currency in future say for import), it can hedge by buying the currency forward.
E.g if RIL wants to buy crude oil in US dollars six months hence, it can enter into a
forward contract to pay INR and buy USD and lock in a fixed exchange rate for INR-
USD to be paid after 6 months regardless of the actual INR-Dollar rate at the time. In
this example the downside is an appreciation of Dollar which is protected by a fixed
forward contract. The main advantage of a forward is that it can be tailored to the
specific needs of the firm and an exact hedge can be obtained. On the downside, these
contracts are not marketable, they can’t be sold to another party when they are no
longer required and are binding.
 Futures: A futures contract is similar to the forward contract but is more liquid
because it is traded in an organized exchange i.e. the futures market. Depreciation of a
currency can be hedged by selling futures and appreciation can be hedged by buying
futures. Advantages of futures are that there is a central market for futures which
eliminates the problem of double coincidence. Futures require a small initial outlay (a
proportion of the value of the future) with which significant amounts of money can be
gained or lost with the actual forwards price fluctuations. This provides a sort of
leverage. The previous example for a forward contract for RIL applies here also just
that RIL will have to go to a USD futures exchange to purchase standardised dollar
futures equal to the amount to be hedged as the risk is that of appreciation of the
dollar. As mentioned earlier, the tailorability of the futures contract is limited i.e. only
standard denominations of money can be bought instead of the exact amounts that are
bought in forward contracts.
 Options: 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; called the Exercise Price or Strike Price. The fixed nature of the exercise price
reduces the uncertainty of exchange rate changes and limits the losses of open
currency positions. Options are particularly suited as a hedging tool for contingent

cash flows, as is the case in bidding processes. Call Options are used if the risk is an
upward trend in price (of the currency), while Put Options are used if the risk is a
downward trend. Again taking the example of RIL which needs to purchase crude oil
in USD in 6 months, if RIL buys a Call option (as the risk is an upward trend in dollar
rate), i.e. the right to buy a specified amount of dollars at a fixed rate on a specified
date, there are two scenarios. If the exchange rate movement is favourable i.e the
dollar depreciates, then RIL can buy them at the spot rate as they have become
cheaper. In the other case, if the dollar appreciates compared to today’s spot rate, RIL
can exercise the option to purchase it at the agreed strike price. In either case RIL
benefits by paying the lower price to purchase the dollar.
 Swaps: A swap is a foreign currency contract whereby the buyer and seller exchange
equal initial principal amounts of two different currencies at the spot rate. The buyer
and seller exchange fixed or floating rate interest payments in their respective
swapped currencies over the term of the contract. At maturity, the principal amount is
effectively re-swapped at a predetermined exchange rate so that the parties end up
with their original currencies. The advantages of swaps are that firms with limited
appetite for exchange rate risk may move to a partially or completely hedged position
through the mechanism of foreign currency swaps, while leaving the underlying
borrowing intact. Apart from covering the exchange rate risk, swaps also allow firms
to hedge the floating interest rate risk. Consider an export oriented company that has
entered into a swap for a notional principal of USD 1 mn at an exchange rate of
42/dollar. The company pays US 6months LIBOR to the bank and receives 11.00%
p.a. every 6 months on 1st January & 1st July, till 5 years. Such a company would
have earnings in Dollars and can use the same to pay interest for this kind of
borrowing (in dollars rather than in Rupee) thus hedging its exposures.

Development of Derivative Markets in India
Derivatives markets have been in existence in India in some form or other for a long time. In
the area of commodities, the Bombay Cotton Trade Association started futures trading in
1875 and, by the early 1900s India had one of the world’s largest futures industry. In 1952
the government banned cash settlement and options trading and derivatives trading shifted to
informal forwards markets. In recent years, government policy has changed, allowing for an
increased role for market-based pricing and less suspicion of derivatives trading. The ban on
futures trading of many commodities was lifted starting in the early 2000s, and national
electronic commodity exchanges were created.
In the equity markets, a system of trading called “badla” involving some elements of
forwards trading had been in existence for decades. However, the system led to a number of
undesirable practices and it was prohibited off and on till the Securities and Exchange Board
of India (SEBI) banned it for good in 2001. A series of reforms of the stock market between
1993 and 1996 paved the way for the development of exchange-traded equity derivatives
markets in India. In 1993, the government created the NSE in collaboration with state-owned
financial institutions. NSE improved the efficiency and transparency of the stock markets by
offering a fully automated screen-based trading system and real-time price dissemination. In
1995, a prohibition on trading options was lifted. In 1996, the NSE sent a proposal to SEBI
for listing exchange-traded derivatives. The report of the L. C. Gupta Committee, set up by
SEBI, recommended a phased introduction of derivative products, and bi-level regulation
(i.e., self-regulation by exchanges with SEBI providing a supervisory and advisory role).
Another report, by the J. R. Varma Committee in 1998, worked out various operational
details such as the margining systems. In 1999, the Securities Contracts (Regulation) Act of
1956, or SC(R)Act, was amended so that derivatives could be declared “securities.” This
allowed the regulatory framework for trading securities to be extended to derivatives. The
Act considers derivatives to be legal and valid, but only if they are traded on exchanges.
Finally, a 30-year ban on forward trading was also lifted in 1999.
The economic liberalization of the early nineties facilitated the introduction of derivatives
based on interest rates and foreign exchange. A system of market-determined exchange rates
was adopted by India in March 1993. In August 1994, the rupee was made fully convertible
on current account. These reforms allowed increased integration between domestic and
international markets, and created a need to manage currency risk.

Derivatives Users in India
The use of derivatives varies by type of institution. Financial institutions, such as banks, have
assets and liabilities of different maturities and in different currencies, and are exposed to
different risks of default from their borrowers. Thus, they are likely to use derivatives on
interest rates and currencies, and derivatives to manage credit risk. Non-financial institutions
are regulated differently from financial institutions, and this affects their incentives to use
derivatives. Indian insurance regulators, for example, are yet to issue guidelines relating to
the use of derivatives by insurance companies.
In India, financial institutions have not been heavy users of exchange-traded derivatives so
far, with their contribution to total value of NSE trades being less than 8% in October 2005.
However, market insiders feel that this may be changing, as indicated by the growing share of
index derivatives (which are used more by institutions than by retail investors). In contrast to
the exchange-traded markets, domestic financial institutions and mutual funds have shown
great interest in OTC fixed income instruments. Transactions between banks dominate the
market for interest rate derivatives, while state-owned banks remain a small presence.
Corporations are active in the currency forwards and swaps markets, buying these
instruments from banks.
Some institutions such as banks and mutual funds are only allowed to use derivatives to
hedge their existing positions in the spot market, or to rebalance their existing portfolios.
Since banks have little exposure to equity markets due to banking regulations, they have little
incentive to trade equity derivatives. Foreign investors must register as foreign institutional
investors (FII) to trade exchange-traded derivatives, and be subject to position limits as
specified by SEBI. Alternatively, they can incorporate locally as broker-dealer. FIIs have a
small but increasing presence in the equity derivatives markets. They have no incentive to
trade interest rate derivatives since they have little investments in the domestic bond markets.
It is possible that unregistered foreign investors and hedge funds trade indirectly, using a
local proprietary trader as a front.
Retail investors (including small brokerages trading for themselves) are the major
participants in equity derivatives, accounting for about 60% of turnover in October 2005,
according to NSE. The success of single stock futures in India is unique, as this instrument
has generally failed in most other countries. One reason for this success may be retail

investors’ prior familiarity with “badla” trades which shared some features of derivatives
trading. Another reason may be the small size of the futures contracts, compared to similar
contracts in other countries. Retail investors also dominate the markets for commodity
derivatives, due in part to their long-standing expertise in trading in the “havala” or forwards
markets.
Currency-based derivatives are used by exporters invoicing receivables in foreign currency,

willing to protect their earnings from the foreign currency depreciation by locking the
currency conversion rate at a high level. Their use by importers hedging foreign currency
payables is effective when the payment currency is expected to appreciate and the importers
would like to guarantee a lower conversion rate. Investors in foreign currency denominated
securities would like to secure strong foreign earnings by obtaining the right to sell foreign
currency at a high conversion rate, thus defending their revenue from the foreign currency
depreciation. Multinational companies use currency derivatives being engaged in direct
investment overseas. They want to guarantee the rate of purchasing foreign currency for
various payments related to the installation of a foreign branch or subsidiary, or to a joint
venture with a foreign partner.
A high degree of volatility of exchange rates creates a fertile ground for foreign exchange
speculators. Their objective is to guarantee a high selling rate of a foreign currency by
obtaining a derivative contract while hoping to buy the currency at a low rate in the future.
Alternatively, they may wish to obtain a foreign currency forward buying contract, expecting
to sell the appreciating currency at a high future rate. In either case, they are exposed to the
risk of currency fluctuations in the future betting on the pattern of the spot exchange rate
adjustment consistent with their initial expectations.
The most commonly used instrument among the currency derivatives are currency forward
contracts. These are large notional value selling or buying contracts obtained by exporters,
importers, investors and speculators from banks with denomination normally exceeding 2
million USD. The contracts guarantee the future conversion rate between two currencies and
can be obtained for any customized amount and any date in the future. They normally do not
require a security deposit since their purchasers are mostly large business firms and
investment institutions, although the banks may require compensating deposit balances or
lines of credit. Their transaction costs are set by spread between bank's buy and sell prices.

Exporters invoicing receivables in foreign currency are the most frequent users of these
contracts. They are willing to protect themselves from the currency depreciation by locking in
the future currency conversion rate at a high level. A similar foreign currency forward selling
contract is obtained by investors in foreign currency denominated bonds (or other securities)
who want to take advantage of higher foreign that domestic interest rates on government or
corporate bonds and the foreign currency forward premium. They hedge against the foreign
currency depreciation below the forward selling rate which would ruin their return from
foreign financial investment. Investment in foreign securities induced by higher foreign
interest rates and accompanied by the forward selling of the foreign currency income is called
a covered interest arbitrage.
Why Use of Currency Derivatives
 Hed gin g:-
Presume Entity A is expecting a remittance for USD 1000 on 27 August 08. Wants to
lock in the foreign exchange rate today so that the value of inflow in Indian rupee terms
is safeguarded. The entity can do so by selling one contract of USDINR futures since
one contract is for USD 1000.
Presume that the current spot rate is Rs.43 and ‘USDINR 27 Aug 08’ contract is trading
at Rs.44.2500. Entity A shall do the following:
Sell one August contract today. The value of the contract is Rs.44,250.
Let us assume the RBI reference rate on August 27, 2008 is Rs.44.0000. The entity shall
sell on August 27, 2008, USD 1000 in the spot market and get Rs. 44,000. The futures
contract will settle at Rs.44.0000 (final settlement price = RBI reference rate).
The return from the futures transaction would be Rs. 250, i.e. (Rs. 44,250 – Rs. 44,000).
As may be observed, the effective rate for the remittance received by the entity A is
Rs.44.2500 (Rs.44,000 + Rs.250)/1000, while spot rate on that date was Rs.44.0000.
The entity was able to hedge its exposure.

 Speculation: Bullish, buy futures
Take the case of a speculator who has a view on the direction of the market. He would like
to trade based on this view. He expects that the USD-INR rate presently at Rs.42, is to
go up in the next two-three months. How can he trade based on this belief? In case he
can buy dollars and hold it, by investing the necessary capital, he can profit if say the
Rupee depreciates to Rs.42.50. Assuming he buys USD 10000, it would require an
investment of Rs.4,20,000. If the exchange rate moves as he expected in the next three
months, then he shall make a profit of around Rs.10000. This works out to an annual
return of around 4.76%. It may please be noted that the cost of funds invested is not
considered in computing this return.
A speculator can take exactly the same position on the exchange rate by using futures
contracts. Let us see how this works. If the INR- USD is Rs.42 and the three month
futures trade at Rs.42.40. The minimum contract size is USD 1000. Therefore the
speculator may buy 10 contracts. The exposure shall be the same as above USD 10000.
Presumably, the margin may be around Rs.21, 000. Three months later if the Rupee
depreciates to Rs. 42.50 against USD, (on the day of expiration of the contract), the futures
price shall converge to the spot price (Rs. 42.50) and he makes a profit of Rs.1000 on an
investment of Rs.21, 000. This works out to an annual return of 19 percent. Because of the
leverage they provide, futures form an attractive option for speculators.
 Speculation: Bearish, sell futures
Futures can be used by a speculator who believes that an underlying is over-valued and is
likely to see a fall in price. How can he trade based on his opinion? In the absence of a
deferral product, there wasn 't much he could do to profit from his opinion. Today all he
needs to do is sell the futures.
Let us understand how this works. Typically futures move correspondingly with the
underlying, as long as there is sufficient liquidity in the market. If the underlying price rises,
so will the futures price. If the underlying price falls, so will the futures price. Now take the
case of the trader who expects to see a fall in the price of USD-INR. He sells one two-
month contract of futures on USD say at Rs. 42.20 (each contact for USD 1000). He pays a
small margin on the same. Two months later, when the futures contract expires, USD-INR

rate let us say is Rs.42. On the day of expiration, the spot and the futures price converges. He
has made a clean profit of 20 paisa per dollar. For the one contract that he sold, this works
out to be Rs.2000.
 Arbitrage:
Arbitrage is the strategy of taking advantage of difference in price of the same or similar
product between two or more markets. That is, arbitrage is striking a combination of
matching deals that capitalize upon the imbalance, the profit being the difference between
the market prices. If the same or similar product is traded in say two different markets, any
entity which has access to both the markets will be able to identify price differentials, if
any. If in one of the markets the product is trading at higher price, then the entity shall buy
the product in the cheaper market and sell in the costlier market and thus benefit from the
price differential without any additional risk.
One of the methods of arbitrage with regard to USD-INR could be a trading strategy
between forwards and futures market. As we discussed earlier, the futures price and
forward prices are arrived at using the principle of cost of carry. Such of those entities who
can trade both forwards and futures shall be able to identify any mis-pricing between
forwards and futures. If one of them is priced higher, the same shall be sold while
simultaneously buying the other which is priced lower. If the tenor of both the contracts is
same, since both forwards and futures shall be settled at the same RBI reference rate, the
transaction shall result in a risk less profit.

Accounting of Currency Derivative
Though In India accounting of currency derivatives are not fully implemented, the
Accounting Standard (AS) 11, the Effects of Changes in Foreign Exchange Rates (revised
2003), has come with some accounting treatments:
An enterprise may enter into a forward exchange contract or another financial instrument that
is in substance a forward exchange contract, which is not intended for trading or speculation
purposes, to establish the amount of the reporting cur currency required or available at the
settlement date of a transaction. The premium or discount arising at the inception of such a
forward exchange contract should be amortized as expense or income over the life of the
contract. Exchange differences on such a contract should be recognized in the statement of
profit and loss in the reporting period in which the exchange rates change. Any profit or loss
arising on cancellation or renewal of such a forward exchange contract should be recognized
as income or as expense for the period.
Any premium or discount arising at the inception of a forward exchange contract is accounted
for separately from the exchange differences on the forward exchange contract.
Exchange difference on a forward exchange contract is the difference between (a) the foreign
currency amount of the contract translated at the exchange rate at the reporting date, or the
settlement date where the transaction is settled during the reporting period, and (b) the same
foreign currency amount translated at the latter of the date of inception of the forward
exchange contract and the last reporting date.
For enterprises entering into contract for trading or speculation purpose: A gain or loss
on a forward exchange contract to which paragraph the above not apply should be computed
by multiplying the foreign currency amount of the forward exchange contract by the
difference between the forward rate available at the reporting date for the remaining maturity
of the contract and the contracted forward rate (or the forward rate last used to measure a gain
or loss on that contract for an earlier period).
 The gain or loss so computed should be recognized in the statement of profit and loss
for the period.
 The premium or discount on the forward exchange contract is not recognized
separately.

Accounting as per international accounting standard: IAS 39
IAS 39 demands that hedging relationships have to be reported by demanding that both the
hedging transaction and underlying hedged transaction be reported. According to IAS 39,
there are three types of heading relationship, of which the following two are relevant:
1. Fair value Hedge: The hedging transaction secures the value of an asset or liability.
The standard demands that changes in value of the hedged underlying transaction and
the derivative hedging transaction, i.e. the hedging relationship, be reported with
compensating effect on the results.
2. Cash flow hedge: If a future payment stream is hedged, profits and losses from the
hedging transaction are recorded, to the extent to which the hedging relationship can
be classified as valid, in a separate item in the equity. The profits and losses recorded
in the equity are then redeemed against the results in the periods when a future cash
flow is no longer exclusively secured. This is the case, for example, if first of all an
order value is secured and later the order value is billed and receivable is produced.
As per standard practice under IAS 39: In case of Fixed assets related forward contracts, the
accounting treatment will be same for forward booking, valuation of contracts before actual
delivery of fixed assets will be from valuation reserve. On actual delivery the Fixed assets be
capitalized and the value in valuation reserve will be transferred to Fixed assets. Subsequent
valuation will be at mark to market and shown in Profit and loss account and on capitalization
transferred to Fixed assets. In case of Hedge relationship is broken like purchase deal is being
concealed or otherwise Balances of valuation reserve being transferred to Gain /loss in profit
and loss account.

Regulatory Framework
Evolution of a legal framework for derivatives trading in India
An important step towards introduction of derivatives trading in India was the promulgation
of the Securities Laws (Amendment) Ordinance, 1995, which lifted the prohibition on
“options in securities” (NSEIL, 2001). However, since there was no regulatory framework to
govern trading of securities, the derivatives market could not develop SEBI set up a
committee in November 1996 under the chairmanship of Dr. L.C. Gupta to develop
appropriate regulatory framework for derivatives trading. The committee suggested that if
derivatives could be declared as “securities” under SCRA, the appropriate regulatory
framework of “securities” could also govern trading of derivatives. SEBI also set up a group
under the chairmanship of Prof. J.R. Varma in 1998 to recommend risk containment
measures for derivatives trading. The Government decided that a legislative amendment in
the securities laws was necessary to provide a legal framework for derivatives trading in
India. Consequently, the Securities Contracts (Regulation) Amendment Bill 1998 was
introduced in the Lok Sabha on 4th July 1998 and was referred to the Parliamentary Standing
Committee on Finance for examination and report thereon. The Bill suggested that
derivatives may be included in the definition of “securities” in the SCRA whereby trading in
derivatives may be possible within the framework of that Act. The said Committee submitted
the report on 17th March 1999.
The Committee was of the opinion that the introduction of derivatives, if implemented, with
proper safeguards and risk containment measures, will certainly give a fillip to the sagging
market, result in enhanced investment activity and instill greater confidence among
investors/participants. The Committee was of the view that since cash settled contracts could
be classified as “wagering agreements” which can be null and void under Section 30 of the
Indian Contracts Act, 1872, and since index futures are always cash settled, such futures
contracts can be entangled in legal controversy. Therefore, the Committee suggested an
overriding provision as a matter of abandoned caution – “Notwithstanding anything
contained in any other Act, contracts in derivatives as per the SCRA shall be legal and valid.”
Further, since Committee was convinced that stock exchanges would be better equipped to
undertake trading in derivatives in sophisticated environment it would be prudent to allow
trading in derivatives by such stock exchanges only. The Committee, therefore, suggested a

clause- “The derivative shall be traded and settled on stock exchanges and clearing houses of
the stock exchanges, respectively in accordance with the rules and bye-laws of the stock
exchange.” The Proposed Bill, which incorporated the recommendations of the said
Parliamentary Committee, was finally enacted in December 1999.
The Committee also recommended various operational/legal measures to safeguard the

integrity of the capital market and protect investors. These measures, inter alia, include the
following:
1. The Committee observed that Dr. L.C. Gupta Committee appointed by SEBI had
drawn out detailed guidelines pertaining to the regulatory framework on derivatives
prescribing necessary preconditions which should be adopted before the introduction
of derivatives. The Committee, therefore, recommended that these should be adhered
to fully.
2. The Committee felt that there was an urgent need to educate the Indian investors by
creating investment awareness among them by conducting intensive educational
programmes, so that they are able to understand their risk profiles in a better way.
3. Measures should be taken to strengthen the cash market so that they become strong
and efficient.
4. The Committee felt that it is imperative that the regulatory authorities ensure a strong
surveillance/vigilance and enforcement machinery.
5. The Committee was of the view that since derivatives trading require a critical mass
of sophisticated investors supported by credit and stock analysts, SEBI should, in
consultation with the stock exchanges, endeavour to conduct certification programme
on derivatives trading with a view to educating the investors and market
intermediaries.
6. Keeping in view the swift movement of funds and the technical complexities involved
in derivatives transactions, the committee felt that there was a need to protect
particularly the small investors by preventing them from venturing in to options and
futures market, who may be lured by the sheer speculative gains. The Committee,
therefore, recommended that the threshold limit of the transactions should be pegged
not below Rs.2 lakhs.
7. The Committee was of the view that there is an urgent need to prescribe pronounced
accounting standards in the case of investors/ dealers and also back office standards
for intermediaries with a view to reducing the possibility of concealing loss and

perpetrating the frauds by companies/intermediaries. The Committee also noted that

the need of accounting disclosure had also been recognized by Dr. L.C. Gupta
Committee. The committee, therefore, recommended that the Institute of Chartered
Accountants of India, in consultation with the stock exchanges, should formulate
suitable accounting standards and SEBI should prescribe the same before trading in
derivatives is commenced.
8. The Committee also asked the Government to consider exempting derivatives
transactions from the imposition of stamp duty. It is important to note that the
suggestions and recommendations of the said Committee were implemented by the
statutory regulators. Thus the enactment of Securities Laws (Amendment) Act 1999
and repeal of 1969 notification provided a legal framework for securities based
derivatives trading on stock exchanges in India, which is co-terminus with framework
of trading of other “securities” allowed under the SCRA. The trading of stock index
futures started in June 2000 and later on, other products, such as, stock index options
and stock options and single stock futures were also allowed. The derivatives are
formally defined under the said Act of 1999 (No. 31 of 1999) to include: (a) a security
derived from a debt instrument, share, loan whether secured or unsecured, risk
instrument or contract for differences or any other form of security, and (b) a contract
which derives its value from the prices or index of prices or underlying securities. The
Act also clarified that, notwithstanding anything contained in any other law for the
time being in force, contracts in derivatives shall be legal and valid only if such
contacts are traded on a recognized stock exchange and settled on a clearing entity of
the recognised stock exchange in accordance with the rules and bye-laws of such
stock exchange, thus precluding OTC derivatives (this has implications for legal
validity of such derivatives, as discussed later). The detailed legal framework for
derivatives trading on stock exchanges was suggested by the L.C. Gupta Committee
on derivatives, which had submitted its report in March 1998. It not only provided a
conceptual basis for various regulatory features, but also suggested byelaws for
derivatives exchanges and clearing corporations. These bye-laws were required to be
adopted by the stock exchange and clearing entities before derivatives activity can
start within their jurisdiction.

International regulation of derivatives markets
The International Organisation of Securities Commissions (IOSCO) has been providing

international best practices and perspectives on derivatives markets. In 1990, the IOSCO
published the Principles for Oversight of Screen Based Trading Systems for Derivatives
Products. It was suggested that all the jurisdictions adopt (SEBI, being a member
organization, has adopted these principles,) the 10 non-exclusive general principles for the
oversight of screen based trading systems for derivatives products which identify areas of
common regulatory concern. These principles basically relate to compliance by system
sponsor with the regulatory requirements relating to legal standards, regulatory policies, risk
management mechanisms and adequate disclosures of attendant risks. These 10 principles
were reviewed by IOSCO and 4 additions were proposed in the year 2000 (IOSCO 2000) for
derivatives products operating on the cross-border basis. The 1990 principles also anticipated
IOSCO Objectives and Principles of Securities Regulations of 1998 relating to protection of
investors, fairness and transparency of markets and reduction of systemic risk. The additional
regulations suggested include, regulatory coordination and cooperation to avoid potential
duplication, inconsistencies and gaps, sharing of relevant information and adequate disclosure
and transparency of regulatory requirements in jurisdictions. The IOSCO report on the
“International Regulation of Derivative Markets, Products and Financial Intermediaries”
released in December 1996 provides a description of various models or approaches to the
regulation of derivatives markets based on regulatory summaries prepared on common
framework of analysis (IOSCO 1996b). It was observed that while there was no single model
for the regulation of derivatives markets, there was substantial similarity in perceived
regulatory objectives. The IOSCO framework identifies the three objectives of regulation,
which need to be specified by the regulatory framework of the securities markets. These are
market efficiency and integrity, customer protection/ fairness and financial integrity (IOSCO,
1996a).

RBI Regulations
RBI Regulations in Rupee Forwards
An important segment of the FOREX derivatives market in India is the Rupee forward
contracts market. This has been growing rapidly with increasing participation from
corporates, exporters, importers, banks and FIIs. Till February 1992, forward contracts were
permitted only against trade related exposures and these contracts could not be cancelled
except where the underlying transactions failed to materialize. In March 1992, in order to
provide operational freedom to corporate entities, unrestricted booking and cancellation of
forward contracts for all genuine exposures, whether trade related or not, were permitted.
Although due to the Asian crisis, freedom to re-book cancelled contracts was suspended,
which has been since relaxed for the exporters but the restriction still remains for the
importers.
RBI Regulations
The exposures for which the rupee forward contracts are allowed under the existing RBI
notification for various participants are as follows:
1. Residents:
 Genuine underlying exposures out of trade/business
 Exposures due to foreign currency loans and bonds approved by RBI
 Receipts from GDR issued
 Balances in EEFC accounts
2. Foreign Institutional Investors:

 They should have exposures in India.
 Hedge value not to exceed 15 percent of equity as of 31 March 1999 plus increase
in market value/ inflows Non-resident Indians/Overseas Corporate
 Dividends from holdings in a Indian company
 Deposits in FCNR and NRE accounts
 Investments under portfolio scheme in accordance with FERA or FEMA

The forward contracts are also allowed to be booked for foreign currencies (other than
Dollar) and Rupee subject to similar conditions as mentioned above. The banks are also
allowed to enter into forward contracts to manage their assets - liability portfolio.
The cancellation and re-booking of the forward contracts is permitted only for genuine
exposures out of trade/business upto 1 year for both exporters and importers, whereas in case
of exposures of more than 1 year, only the exporters are permitted to cancel and re-book the
contracts. Also another restriction on booking the forward contracts is that the maturity of the
hedge should not exceed the maturity of the underlying transaction.
RBI Regulations in Cross currency options
The Reserve Bank of India has permitted authorised dealers to offer cross currency options to
the corporate clients and other interbank counter parties to hedge their foreign currency
exposures. Before the introduction of these options the corporates were permitted to hedge
their foreign currency exposures only through forwards and swaps route. Forwards and swaps
do remove the uncertainty by hedging the exposure but they also result in the elimination of
potential extraordinary gains from the currency position. Currency options provide a way of
availing of the upside from any currency exposure while being protected from the downside
for the payment of an upfront premium.
RBI Regulations
These contracts were allowed with the following conditions:
 These currency options can be used as a hedge for foreign currency loans provided
that the option does not involve rupee and the face value does not exceed the
outstanding amount of the loan, and the maturity of the contract does not exceed the
un-expired maturity of the underlying loan.
 Such contracts are allowed to be freely re-booked and cancelled. Any premium
payable on account of such transactions does not require RBI approval
 Cost reduction strategies like range forwards can be used as long as there is no net
inflow of premium to the customer.

 Banks can also purchase call or put options to hedge their cross currency proprietary
trading positions. But banks are also required to fulfil the condition that no ‘stand
alone’ transactions are initiated.
 If a hedge becomes naked in part or full owing to shrinking of the portfolio, it may be
allowed to continue till the original maturity and should be marked to market at
regular intervals.
There is still restricted activity in this market but we may witness increasing activity in cross
currency options as the corporate start understanding this product better.
RBI Regulations in Foreign currency – rupee swaps (FC-RE)
Another spin-off of the liberalization and financial reform was the development of a fledgling
market in FC-RE swaps. A fledgling market in FC-RE swaps started with foreign banks and
some financial institutions offering these products to corporate. Initially, the market was very
small and two way quotes were quite wide, but the market started developing as more market
players as well as business houses started understanding these products and using them to
manage their exposures. Corporate started using FC-RE swaps mainly for the following
purposes:
 Hedging their currency exposures (ECBs, forex trade, etc.)

 To reduce borrowing costs using the comparative advantage of borrowing in local
markets (Alternative to ECBs – Borrow in INR and take the swap route to take
exposure to the FC currency)
The market witnessed expanding volumes in the initial years with volumes up to US$ 800
million being experienced at the peak. Corporate were actively exploring the swap market in
its various variants (such as principal only and coupon only swaps), and using the route not
only to create but also to extinguish forex exposures. However, the regulator was worried
about the impact of these transactions on the local forex markets, since the spot and forward
markets were being used to hedge these swap transactions.

So the RBI tried to regulate the spot impact by passing the below regulations:
 The authorized dealers offering swaps to corporate should try and match demand
between the corporate.
 The open position on the swap book and the access to the interbank spot market
because of swap transaction was restricted to US$ 10 million.
 The contract if cancelled is not allowed to be re-booked or re-entered for the same
underlying.
The above regulations led to a constriction in the market because of the one-sided nature of
the market. However, with a liberalizing regime and a build-up in foreign exchange reserves,
the spot access was initially increased to US$ 25 million and then to US$ 50 million. The
authorized dealers were also allowed the use of currency swaps to hedge their asset liability
portfolio. The above developments are expected to result in increased market activity with
corporates being able to use the swap route in a more flexible manner to hedge their
exposures. A necessary pre-condition to increased liquidity would be the further development
and increase in participants in the rupee swap market (linked to MIFOR) thereby creating an
efficient hedge market to hedge rupee interest rate risk.

Foreign Exchange Risk Management:
Firms dealing in multiple currencies face a risk (an unanticipated gain/loss) on account of
sudden/unanticipated changes in exchange rates, quantified in terms of exposures. Exposure
is defined as a contracted, projected or contingent cash flow whose magnitude is not certain
at the moment and depends on the value of the foreign exchange rates. The process of
identifying risks faced by the firm and implementing the process of protection from these
risks by financial or operational hedging is defined as foreign exchange risk management.
This paper limits its scope to hedging only the foreign exchange risks faced by firms.
Necessity of managing foreign exchange risk
A key assumption in the concept of foreign exchange risk is that exchange rate changes are
not predictable and that this is determined by how efficient the markets for foreign exchange
are. Research in the area of efficiency of foreign exchange markets has thus far been able to
establish only a weak form of the efficient market hypothesis conclusively which implies that
successive changes in exchange rates cannot be predicted by analysing the historical
sequence of exchange rates. However, when the efficient markets theory is applied to the
foreign exchange market under floating exchange rates there is some evidence to suggest that
the present prices properly reflect all available information. This implies that exchange rates
react to new information in an immediate and unbiased fashion, so that no one party can
make a profit by this information and in any case, information on direction of the rates arrives
randomly so exchange rates also fluctuate randomly. It implies that foreign exchange risk
management cannot be done away with by employing resources to predict exchange rate
changes.

Foreign Exchange Risk Management Framework
Once a firm recognizes its exposure, it then has to deploy resources in managing it. A
heuristic for firms to manage this risk effectively is presented below which can be modified
to suit firm-specific needs i.e. some or all the following tools could be used.
 Forecasts: After determining its exposure, the first step for a firm is to develop a
forecast on the market trends and what the main direction/trend is going to be on the
foreign exchange rates. The period for forecasts is typically 6 months. It is important
to base the forecasts on valid assumptions. Along with identifying trends, a
probability should be estimated for the forecast coming true as well as how much the
change would be.
 Risk Estimation: Based on the forecast, a measure of the Value at Risk (the actual
profit or loss for a move in rates according to the forecast) and the probability of this
risk should be ascertained. The risk that a transaction would fail due to market-
specific problems4 should be taken into account. Finally, the Systems Risk that can
arise due to inadequacies such as reporting gaps and implementation gaps in the
firms’ exposure management system should be estimated.
 Benchmarking: Given the exposures and the risk estimates, the firm has to set its
limits for handling foreign exchange exposure. The firm also has to decide whether to
manage its exposures on a cost centre or profit centre basis. A cost centre approach is
a defensive one and the main aim is ensure that cash flows of a firm are not adversely
affected beyond a point. A profit centre approach on the other hand is a more
aggressive approach where the firm decides to generate a net profit on its exposure
over time.

 Hedging: Based on the limits a firm set for itself to manage exposure, the firms then
decides an appropriate hedging strategy. There are various financial instruments
available for the firm to choose from: futures, forwards, options and swaps and issue
of foreign debt. Hedging strategies and instruments are explored in a section.
 Stop Loss: The firms risk management decisions are based on forecasts which are but
estimates of reasonably unpredictable trends. It is imperative to have stop loss
arrangements in order to rescue the firm if the forecasts turn out wrong. For this, there
should be certain monitoring systems in place to detect critical levels in the foreign
exchange rates for appropriate measure to be taken.
 Reporting and Review: Risk management policies are typically subjected to review
based on periodic reporting. The reports mainly include profit/ loss status on open
contracts after marking to market, the actual exchange/ interest rate achieved on each
exposure and profitability vis-à-vis the benchmark and the expected changes in
overall exposure due to forecasted exchange/ interest rate movements. The review
analyses whether the benchmarks set are valid and effective in controlling the
exposures, what the market trends are and finally whether the overall strategy is
working or needs change.

Factors affecting the decision to hedge foreign currency risk
Research in the area of determinants of hedging separates the decision of a firm to hedge
from that of how much to hedge. There is conclusive evidence to suggest that firms with
larger size, R&D expenditure and exposure to exchange rates through foreign sales and
foreign trade are more likely to use derivatives. First, the following section describes the
factors that affect the decision to hedge and then the factors affecting the degree of hedging
are considered.
 Firm size: Firm size acts as a proxy for the cost of hedging or economies of scale.
Risk management involves fixed costs of setting up of computer systems and
training/hiring of personnel in foreign exchange management. Moreover, large firms
might be considered as more creditworthy counterparties for forward or swap
transactions, thus further reducing their cost of hedging. The book value of assets is
used as a measure of firm size.
 Leverage: According to the risk management literature, firms with high leverage
have greater incentive to engage in hedging because doing so reduces the probability,
and thus the expected cost of financial distress. Highly levered firms avoid foreign
debt as a means to hedge and use derivatives.
 Liquidity and profitability: Firms with highly liquid assets or high profitability have
less incentive to engage in hedging because they are exposed to a lower probability of
financial distress. Liquidity is measured by the quick ratio, (i.e. quick assets divided
by current liabilities). Profitability is measured as EBIT divided by book assets.
 Sales growth: Sales growth is a factor determining decision to hedge as opportunities
are more likely to be affected by the underinvestment problem. For these firms,
hedging will reduce the probability of having to rely on external financing, which is
costly for information asymmetry reasons, and thus enable them to enjoy
uninterrupted high growth. The measure of sales growth is obtained using the 3-year
geometric average of yearly sales growth rates.
This highlights how risk management systems have to be altered according to characteristics
of the firm, hedging costs, nature of operations, tax considerations, regulatory requirements
etc.

Report on Project work
Title of the Project:
“Scope and limitation of Currency Derivative in India”

Objectives of the Project:
 To analyse the scope of currency derivative in India.

 To study the factors that helped in development of currency derivative in foreign
country and a comparative analysis of all those factors with that of in India.
 To study the legal regulation in Indian FOREX market.
 To find out suitable solution (like future, forward or option) to the customers
according to their risk taking ability.
 To provide different hedging strategies.
Research Methodology and Data Collection
Most of the data required for the above study is collected from primary and secondary
methods.
Primary Data; Survey: To find out the scope and limitation of the Currency Derivative in
India, I had done one survey of a sample of 60 respondents, who had foreign currency
exposure. The questionnaire of the survey will be design by keeping all this point in to mind:
 Classification of the respondent (i.e. Importer, Exporter, Financial Institutes,

Professional, having any exposure in foreign currency)
 Total foreign currency exposure in one year
 Awareness about product on Currency Derivative
 How keen people are interested in adopting Currency Derivative
 Analysis of the Risk Aversion level
 What type of the product can be provided to reduce their risk

Secondary Data:
Secondary data are data which have already been collected for purposes other than the
problem at hand.
But I will more focus on the Primary data which I will collect by preparing questionnaire and
I will frame it by asking both open ended and close ended questionnaire and for Secondary
data I will refer internet and journals.
Data relating to foreign exchange rate and their determinants are collected to analysis the
following:
 To analyse the determinants of foreign exchange rate.
 To forecast of the exchange rate.
Primary Data will be analysed by using Graphs and tables and according to that the
suggestions and recommendations will be provided to the respondents.
Primary Data Analysis

Category of Respondent
Frequency Percent Valid Percent Cumulative Percent

Cumulative
Valid financial Institute 6 10.0 10.0 10.0
Frequency Percent Valid Percent Percent
Exporter 24 40.0 40.0 50.0
Valid USD 28 46.7 46.7 46.7
Importer 11 18.3 18.3 68.3
Pound 12 20.0 20.0 66.7
Both Exporter and Import 9 15.0 15.0 83.3
Euro 4 6.7 6.7 73.3
Professionals 10 16.7 16.7 100.0
Yen 15 25.0 25.0 98.3
Total 60 100.0 100.0
Any Other 1 1.7 1.7 100.0
Total 60 100.0 100.0

The graph shows
that majority of respondents to my survey are exporters. The major reason for this is that exporters are
the one who have maximum exposure towards currency risks. After exporters, importers have formed
a crucial part of my survey. They are followed by professionals; corporate engaged in export as well
as import and Financial Institutes.
Name the Currency

This graph clearly shows that majority of foreign currency transactions are done in US Dollar. The
reason for this is that USD is the most powerful currency and it is accepted worldwide. US Dollar is
followed by Japanese Yen, which holds a substantial share in transaction of currencies. Surprisingly
Yen is much ahead of Pound and Euro has got a very little share of just 6.7 %
Nature of the Transactor
Cumulative
Frequency Percent Valid Percent Percent
Valid Arbitrator 3 5.0 5.0 5.0
Speculator 5 8.3 8.3 13.3
Hedger 9 15.0 15.0 28.3
None Of the Above 43 71.7 71.7 100.0
Total 60 100.0 100.0

Transactor is the person who makes the transaction. Here I have tried to divide the transactors
in four different categories according to the purpose of transactions. The survey data shows
that almost 3/4th of the respondents belong to the categories other than arbitrators, speculators
and hedgers. I have kept them in the group called none of the above .Hedgers are 15% and
Speculators are 8.3%.
Cross Tabulation

Amount for Derivatives * Total Amount
Total Amount
Amount for Rs Rs Rs
Derivatives Less than 500000 to 1000000 2500000
Rs Rs to Rs to Rs Above Rs
500000 1000000 2500000 5000000 5000000 Total
Rs 5000 to Rs 1 1 0 0 0 2
10000
Rs 10000 to Rs 0 1 4 0 0 5
25000
Rs 25000 to Rs 0 0 0 23 1 24
50000
Above Rs 0 0 0 0 29 29
50000
Total 1 2 4 23 30 60
The above analysis of data shows the relation between total turnover of the company and the
amount they are ready spent on currency derivatives to mitigate their risks. The analysis shows that
amount to be spent on derivatives is directly proportional to total turnover.
Category of Respondent * Nature Of the Transaction
Nature Of the Transaction Total

Category of None Of
Respondent Arbitrat Hedge the
or Speculator r Above
financial Institute 2 4 0 0 6
Exporter 0 0 1 23 24
Importer 0 0 0 11 11
Both Exporter and 0 0 0 9 9
Import
Professionals 1 1 8 0 10
Total 3 5 9 43 60
The table shows that majority of the speculators and arbitrators are financial institutions.
On the other hand majority of the people engaged in currency derivatives are not the
speculators etc. They are people from different profession who just use currency trading as a
tool to mitigate risks.

Knowledge about different instrument
Category of Respondent * Know forwards

Know forwards Total
Category of Little High Very High
Respondent No Knowledge Knowledge Knowledge Knowledge
Financial 0 0 0 6 6
Institute
Both Exporter 1 8 0 0 9
and Import
Total 35 9 9 7 60
This table shows that majority of the people involved in my survey have little or no
knowledge about the technicalities like forward of currency derivatives. Though financial
institutions and professionals possess a good knowledge about the same.
Category of Respondent * Know futures

Know futures
Category of No Little High Very high
Respondent Knowledge Knowledge knowledge Knowledge Total
Financial Institute 0 0 2 4 6
Exporter 11 13 0 0 24
Both Exporter and 0 9 0 0 9
Import
Total 22 22 9 7 60
This table shows that majority of the people involved in my survey have little or no
knowledge about currency Futures. But the financial institutions and professionals possess a
good knowledge about the same.

Category of Respondent * Know options
Know options
Category of Little Moderate High very High

Respondent Knowledge Knowledge Knowledge Knowledge Total
Financial 0 1 3 2 6
Institute
and Import
Total 21 24 7 8 60
This table shows that majority of the people involved in our survey have little or no knowledge
about the Options in currency derivatives. But the financial institutions and professionals
possess a good knowledge about the same.
Category of Respondent * Know swaps
Know swaps Total

Category of Moderat Very
Respondent No Little e High high
Knowl Knowled Knowled Knowled Knowled
edge ge ge ge ge
Financial 0 0 1 4 1 6
Institute
Exporter 24 0 0 0 0 24
Importer 0 11 0 0 0 11
Both Exporter 8 1 0 0 0 9
and Import
Professionals 0 0 1 1 8 10
Total 32 12 2 5 9 60

This Graph shows that the majority of the people have vey less knowledge about this
currency swap. Only professional and financial institutes have good knowledge of this
instrument.
Use of derivative instrument
Category of Respondent * Usage forwards

Count
Usage forwards
Category of Not at Very Less sometim Most Of Alway
Respondent all time es the time s Total
Financial 0 0 5 1 0 6
Institute
Exporter 10 14 0 0 0 24
Importer 11 0 0 0 0 11
and Import
Total 30 15 13 1 1 60
From the above table we can see that not many people are aware about the uses of forwards.
Only some professionals and financial institute use it sometimes otherwise most of my
respondent are not aware about the use of forwards.
Category of Respondent * Usage futures
Usage futures
Category of Not at Very less Sometim Most of the
Respondent all time es time Total
Financial Institute 0 0 1 5 6
and Import
Total 24 22 9 5 60

From this table we can see that Financial institute uses the currency futures most of the times
while Exporters are not using the currency futures at all which shows the lack of knowledge
among them
Category of Respondent * Usage options
Usage options
Category of Not
Respondent at very less sometim Most of
all time es the time always Total
Financial Institute 0 0 1 4 1 6
Exporter 1 13 10 0 0 24
Importer 0 11 0 0 0 11
and Import
Total 1 25 20 13 1 60
These table shows that options are used by both importers and exporters. It means these
respondents have better knowledge of options as compared to futures. But the frequency of
use is low.
Category of Respondent * Usage swaps
Usage swaps Total

Category of Not at Very less Sometim Most of
Respondent all time es the time
Financial 0 0 5 1 6
Institute
and Import
Total 40 12 6 2 60

This table shows the uses regarding Swaps. The analysis shows that very few people use
swap options. This is used only by financial institutions for hedging risks.
FINDINGS
 Knowledge of customers about currency derivatives is very less.
 Lack of expert knowledge in the field of currency derivatives.
 Less publicity or spread knowledge about currency derivatives segment by Financial

Institutes as well as Government.
 Customers are afraid or feel unsafe to make dealing with such financial institutes.
 “Profit is the reward of risk”. Customers are always said to be a risk-taker and manage it
properly.
 Most of the Business units have little business in Foreign currency in India, and who has
large scale business are demand for well reputed financial institutes though they charge
high rate of brokerage or commission.
SUGGESTIONS
 Financial Institutes and governments have to come together to make awareness of the
currency derivatives in India.
 Customers have to make trust on private financial institutes other than Banks.
 Government has to liberalize rules and regulation.
 Firms should shift from one ‘instrument’ to another or one currency to another depending
upon the changing market conditions or changing economy indicators.

CONCLUSION
In terms of the growth of derivatives markets, and the variety of derivatives users, the Indian
market has equalled or exceeded many other regional markets. While the growth is being
spearheaded mainly by retail investors, private sector institutions and large corporations,
smaller companies and state-owned institutions are gradually getting into the act. The variety
of derivatives instruments available for trading is also expanding.
There remain major areas of concern for Indian derivatives users. Large gaps exist in
the range of derivatives products that are traded actively. In equity derivatives, NSE figures
show that almost 90% of activity is due to stock futures or index futures, whereas trading in
options is limited to a few stocks, partly because they are settled in cash and not the
underlying stocks. Exchange-traded derivatives based on interest rates and currencies are
virtually absent.
Liquidity and transparency are important properties of any developed market. Liquid
markets require market makers who are willing to buy and sell, and be patient while doing so.
In India, market making is primarily the province of Indian private and foreign banks, with
public sector banks lagging in this area. A lack of market liquidity may be responsible for
inadequate trading in some markets. Transparency is achieved partly through financial
disclosure. Financial statements currently provide misleading information on institutions’ use
of derivatives. Further, there is no consistent method of accounting for gains and losses from
derivatives trading. Thus, a proper framework to account for derivatives needs to be
developed.
Further regulatory reform will help the markets grow faster. For example, Indian
commodity derivatives have great growth potential but government policies have resulted in
the underlying spot/physical market being fragmented (e.g. due to lack of free movement of
commodities and differential taxation within India). Similarly, credit derivatives, the fastest
growing segment of the market globally, are absent in India and require regulatory action if
they are to develop.
As Indian derivatives markets grow more sophisticated, greater investor awareness

will become essential. NSE has programmes to inform and educate brokers, dealers, traders,

and market personnel. In addition, institutions will need to devote more resources to develop
the business processes and technology necessary for currency derivatives trading.
Bibliography:-
Financial Derivatives (theory, concepts and problems) By: S.L. Gupta.
NCFM: Currency future Module.
BCFM: Currency Future Module.
NISM: Currency Module.
Report of the RBI-SEBI standing technical committee on exchange traded currency futures)
2008
Report of the Internal Working Group on Currency Futures (Reserve Bank of India, April
2008)
Websites:-
www.bonanzaonline.com
www.nseindia.com
www.bseindia.com
www.mcxindia.com
www.rbi.gov
www.cme.com
www.forextrading.com
www.sebi.gov.in

ANNEXURE
Questionnaire
Dear Respondent,
I am a student of Kalol Institute of Management pursuing Mater Of Business Administration (MBA)

and as a partial requirement for completing my Project, I have undertaken a research project
on “Scope and Limitation of Currency Derivative in India”. You are requested to fill up the
following questionnaire to facilitate me in collecting the relevant data. I would like to assure
you that the assignment is purely academic in nature and I will maintain the confidentiality of
your information. I will be very thankful to you for your attention.
Sincerely,
Chitrang Patel
Scope and Limitation of Currency Derivative in India

A. Category of Respondent:
1. Financial Institution 4. Both Exporter and Importer
2. Exporter 5. Professionals
3. Importer 6.Others
B. What is your exposure to the foreign currency?
1. Receiver of Foreign Currency 2. Payer of Foreign Currency

C. Name the currency/currencies you are dealing with: (multiple choice)
1. USD 4. Yen
2. Pound 5. Any Other
3. Euro
D. Do you have the knowledge of following products?
1. No knowledge 4. High knowledge

2. Little knowledge 5.Very High knowledge

3. Moderate knowledge
Products Scale
1 2 3 4 5
Forwards
Futures
Options
Swaps
E. Are you using these currency derivatives to hedge your risk?
1. Not at all 4.Most of the time

2. Very less time 5.Always
3. Sometimes
Products Scale
1 2 3 4 5
Forwards
Futures
Options
Swaps
F. What is your total currency exposure in last financial year (in approximate
Rupee term):
1. Less than Rs. 5,00,000 4. Rs. 25,00,000 to Rs. 50,00,000
2. Rs. 5,00,000 to Rs. 10,00,000 5. Above Rs. 50,00,000
3. Rs. 10,00,000 to Rs. 25,00,000
G. What do you think about Risk in Derivative instruments?

1. High Risk 3.Low Risk
2. Moderate Risk
H. How much money are you ready to invest for Derivative instrument:
1. Less than Rs. 5,000 4.Rs. 25,000 to Rs. 50,000
2. Rs. 5,000 to Rs. 10,000 5.Above Rs. 50,000
3. Rs. 10,000 to Rs. 25,000

I. What are the reasons behind such investment for Derivative Instrument?
1. Less knowledge 4.Highly Regulated
2. High Risk 5.Highly Volatile
3. Untap Market 6.Any Other_____________
J. Nature of the transaction:
1. Arbitrator 3. Hedger
2. Speculator 4. None of the above
PERSONAL INFORMATION
Your Name ________________________________________
Designation: _______________________________________
Your age group
20-30 yrs
30-40 yrs
40-50 yrs
50 yrs above

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Bonanza Portfolio Ltd, Ahmedabad.

Bonanza Portfolio Ltd., Ahmedabad

Enrolment No: - 097250592005

Kalol Institute of Management, Kalol

Kalol Institute of Management, Kalol (2009-11)Page 1

Project Title: Scope and Limitation of Currency Derivative in India

Company Name: Bonanza Portfolio Limited

Address: 403-406 Shital Varsha Arcade,

Department: Derivatives Division

Project Guide: Mr. Ashish Mishra,

Kalol Institute of Management, Kalol (2009-11)Page 2

I hereby take the opportunity to express my wholehearted thankfulness to Bonanza Portfolio

Enrollment No:- 097250592005

Kalol Institute of Management, Kalol (2009-11)Page 3

Kalol Institute of Management

Gujarat Technological University

Kalol Institute of Management, Kalol (2009-11)Page 4

Kalol Institute of Management, Kalol (2009-11)Page 5

Sr. Particular Page

Kalol Institute of Management, Kalol (2009-11)Page 6

Some key characteristics of the sample 394 firms are:

Kalol Institute of Management, Kalol (2009-11)Page 7

Branches & Sub-Brokers

Kalol Institute of Management, Kalol (2009-11)Page 8

Kalol Institute of Management, Kalol (2009-11)Page 9

Kalol Institute of Management, Kalol (2009-11)Page 10

Company name Total Sub No.of No. of City

Details of Big Broker Houses

Kalol Institute of Management, Kalol (2009-11)Page 11

Kalol Institute of Management, Kalol (2009-11)Page 12

Indian Stock Markets: Growth of Market Structure (In Number)

Source: Securities and Exchange Board of India

Exchange-wise Brokers and Sub-Brokers in Indian Stock Exchanges 2005-06

Source: Securities and Exchange Board of India

Kalol Institute of Management, Kalol (2009-11)Page 13

It provides an extensive smorgasbord of services in equity, commodities, currency

1.1. Products and Services:-

 Primary Brokerage Services

In depth reporting on portfolio performance, including graphs & charts.

Kalol Institute of Management, Kalol (2009-11)Page 14

Mission & Vision:-

“We believe in making money, not mistake.”

Bonanza - it's a windfall:-

Achievements of Bonanza Portfolio Ltd:-

(1) Top Equity Broking House in Terms of Branch Expansion 2007.

(2) 3rd in Term of Number of Trading Account For 2008*.

(5) Awards by BSE “Major Volume Drivers 2006-2007 & 2004-2005”.

Kalol Institute of Management, Kalol (2009-11)Page 15

(9) Provide 24 hours back office.

(10) More than 100 franchises in Gujarat in short time.

(1) National Stock Exchange of India(NSEIL)

(2) The Bombay Stock Exchange(BSE)

(3) Multi Commodity Exchange(MCX)

(4) National Commodity & Derivatives Exchange Ltd(NCDEX)

(5) National multi commodity exchange(NMCE)

(6) Depository Participant for Equity(NSDL/CDSL)

(7) Depository participant for commodity