A

Project report

On

Currency futures market in India

In Partial Fulfillment of the Project Study in

Masters of Business Administration Programme

Submitted by: Submitted to:

AMOL TAMBE

Batch: 09-11

ITM

1
PREFACE
As a part of M.B.A. curriculum we have to do summer training in the corporate world for
7 weeks as partial fulfillment of degree and based on that we have to prepare project
report on it. So there is great importance for us of this valuable training as we have to get
real world learning experience.

Fortunately, we got opportunities to have our training at Anagram Securities ltd. And we
came into touch with corporate world and learnt basic concepts of currency futures
market. Whatever we learnt we have also tried to apply it in our project report and for
that we selected topic “currency futures market in India” and we have tried to understand
it properly with practical examples. With this we have also included topics about
organization and its activities, products, market analysis etc. where we have done our
training so our objectives of this report and training are as followings.

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ACKNOWLEDGEMENT

An acknowledgement is something which is overlooked by many, but it forms integral

part of our project and is only means through which we could communicate our thanks to
all those who have extended their help with selflessness in an untiring manner.

We are thankful to our Institute (NRIBM-GLS) for giving us an opportunity of doing our
summer project at Anagram. We heartly thankful to our Director Dr.HiteshRuparel and
Prof. Dr. SnehaShukla for providing us guidance in this project.

We would like to express our gratitude to our company guide Miss. NamrataAgarwal and
HR Manager to giving us opportunity to have our summer project in this well-known
company. We are also very thankful to Mr. KashyapDarji, without his guidance this
project would have not been possible. It was nice learning experience to have with him.

Last but not least we are thankful to all of those who have directly or indirectly helped us
to make this project a great journey in the ocean of knowledge. We are again very much
thankful to all these persons.

Thank you,

Milan Adodariya

KhimaGoraniya

M.B.A-NRIBM

(BATCH 2009-11)

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EXECUTIVE SUMMARY

The project aims to get an overview about currency futures market and to achieve this we
have decided to go step by step under the guidance of our internal guide as well as
external guide at Anagram Capital which is as under.

Research methodology gives a proper direction to go through out the project. It includes
our objective to get basic understanding about the currency market as well as to know
about the awareness level of people who are active in the stock market towards currency
futures.

A brief introduction has been given about history of various means of exchange and need
of determining a particular currency for a country and major currencies of the world.

India has a strong presence in the world’s economic activities so a strong need felt by
RBI and SEBI to do something in this area. Hence a working committee has been formed
and according to their suggestions trading in currency futures started in India.

Indian broking industry is always an attractive destination for FII’s and FDI’s to invest
and trade but major portion of that constitutes from equity shares. After the permission of
SEBI and RBI this industry has also focused on trading in currency futures and today
industry has gained a lot from this area also.

Anagram capital is a big player in retail broking and having its root in western India
particularly in Gujarat. The company has a strong research base and providing sound tips
to its varied client base. Anagram also has a special team managing its currency futures
clients.

Primary data has been collected from the survey and Data analysis has been done with
the help of various statistical tools. The market of currency future is still not penetrated
and future of currency futures is very good as the size of Indian economy is increasing
day by day.

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 Table of Contents

Chapter Topic Page No.

No.
Preface
Acknowledgement
Executive Summary
Research Methodology
1.1 Introduction
1.2 Research Objectives
1.3 Research Design
1 1.4 Literature reviewed
1.5 Data collection
1.6 Sample size
1.7 Data analysis
1.8 Limitations
Introduction to the Foreign Exchange market
2.1 Foreign Exchange
2.2 Overview of the international currency markets
2 2.3 Major currency of the world
2.4 Exchange rate mechanism
2.5 Economic variables impacting exchange rate
movement
Currency futures in Indian Context
3.1 Introduction of currency futures on indian
exchange
3.2 Need for Exchange Traded Currency Futures
3 3.3 Over-the-counter v/s Exchange traded
3.4 Formation of committee
3.5 Contract Specification of currency futures
3.6 Strategies used in currency futures
3.7 Hedging used in currency futures

4 Industry profile

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 4.1 Broking Insights
4.2 Terminals
4.3 Branches and sub-Brokers
4.4 Financial markets
4.5 Products
4.6 Future plans
Company profile
5.1 Introduction
5.2 Investment Philosophy
5.3 Beyond Broking
5.4 Research and Risk Management
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5.5 Infrastructure
5.6 Distribution Business
5.7 Business Segments
5.8 Products of Anagram
5.9 SWOT analysis of anagram
6 Data Analysis & Interpretation
7 Key Findings
8 Conclusion
9 Bibliography
Annexure [Questionnaire]

Chapter-1

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Introduction to the Foreign Exchange market

2.1 Foreign Exchange:

The foreign exchange (currency or forex or FX) market exists wherever one currency
is traded for another. It is by far the largest market in the world, in terms of cash value
traded, and includes trading between large banks, central banks, currency speculators,
multinational corporations, governments, and other financial markets and institutions.
The trade happening in the forex markets across the globe exceeds $3.2 trillion/day
(on an average) presently. Retail traders (small speculators) are a small part of this
market. A foreign exchange transaction is still a shift of funds or short-term financial
claims from one country and currency to another.

2.1.1 History:

The history and evolution of the Foreign Exchange may be traced back to the early
stages of human history. In the early days the goods were exchanged between
individuals and the value of one good was expressed in terms of other goods. The
limitations of this barter system encouraged traders to use other mediums such as
stones, teeth etc. to determine the value of goods. These mediums soon to be replaced
by precious metals in particular silver and gold thus providing an accepted way of
payment in exchange of goods. It also had the many advantages such as storage and
durability. The introduction of Roman gold coin followed by the silver one played a
key role in the development of the trade and foreign exchange during the biblical
times. Both coins gained a wide acceptance in Middle East and other parts of the
world forming an elementary international monetary system. By the middle Ages,
increased usage of bills encouraged the foreign exchange to become a function of
international banking.

However with the attempts of governments to create a more stable economic

environment for global trading and exchange, the last century witnessed some
measures and events that shaped the current foreign exchange markets.

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 The Gold Standard, 1816-1933 :-

The 'gold standard' used the physical weight of gold as the standard value for the
money and making it directly exchangeable in the form of the precious metal. In 1816
for instance, the pound sterling was defined as 123.27 grains of gold on its way to
becoming the foremost reserve currency and was the principal component of the
international capital market. This led to the expression 'as good as gold' when applied
to the Sterling, as the Bank of England at the time gained stability and prestige as the
premier monetary authority. Before the First World War, most Central banks
supported their currencies with convertibility to gold. Paper money could always be
exchanged for gold. For this type of gold exchange, a central bank coverage backing
up the government’s currency reserves was not necessarily needed. When a group
mindset fostered a disastrous notion of converting back to gold in mass, panic
resulted in so-called "Run on banks”.

The US dollar adopted the gold standard late in 1879 and became the standard-bearer
replacing the British Pound when Britain and the other European countries came off
the system with the outbreak of World War I in 1914. Eventually, though, the
worsening international depression lead even the dollar off the gold standard by 1933
marking the period of collapse in international trade and financial flows prior to
World War II.

 The Bretton Woods System, 1944-73:-

The Gold Standard partly, fixing the USD at $35.00 per ounce of Gold and fixing the
other main currencies to the dollar, initially intended to be on a permanent basis. The
Bretton Woods system formalized the role of the US dollar as the new 'global' reserve
currency with its value fixed into gold and the US assuming the responsibility of
ensuring convertibility while other currencies were pegged to the dollar.

In Asia, the lack of sustainability of fixed foreign exchange rates has gained new
relevance with the events in the latter part of 1997, where currencies were forced to

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 float. Currency after currency was devalued against the US dollar. The devaluation of
currencies continued to plague the currency trading markets, and confidence in the
open market of forex trading was not sustained. Leaving other fixed exchange rates in
particular in South America also looking very vulnerable. While commercial
companies have had to face a much more volatile currency environment in recent
years, investors and financial institutions have discovered a new playground. The size
of the FOREX market now dwarfs any other investment market.

The last few decades have seen foreign exchange trading develop into the world’s
largest global market. Restrictions on capital flows have been removed in most
countries, leaving the market forces free to adjust foreign exchange rates according to
their perceived values. In the 1980s, cross-border capital movements accelerated with
the advent of computers and technology, extending market continuum through Asian,
European and American time zones. Transactions in foreign exchange rocketed from
about $70 billion a day in the 1980s, to more than $1.5 trillion a day two decades
later.

2.2 OVERVIEW OF INTERNATIONAL CURRENCY MARKETS

During the past quarter century, the concept of a 24-hour market has become a reality.
Somewhere on the planet, financial centers are open for business; banks and other
institutions are trading the US Dollar and other currencies every hour of the day and
night, except on weekends. In financial centers around the world, business hours
overlap; as some centers close, others open and begin to trade. The foreign exchange
market follows the sun around the earth.

Business is heavy when both the US markets and the major European markets are
open -that is, when it is morning in New York and afternoon in London. In the New
York market, nearly two-thirds of the day’s activity typically takes place in the
morning hours. Activity normally becomes very slow in New York in the mid-to late

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afternoon, after European markets have closed and before the Tokyo, Hong Kong,
and Singapore markets have opened.

Given this uneven flow of business around the clock, market participants often will
respond less aggressively to an exchange rate development that occurs at a relatively
inactive time of day, and will wait to see whether the development is confirmed when
the major markets open. Some institutions pay little attention to developments in less
active markets. Nonetheless, the 24-hour market does provide a continuous “real-
time” market assessment of the ebb and flow of influences and attitudes with respect
to the traded currencies, and an opportunity for a quick judgment of unexpected
events. With many traders carrying pocket monitors, it has become relatively easy to
stay in touch with market developments at all times.

The market consists of a limited number of major dealer institutions that are
particularly active in foreign exchange, trading with customers and (more often) with
each other. Most of these institutions, but not all, are commercial banks and
investment banks. These institutions are geographically dispersed, located in
numerous financial centers around the world. Wherever they are located, these
institutions are in close communication with each other; linked to each other through
telephones, computers, and other electronic means.

Each nation’s market has its own infrastructure. For foreign exchange market
operations as well as for other connected matters, each country enforces its own laws,
banking regulations, accounting rules, taxation and operates its own payment and
settlement systems. Thus, even in a global foreign exchange market with currencies
traded on essentially the same terms simultaneously in many financial centers, there
are different national financial systems and infrastructures through which transactions
are executed, and within which currencies are held. With access to all of the foreign
exchange markets generally open to participants from all countries, and with vast
amounts of market information transmitted simultaneously and almost instantly to

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 dealers throughout the world, there is an enormous amount of cross-border foreign
exchange trading among dealers as well as between dealers and their customers.

At any moment, the exchange rates of major currencies tend to be virtually identical
in all the financial centers where there is active trading. Rarely are there such
substantial price differences among major centers as to provide major opportunities
for arbitrage. In pricing, the various financial centers that are open for business and
active at any one time are effectively integrated into a single market.

2.3 MAJOR CURRENCIES OF THE WORLD

 US Dollar

Us dollar is by far the most widely traded currency. In part, the widespread use of the
US Dollar reflects its substantial international role as “investment” currency in many
capital markets, “reserve” currency held by many central banks, “transaction”
currency in many international commodity markets, “invoice” currency in many
contracts, and “intervention” currency employed by monetary authorities in market
operations to influence their own exchange rates.

In addition, the widespread trading of the US Dollar reflects its use as a “vehicle”
currency in foreign exchange transactions, a use that reinforces its international role
in trade and finance. For most pairs of currencies, the market practice is to trade each
of the two currencies against a common third currency as a vehicle, rather than to
trade the two currencies directly against each other. The vehicle currency used most
often is the US Dollar, although very recently euro also has become an important
vehicle currency.

Thus, a trader who wants to shift funds from one currency to another, say from Indian
Rupees to Philippine Pesos, will probably sell INR for US Dollars and then sell the
US Dollars for Pesos. Although this approach results in two transactions rather than
one, it may be the preferred way, since the US Dollar/INR market and the US

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Dollar/Philippines Peso market are much more active and liquid and have much better
information than a bilateral market for the two currencies directly against each other.
By using the US Dollar or some other currency as a vehicle, banks and other foreign
exchange market participants can limit more of their working Balances to the vehicle
currency, rather than holding and managing many currencies, and can concentrate
their research and information sources on the vehicle currency.

Use of a vehicle currency greatly reduces the number of exchange rates that must be
dealt with in a multilateral system. In a system of 10 currencies, if one currency is
selected as the vehicle currency and used for all transactions, there would be a total of
nine currency pairs or exchange rates to be dealt with (i.e. one exchange rate for the
vehicle currency against each of the others), whereas if no vehicle currency were
used, there would be 45 exchange rates to be dealt with. In a system of 100 currencies
with no vehicle currencies, potentially there would be 4,950 currency pairs or
exchange rates [the formula is: n(n-1)/2]. Thus, using a vehicle currency can yield the
advantages of fewer, larger, and more liquid markets with fewer currencies Balances
reduced informational needs, and simpler operations.

The US Dollar took on a major vehicle currency role with the introduction of the
Breton Woods par value system, in which most nations met their IMF exchange rate
obligations by buying and selling US Dollars to maintain a par value relationship for
their own currency against the US Dollar. The US Dollar was a convenient vehicle
because of its central role in the exchange rate system and its widespread use as a
reserve currency.

The US Dollar’s vehicle currency role was also due to the presence of large and
liquid US Dollar money and other financial markets, and, in time, the Euro-US Dollar
markets, where the US Dollars needed for (or resulting from) foreign exchange
transactions could conveniently be borrowed (or placed).

 The Euro

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 Like the US Dollar, the Euro has a strong international presence and over the years
has emerged as a premier currency, second only to the US Dollar.

 The Japanese Yen

The Japanese Yen is the third most traded currency in the world. It has a much
smaller international presence than the US Dollar or the Euro. The Yen is very liquid
around the world, practically around the clock

 The British Pound

Until the end of World War II, the Pound was the currency of reference. The
nickname Cable is derived from the telegrams used to update the GBP/USD rates
across the Atlantic. The currency is heavily traded against the Euro and the US
Dollar, but it has a spotty presence against other currencies. The two-year bout with
the Exchange Rate Mechanism, between 1990 and 1992, had a soothing effect on the
British Pound, as it generally had to follow the Deutsche Mark's fluctuations, but the
crisis conditions that precipitated the pound's withdrawal from the Exchange Rate
Mechanism had a psychological effect on the currency. .

2.4 EXCHANGE RATE MECHANISM

“Foreign Exchange” refers to money denominated in the currency of another nation

or a group of nations. Any person who exchanges money denominated in his own
nation’s currency for money denominated in another nation’s currency acquires
foreign exchange. This holds true whether the amount of the transaction is equal to a
few rupees or to billions of rupees; whether the person involved is a tourist cashing a
travellers’ cheque or an investor exchanging hundreds of millions of rupees for the
acquisition of a foreign company; and whether the form of money being acquired is
foreign currency notes, foreign currency-denominated bank deposits, or other short-
term claims denominated in foreign currency.

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A foreign exchange transaction is still a shift of funds or short-term financial claims
from one country and currency to another. Thus, within India, any money
denominated in any currency other than the Indian Rupees (INR) is, broadly
speaking, “foreign exchange.” Foreign Exchange can be cash, funds available on
credit cards and debit cards, travellers’ cheques, bank deposits, or other short-term
claims. It is still “foreign exchange” if it is a short-term negotiable financial claim
denominated in a currency other than INR. Almost every nation has its own national
currency or monetary unit - Rupee, US Dollar, Peso etc.- used for making and
receiving payments within its own borders. But foreign currencies are usually needed
for payments across national borders. Thus, in any nation whose residents conduct
business abroad or engage in financial transactions with persons in other countries,
there must be a mechanism for providing access to foreign currencies, so that
payments can be made in a form acceptable to foreigners. In other words, there is
need for “foreign exchange” transactions—exchange of one currency for another.

The exchange rate is a price - the number of units of one nation’s currency that must
be surrendered in order to acquire one unit of another nation’s currency. There are
scores of “exchange rates” for INR and other currencies, say US Dollar. In the spot
market, there is an exchange rate for every other national currency traded in that
market, as well as for various composite currencies or constructed monetary units
such as the Euro or the International Monetary Fund’s “SDR”. There are also various
“trade-weighted” or “effective” rates designed to show a currency’s movements
against an average of various other currencies (for eg US Dollar index, which is a
weighted index against world major currencies like Euro, Pound Sterling, Yen, and
Canadian Dollar). Apart from the spot rates, there are additional exchange rates for
other delivery dates in the forward markets.

The market price is determined by the interaction of buyers and sellers in that market,
and a market exchange rate between two currencies is determined by the interaction
of the official and private participants in the foreign exchange rate market. For a

14
 currency with an exchange rate that is fixed, or set by the monetary authorities, the
central bank or another official body is a participant in the market, standing ready to
buy or sell the currency as necessary to maintain the authorized pegged rate or range.
But in countries like the United States, which follows a complete free floating regime,
the authorities are not known to intervene in the foreign exchange market on a
continuous basis to influence the exchange rate. The market participation is made up
of individuals, non-financial firms, banks, official bodies, and other private
institutions from all over the world that are buying and selling US Dollars at that
particular time.

The participants in the foreign exchange market are thus a heterogeneous group. The
various investors, hedgers, and speculators may be focused on any time period, from
a few minutes to several years. But, whatever is the constitution of participants, and
whether their motive is investing, hedging, speculating, arbitraging, paying for
imports, or seeking to influence the rate, they are all part of the aggregate demand for
and supply of the currencies involved, and they all play a role in determining the
market price at that instant. Given the diverse views, interests, and time frames of the
participants, predicting the future course of exchange rates is a particularly complex
and uncertain exercise. At the same time, since the exchange rate influences such a
vast array of participants and business decisions, it is a pervasive and singularly
important price in an open economy, influencing consumer prices, investment
decisions, interest rates, economic growth, the location of industry, and much more.
The role of the foreign exchange market in the determination of that price is critically
important.

2.5 ECONOMIC VARIABLES IMPACTING EXCHANGE RATE MOVEMENTS

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 Various economic variables impact the movement in exchange rates. Interest rates,
inflation figures, GDP are the main variables; however other economic indicators that
provide direction regarding the state of the economy also have a significant impact on
the movement of a currency. These would include employment reports, balance of
payment figures, manufacturing indices, consumer prices and retail sales amongst
others. Indicators which suggest that the economy is strengthening are positively
correlated with a strong currency and would result in the currency strengthening and
vice versa.

Currency trader should be aware of government policies and the central bank stance
as indicated by them from time to time, either by policy action or market intervention.
Government structures its policies in a manner such that its long term objectives on
employment and growth are met. In trying to achieve these objectives, it sometimes
has to work around the economic variables and hence policy directives and the
economic variables are entwined and have an impact on exchange rate movements.

Chapter-2

16
Currency futures in Indian Context

3.1 Introduction Of currency Futures on Indian exchange

The foreign exchange market in India started in earnest less than three decades ago
when in 1978 the government allowed banks to trade foreign exchange with one
another. Today over 70% of the trading in foreign exchange continues to take place in
the inter-bank market. The market consists of over 90 Authorized Dealers (mostly
banks) who transact currency among themselves and come out “square” or without
exposure at the end of the trading day. Trading is regulated by the Foreign Exchange
Dealers Association of India (FEDAI), a self-regulatory association of dealers. Since
2001, clearing and settlement functions in the foreign exchange market are largely
carried out by the Clearing Corporation of India Limited (CCIL) that handles
transactions of approximately 3.5 billion US dollars a day, about 80% of the total
transactions.

The liberalization process has significantly boosted the foreign exchange market in
the country by allowing both banks and corporations greater flexibility in holding and
trading foreign currencies. The Sodhani Committee set up in 1994 recommended
greater freedom to participating banks, allowing them to fix their own trading limits,
interest rates on FCNR deposits and the use of derivative products.

The growth of the foreign exchange market in the last few years has been nothing less
than momentous. In the last 5 years, from 2000-01 to 2005-06, trading volume in the
foreign exchange market (including swaps, forwards and forward cancellations) has
more than tripled, growing at a compounded annual rate exceeding 25%. Figure 1
shows the growth of foreign exchange trading in India between 1999 and 2006. The
inter-bank forex trading volume has continued to account for the dominant share
(over 77%) of total trading over this period, though there is an unmistakable
downward trend in that proportion. This is in keeping with global patterns.

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 In March 2006, about half (48%) of the transactions were spot trades, while swap
transactions (essentially repurchase agreements with a one-way transaction – spot or
forward – combined with a longer- horizon forward transaction in the reverse
direction) accounted for 34% and forwards and forward cancellations made up 11%
and 7% respectively. About two-thirds of all transactions had the rupee on one side.
In 2004, according to the triennial central bank survey of foreign exchange and
derivative markets conducted by the Bank for International Settlements (BIS (2005a))
the Indian Rupee featured in the 20th position among all currencies in terms of being
on one side of all foreign transactions around the globe and its share had tripled since
1998. As a host of foreign exchange trading activity, India ranked 23rd among all
countries covered by the BIS survey in 2004 accounting for 0.3% of the world
turnover. Trading is relatively moderately concentrated in India with 11 banks
accounting for over 75% of the trades covered by the BIS 2004 survey.

The foreign exchange market has acquired a distinct vibrancy as evident from the
range of products, participation, liquidity and turnover. The average daily turnover in
the foreign exchange market increased from US $ 23.7 billion in March 2006 to US $
33.0 billion in March 2007 in consonance with the increase in foreign exchange
transactions. Although liberalization helped Indian forex market in various ways,
extensive fluctuations of exchange rate also took place in Indian forex market. These
issues have attracted a great deal of interest from policy-makers and investors. While
some flexibility in foreign exchange markets and exchange rate determination is
desirable, excessive volatility can have 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 required.

3. 2Need for Exchange Traded Currency Futures

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 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.

Exchange traded futures as compared to OTC forwards serve the same economic
purpose, yet differ in fundamental ways. An individual entering into a forward
contract agrees to transact at a forward price on a future date. On the maturity date,
the obligation of the individual equals the forward price at which the contract was
executed. Except on the maturity date, no money changes hands. On the other hand,
in the case of an exchange traded futures contract, marks to market obligations are
settled on a daily basis.

Since the profits or losses in the futures market are collected / paid on a daily basis,
the scope for building up of mark to market losses in the books of various participants
gets limited. The counterparty risk in a futures contract is further eliminated by the
presence of a clearing corporation, which by assuming counterparty guarantee
eliminates credit risk. Further, in an Exchange traded scenario where the market lot is
fixed at a much lesser size than the OTC market, equitable opportunity is provided to
all classes of investors whether large or small to participate in the futures market. The
transactions on an Exchange are executed on a price time priority ensuring that the
best price is available to all categories of market participants irrespective of their size.
Other advantages of an Exchange traded market would be greater transparency,
efficiency and accessibility.

3.3 Over-the-counter v/s Exchange traded

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A. Over-the-counter trading:
1. Over-The-Counter:

Over-the-counter (OTC) or off-exchange trading is to trade financial instruments such

as stocks, bonds, commodities or derivatives directly between two parties. It is
contrasted with exchange trading, which occurs via facilities constructed for the
purpose of trading (i.e., exchanges), such as futures exchanges or stock exchanges.

2. OTC Contract:
An over-the-counter contract is a bilateral contract in which two parties agree on how
a particular trade or agreement is to be settled in the future. It is usually from an
investment bank to its clients directly. Forwards and swaps are prime examples of
such contracts. It is mostly done via the computer or the telephone. For derivatives,
these agreements are usually governed by an International Swaps and Derivatives
Association agreement

3. The OTC markets have the following features:

a) The management of counter-party (credit) risk is decentralized and located within
individual institutions,
b) There are no formal centralized limits on individual positions, leverage, or
margining; limits are determined as credit lines by each of the counterparties entering
into these contracts
c) There are no formal rules for risk and burden-sharing,
d) There are no formal rules or mechanisms for ensuring market stability and
integrity, and for safeguarding the collective interests of market participants, and
e) Although OTC contracts are affected indirectly by national legal systems, banking
supervision and market surveillance, they are generally not regulated by a regulatory
authority.

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B. Exchange trading:

1. Exchange

A futures exchange or derivatives exchange is a central financial exchange where

people can trade standardized futures contracts; that is, a contract to buy specific
quantities of a commodity or financial instrument at a specified price with delivery
set at a specified time in the future.

2. Nature of contracts
a) Exchange-traded contracts are standardized by the exchanges where they trade.
b) The contract details what asset is to be bought or sold, and how, when, where and
in what quantity it is to be delivered.
c) The terms also specify the currency in which the contract will trade, minimum tick
value, and the last trading day and expiry or delivery month.
d) The contracts ultimately are not between the original buyer and the original seller,
but between the holders at expiry and the exchange.
e)The contracts traded on futures exchanges are always standardized. To make sure
liquidity is high, there is only a limited number of standardized contracts.

3.4 Formation of committee

With the expected benefits of exchange traded currency futures, it was decided in a
joint meeting of RBI and SEBI on February 28, 2008, that an RBI-SEBI Standing
Technical Committee on Exchange Traded Currency and Interest Rate Derivatives
would be constituted. To begin with, the Committee would evolve norms and oversee
the implementation of Exchange traded currency futures.

The Committee is constituted with the officials from RBI and SEBI.

21
  The Committee was given the following terms of reference:

i. To coordinate the regulatory roles of RBI and SEBI in regard to trading of

Currency and Interest Rate Futures on the Exchanges.

ii. To suggest the eligibility norms for existing and new Exchanges for Currency
and Interest Rate Futures trading.

iii. To suggest eligibility criteria for the members of such exchanges.

Iv.To review product design, margin requirements and other risk mitigation
measures on an ongoing basis

v. To suggest surveillance mechanism and dissemination of market information

vi. To consider microstructure issues, in the overall interest of financial stability.

3.5 Contract Specification of currency futures

A. USD/INR Contract

1. Underlying

Initially, currency futures contracts on US Dollar – Indian Rupee (US$-INR) would

be permitted.

2. Trading Hours

The trading on currency futures would be available from 9 a.m. to 5 p.m.

3. Size of the contract

The minimum contract size of the currency futures contract at the time of introduction
would be US$ 1000. The contract size would be periodically aligned to ensure that
the size of the contract remains close to the minimum size.

4. Quotation

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 The currency futures contract would be quoted in rupee terms. However, the
outstanding positions would be in dollar terms.

5. Tenor of the contract

The currency futures contract shall have a maximum maturity of 12 months.

6. Available contracts

All monthly maturities from 1 to 12 months would be made available.

7. Settlement mechanism

The currency futures contract shall be settled in cash in Indian Rupee.

8. Settlement price

The settlement price would be the Reserve Bank Reference Rate on the date of
expiry. The methodology of computation and dissemination of the Reference Rate
may be publicly disclosed by RBI.

9. Final settlement day

The currency futures contract would expire on the last working day (excluding
Saturdays) of the month. The last working day would be taken to be the same as that
for Interbank Settlements in Mumbai. The rules for Interbank Settlements, including
those for ‘known holidays’ and ‘subsequently declared holiday’ would be those as
laid down by FEDAI.

B. EURO-INR CONTRACT (EUR-INR)

1. Underlying

Euro-Indian Rupee (EUR-INR)

23
2. Trading Hours

9 a.m. to 5 p.m.

3. Size of the contract

The contract size would be Euro 1000.

4. Quotation

The contract would be quoted in rupee terms. However, the outstanding positions
would be in Euro terms.

5. Tenor of the contract

The maximum maturity of the contract would be 12 months.

6. Available contracts

All monthly maturities from 1 to 12 months would be made available.

7. Settlement mechanism

The contract would be settled in cash in Indian Rupee.

8. Settlement price

The settlement price would be the Reserve Bank Reference Rate on the date of
expiry.

9. Final settlement day

The contract would expire on the last working day (excluding Saturdays) of the
month. The last working day would be taken to be the same as that for Interbank

24
Settlements in Mumbai. The rules for Interbank Settlements, including those for
‘known holidays’ and ‘subsequently declare holiday’ would be those as laid down by
FEDAI

10. Initial Margin

The Initial Margin requirement would be based on a worst case loss of a portfolio of
an individual client across various scenarios of price changes. The various scenarios
of price changes would be so computed so as to cover a 99% VaR over a one day
horizon. In order to achieve this, the price scan range shall be fixed at 3.5 standard
deviation. The initial margin so computed would be subject to a minimum of 2.80%
on the first day of trading and 2% thereafter. The initial margin shall be deducted
from the liquid net worth of the clearing member on an online, real time basis.

11. Calendar spread margin

A currency futures position at one maturity which is hedged by an offsetting position

at a different maturity would be treated as a calendar spread. The calendar spread
margin shall be at a value of Rs. 700 for a spread of 1 month; Rs 1000 for a spread of
2 months and Rs 1500 for a spread of 3 months or more. The benefit for a calendar
spread would continue till expiry of the near month contract.

12. Extreme Loss margin

Extreme loss margin of 0.3% on the mark to market value of the gross open positions
shall be deducted from the liquid assets of the clearing member on an on line, real
time basis.

13. Position Limits

a)Client Level:

25
 The gross open positions of the client across all contracts shall not exceed 6% of
the total open interest or EUR 5 million whichever is higher. The Exchange will
disseminate alerts whenever the gross open position of the client exceeds 3% of
the total open interest at the end of the previous day’s trade.

b) Trading Member Level:

The gross open positions of the trading member across all contracts shall not
exceed 15% of the total open interest or EUR 25 million whichever is higher.

c) Bank:

The gross open positions of the bank across all contracts shall not exceed 15% of
the total open interest or EUR 50 million whichever is higher

d) Clearing Member Level:

No separate position limit is prescribed at the level of clearing member. However,

the clearing member shall ensure that his own trading position and the positions
of each trading member clearing through him is within the limits specified above.

C. POUND STERLINGINR CONTRACT (GBP-INR)

1. Underlying

Pound Sterling Indian Rupee (GBP-INR)

2. Trading Hours

9 a.m. to 5 p.m.

3. Size of the contract

The contract size would be Pound Sterling 1000.

26
4. Quotation

The contract would be quoted in rupee terms. However, the outstanding positions
would be in Pound Sterling terms.

5. Tenor of the contract

The maximum maturity of the contract would be 12 months.

6. Available contracts

All monthly maturities from 1 to 12 months would be made available.

7. Settlement mechanism

The contract would be settled in cash in Indian Rupee.

8. Settlement price

Exchange rate published by the Reserve Bank in its Press Release captioned RBI
Reference Rate for US$ and Euro.

9. Final settlement day

The contract would expire on the last working day (excluding Saturdays) of the
month. The last working day would be taken to be the same as that for Interbank
Settlements in Mumbai. The rules for Interbank Settlements, including those for
‘known holidays’ and ‘subsequently declared holiday’ would be those as laid down
by FEDAI.

10. Initial Margin

27
The Initial Margin requirement would be based on a worst case loss of a portfolio of
an individual client across various scenarios of price changes. The various scenarios
of price changes would be so computed so as to cover a 99% VaR over a one day
horizon. In order to achieve this, the price scan range shall be fixed at 3.5 standard
deviation. The initial margin so computed would be subject to a minimum of 3.20%
on the first day of trading and 2% thereafter. The initial margin shall be deducted
from the liquid net worth of the clearing member on an online, real time basis.

11. Calendar spread margin

A currency futures position at one maturity which is hedged by an offsetting position

at a different maturity would be treated as a calendar spread. The calendar spread
margin shall be at a value of Rs. 1500 for a spread of 1 month; Rs 1800 for a spread
of 2 months and Rs 2000 for a spread of 3 months or more. The benefit for a calendar
spread would continue till expiry of the near month contract.

12. Extreme Loss margin

Extreme loss margin of 0.5% on the mark to market value of the gross open positions
shall be deducted from the liquid assets of the clearing member on an on line, real
time basis.

13. Position Limits

a) Client Level:

The gross open positions of the client across all contracts shall not exceed 6% of
the total open interest or GBP 5 million whichever is higher. The Exchange will
disseminate alerts whenever the gross open position of the client exceeds 3% of
the total open interest at the end of the previous day’s trade.

b) Trading Member Level:

28
 The gross open positions of the trading member across all contracts shall not
exceed 15% of the total open interest or GBP 25 million whichever is higher.

c) Bank:

The gross open positions of the bank across all contracts shall not exceed 15% of
the total open interest or GBP 50 million whichever is higher.

d) Clearing Member Level:

No separate position limit is prescribed at the level of clearing member. However,

the clearing member shall ensure that his own trading position and the positions
of each trading member clearing through him is within the limits specified above.

D. JAPANESE YEN-INR CONTRACT (JPY-INR)

1. Underlying

Japanese Yen – Indian Rupee (JPY-INR)

2. Trading Hours

9 a.m. to 5 p.m

3. Size of the contract

The contract size would be Japanese Yen 1,00,000

4. Quotation

The contract would be quoted in rupee terms. However, the outstanding positions
would be in Japanese Yen terms.

5. Tenor of the contract

The maximum maturity of the contract would be 12 months.

6. Available contracts

29
All monthly maturities from 1 to 12 months would be made available.

7. Settlement mechanism

The contract would be settled in cash in Indian Rupee.

8. Settlement price

Exchange rate published by the Reserve Bank in its Press Release captioned RBI
Reference Rate for US$ and Euro.

9. Final settlement day

The contract would expire on the last working day (excluding Saturdays) of the
month. The last working day would be taken to be the same as that for Interbank
Settlements in Mumbai. The rules for Interbank Settlements, including those for
‘known holidays’ and ‘subsequently declared holiday’ would be those as laid down
by FEDAI.

10. Initial Margin

The Initial Margin requirement would be based on a worst case loss of a portfolio of
an individual client across various scenarios of price changes. The various scenarios
of price changes would be so computed so as to cover a 99% VaR over a one day
horizon. In order to achieve this, the price scan range shall be fixed at 3.5 standard
deviation. The initial margin so computed would be subject to a minimum of 4.50%
on the first day of trading and 2.30% thereafter. The initial margin shall be deducted
from the liquid net worth of the clearing member on an online, real time basis.

11. Calendar spread margin

30
A currency futures position at one maturity which is hedged by an offsetting position
at a different maturity would be treated as a calendar spread. The calendar spread
margin shall be at a value of Rs. 600 for a spread of 1 month; Rs 1000 for a spread of
2 months and Rs 1500 for a spread of 3 months or more. The benefit for a calendar
spread would continue till expiry of the near month contract.

12. Extreme Loss margin

Extreme loss margin of 0.7% on the mark to market value of the gross open positions
shall be deducted from the liquid assets of the clearing member on an on line, real
time basis.

13. Position Limits

a) Client Level:

The gross open positions of the client across all contracts shall not exceed 6% of
the total open interest or JPY 200 million whichever is higher. The Exchange will
disseminate alerts whenever the gross open position of the client exceeds 3% of
the total open interest at the end of the previous day’s trade.

b) Trading Member Level:

The gross open positions of the trading member across all contracts shall not
exceed 15% of the total open interest or JPY 1000 million whichever is higher.

c) Bank:

The gross open positions of the trading member across all contracts shall not
exceed 15% of the total open interest or JPY 2000 million whichever is higher.

31
 d) Clearing Member Level:

No separate position limit is prescribed at the level of clearing member. However,

the clearing member shall ensure that his own trading position and the positions
of each trading member clearing through him is within the limits specified above.

3.6Strategies used in currency futures

1.SPECULATION IN FUTURES MARKETS

Speculators play a vital role in the futures markets. Futures are designed primarily to
assist hedgers in managing their exposure to price risk; however, this would not be
possible without the participation of speculators. Speculators, or traders, assume the
price risk that hedgers attempt to lay off in the markets. In other words, hedgers often
depend on speculators to take the other side of their trades (i.e. act as counter party)
and to add depth and liquidity to the markets that are vital for the functioning of a
futures market. The speculators therefore have a big hand in making the market.
Speculation is not similar to manipulation. A manipulator tries to push prices in the
reverse direction of the market equilibrium while the speculator forecasts the
movement in prices and this effort eventually brings the prices closer to the market
equilibrium. If the speculators do not adhere to the relevant fundamental factors of the
spot market, they would not survive since their correlation with the underlying spot
market would be nonexistent.

2. LONG POSITION IN FUTURES

Long position in a currency futures contract without any exposure in the cash market
is called a speculative position. Long position in futures for speculative purpose
means buying futures contract in anticipation of strengthening of the exchange rate
(which actually means buy the base currency (USD) and sell the terms currency
(INR) and you want the base currency to rise in value and then you would sell it back
at a higher price). If the exchange rate strengthens before the expiry of the contract

32
then the trader makes a profit on squaring off the position, and if the exchange rate
weakens then the trader makes a loss.

The graph above depicts the pay-off of a long position in a future contract, which
does demonstrate that the pay-off of a trader is a linear derivative, that is, he makes
unlimited profit if the market moves as per his directional view, and if the market
goes against, he has equal risk of making unlimited losses if he doesn’t choose to exit
out his position.

Hypothetical Example – Long positions in futures

On May 1, 2008, an active trader in the currency futures market expects INR will
depreciate against USD caused by India’s sharply rising import bill and poor FII
equity flows. On the basis of his view about the USD/INR movement, he buys 1
USD/INR August contract at the prevailing rate of Rs. 40.5800. He decides to hold
the contract till expiry and during the holding period USD/INR futures actually
moves as per his anticipation and the RBI Reference rate increases to USD/INR 42.46
on May 30, 2008. He squares off his position and books a profit of Rs. 1880
(42.4600x1000 - 40.5800x1000) on 1 contract of USD/INR futures contract.

3. SHORT POSITION IN FUTURES

Short position in a currency futures contract without any exposure in the cash market
is called a speculative transaction. Short position in futures for speculative purposes
means selling a futures contract in anticipation of decline in the exchange rate (which
actually means sell the base currency (USD) and buy the terms currency (INR) and
you want the base currency to fall in value and then you would buy it back at a lower
price). If the exchange rate weakens before the expiry of the contract, then the trader
makes a profit on squaring off the position, and if the exchange rate strengthens then
the trader makes loss.

33
 Example – Short positions in futures

On August 1, 2008, an active trader in the currency futures market expects INR will
appreciate against USD, caused by softening of crude oil prices in the international
market and hence improving India’s trade balance.

On the basis of his view about the USD/INR movement, he sells 1 USD/INR August
contract at the prevailing rate of Rs. 42.3600.

On August 6, 2008, USD/INR August futures contract actually moves as per his
anticipation and declines to 41.9975. He decides to square off his position and earns a
profit of Rs. 362.50 (42.3600x1000 – 41.9975x1000) on squaring off the short
position of 1 USD/INR August futures contract.

Observation:

The trader has effectively analysed the market conditions and has taken a right call by
going short on futures and thus has made a gain of Rs. 362.50 per contract with small
investment (a margin of 3%, which comes to Rs. 1270.80) in a span of 6 days.

3.7HEDGING USED IN CURRENCY FUTURES

Hedging:

Hedging means taking a position in the future market that is opposite to a position in
the physical market with a view to reduce or limit risk associated with unpredictable
changes in exchange rate.

A hedger has an Overall Portfolio (OP) composed of (at least) 2 positions:

1. Underlying position

2. Hedging position with negative correlation with underlying position

Value of OP = Underlying position + Hedging position; and in case of a Perfect

hedge, the Value of the OP is insensitive to exchange rate (FX) changes.

34
Types of FX Hedgers using Futures

Long hedge:

· Underlying position: short in the foreign currency

· Hedging position: long in currency futures

Short hedge:

· Underlying position: long in the foreign currency

· Hedging position: short in currency futures

The proper size of the Hedging position

· Basic Approach: Equal hedge

· Modern Approach: Optimal hedge

Equal hedge:

In an Equal Hedge, the total value of the futures contracts involved is the same as the
value of the spot market position. As an example, a US importer who has an exposure
of £ 1 million will go long on 16 contracts assuming a face value of £62,500 per
contract. Therefore in an equal hedge: Size of Underlying position = Size of Hedging
position.

Optimal Hedge:

An optimal hedge is one where the changes in the spot prices are negatively
correlated with the changes in the futures prices and perfectly offset each other. This
can generally be described as an equal hedge, except when the spot-future basis
relationship changes. An Optimal Hedge is a hedging strategy which yields the
highest level of utility to the hedger.

35
Corporate Hedging

Before the introduction of currency futures, a corporate hedger had only Over-the-
Counter (OTC) market as a platform to hedge his currency exposure; however now he
has an additional platform where he can compare between the two platforms and
accordingly decide whether he will hedge his exposure in the OTC market or on an
exchange or he will like to hedge his exposures partially on both the platforms.

Example 1: Long Futures Hedge Exposed to the Risk of Strengthening USD

Unhedged Exposure: Let’s say on January 1, 2008, an Indian importer enters into a
contract to import 1,000 barrels of oil with payment to be made in US Dollar (USD)
on July 1, 2008. The price of each barrel of oil has been fixed at USD 110/barrel at
the prevailing exchange rate of 1 USD = INR 39.41; the cost of one barrel of oil in
INR works out to be Rs. 4335.10 (110 x 39.41). The importer has a risk that the USD
may strengthen over the next six months causing the oil to cost more in INR;
however, he decides not to hedge his position.

On July 1, 2008, the INR actually depreciates and now the exchange rate stands at 1
USD = INR 43.23. In dollar terms he has fixed his price, that is USD 110/barrel,
however, to make payment in USD he has to convert the INR into USD on the given
date and now the exchange rate stands at 1USD = INR43.23.

Therefore, to make payment for one dollar, he has to shell out Rs. 43.23. Hence the
same barrel of oil which was costing Rs. 4335.10 on January 1, 2008 will now cost
him Rs. 4755.30, which means 1 barrel of oil ended up costing Rs. 4755.30 - Rs.
4335.10 = Rs. 420.20 more and hence the 1000 barrels of oil has become dearer by
INR 4,20,200.

When INR weakens, he makes a loss, and when INR strengthens, he makes a profit.
As the importer cannot be sure of future exchange rate developments, he has an
entirely speculative position in the cash market, which can affect the value of his

36
operating cash flows, income statement, and competitive position, hence market share
and stock price.

Hedged:

Let’s presume the same Indian Importer pre-empted that there is good probability that
INR will weaken against the USD given the current macro-economic fundamentals of
increasing Current Account deficit and FII outflows and decides to hedge his
exposure on an exchange platform using currency futures.

Since he is concerned that the value of USD will rise he decides go long on currency
futures, it means he purchases a USD/INR futures contract. This protects the importer
because strengthening of USD would lead to profit in the long futures position, which
would effectively ensure that his loss in the physical market would be mitigated.

The following figure and Exhibit explain the mechanics of hedging using currency
futures.

Observation:

Following a 9.7% rise in the spot price for USD, the US dollars are purchased at the
new, higher spot price, but profits on the hedge foster an effective exchange rate
equal to the original hedge price.

Example 2: Short Futures Hedge Exposed to the Risk of Weakening USD

Unhedged Exposure: Let’s say on March 1, 2008, an Indian refiner enters into a
contract to export 1000 barrels of oil with payment to be received in US Dollar
(USD) on June 1, 2008. The price of each barrel of oil has been fixed at USD
80/barrel at the prevailing exchange rate of 1 USD = INR 44.05; the price of one
barrel of oil in INR works out to be is Rs. 3524 (80 x 44.05). The refiner has a risk
that the INR may strengthen over the next three months causing the oil to cost less in
INR; however he decides not to hedge his position.

37
On June 1, 2008, the INR actually appreciates against the USD and now the exchange
rate stands at 1 USD = INR 40.30. In dollar terms he has fixed his price, that is USD
80/barrel; however, the dollar that he receives has to be converted in INR on the
given date and the exchange rate stands at 1USD = INR40.30. Therefore, every dollar
that he receives is worth Rs. 40.30 as against Rs. 44.05. Hence the same barrel of oil
that initially would have garnered him Rs. 3524 (80 x 44.05) will now realize Rs.
3224, which means 1 barrel of oil ended up selling Rs. 3524 – Rs. 3224 = Rs. 300
less and hence the 1000 barrels of oil has become cheaper by INR 3,00,000.

When INR strengthens, he makes a loss and when INR weakens, he makes a profit.
As the refiner cannot be sure of future exchange rate developments, he has an entirely
speculative position in the cash market, which can affect the value of his operating
cash flows, income statement, and competitive position, hence market share and stock
price. Hedged: Let’s presume the same Indian refiner pre-empted that there is good
probability that INR will strengthen against the USD given the current
macroeconomic fundamentals of reducing fiscal deficit, stable current account deficit
and strong FII inflows and decides to hedge his exposure on an exchange platform
using currency futures.

Since he is concerned that the value of USD will fall he decides go short on currency
futures, it means he sells a USD/INR future contract. This protects the importer
because weakening of USD would lead to profit in the short futures position, which
would effectively ensure that his loss in the physical market would be mitigated.

The following figure and exhibit explain the mechanics of hedging using currency
futures.

Observation:

Following an 8.51% fall in the spot price for USD, the US dollars are sold at the new,
lower spot price; but profits on the hedge foster an effective exchange rate equal to
the original hedge price.

38
Example 3 (Variation of Example 1): Long Futures Hedge Exposed to the Risk
of Contract Expiry and Liquidation on the Same Day.

Observation: The size of the exposure is USD 110000 and the desired value date is
precisely the same as the futures delivery date (June 30). Following a 9.5% rise in the
spot price for USD against INR, the US dollars are purchased at the new, higher spot
price; but profits on the hedge foster an effective exchange rate equal to the original
futures price because on the date of expiry the spot price and the future price tend to
converge.

39
Chapter-4

INDUSTRY PROFILE:

4.1 Broking Insights

The Indian broking industry is one of the oldest trading industries that have been
around even before the establishment of the BSE in 1875. 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.

40
  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 Mututal 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

4.2 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.

41
4.3 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.

4.4 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.Of the brokers operating in the commodities market, 57% firms operate
at NCDEX and MCX. Around 20% and 21% firms are solely in NCDEX and MCX
respectively, whereas 2% firms trade in NCDEX, MCX and NMCE.

42
4.5 Products

The survey also revealed that in the past couple of years, apart from trading, the firms
have started offering various investment related value added services. The sustained
growth of the economy in the past couple of years has resulted in broking firms
offering many diversified services related to IPOs, mutual funds, company research
etc. However, the core trading activity is still the predominant form of business,
forming 90% of the firms in the sample. 67% firms are engaged in offering IPO
related services. The broking industry seems to have capitalised on the growth of the
mutual fund industry, which was pegged at 40% in 2006. More than 50% of the
sample broking houses deal in mutual fund investment services. The average growth
in assets under management in the last two years is almost 48%. Company research is
another lucrative area where the broking firms offer their services; more than 33% of
the firms are engaged in providing company research services. Additionally, a host of
other value added services such as fundamental and technical analysis, investment
banking, arbitrage etc. are offered by the firms at different levels.Of the total sample
of broking houses providing trading services, 52% are based in the West, followed by
25% from North, 13% from South and 10% from the East. Around 50% of the firms
offering IPO related services are based in the West as compared to 27% in North,
13% in South and 10% in East. In providing mutual funds services, the Western
region was dominant amounting to 49% followed by 27% from North; The South and
the East are almost at par with 13% and 11% respectively.

43
4.6 Future Plans

68% of the firms from the sample have envisaged strategies for future growth. With
the middle class Indian investor as well as foreign investor willing to invest in the
stock market, majority of the firms preferred expansion of institutional and the
Foreign Institutional Investor clients in their areas of growth. Around 84% have
shown interest in expanding their institutional client base. Nearly 51% of such firms
are located in the West, 25% in North, 15% are from South and 9% from East. Since
the past couple of years, India, along with Korea and Taiwan, has been one of the
preferred destinations for the FIIs. With corporate restructuring, rising market
capitalization and sectoral friendly policies helping the FIIs, more than two thirds of
the firms are interested in increasing their FII client base. Amongst these firms, West
again has maximum representation of 53%, followed by North with 22%. South has
15% firms and East makes up for 9%.

44
Chapter-8

CONCLUSION

With above analysis and finding we would like to conclude that

1. Dollar is easily acceptable currency in all over the world, so most of the traders use
Dollar as a major currency in making payment and in receiving the remittances.

2. USA and Briton is major business stations of our traders because large numbers of
export and import is related to these countries. So, Brokerage house should draft its
policy of hedging according to these country’s legal policy and business environment.

3. Most of the traders use hedging strategy to expose their foreign exposure. Hedging is
most risk sharing strategy and widely used by the exporter and importer to minimize
their risk.

4. Speculation is consider as most risky technique and it is least considered by the

respondents. Arbitrage is another strategy of foreign currency exposure and it is also
used but not as much as hedging strategy.

5. Many people are actively involved in stock market but not doing anything in currency
futures. Some of them are willing to trade in currency futures if appropriate
knowledge is provided to them.

45
Chapter-9

BIBLIOGRAPHY

International Business: Theory and practice

Newspapers

NISM Currency Derivative Module

Richard I. Levin and David S. Rubin (2004).Statistics for Management, 7th Edition.

Donald R Cooper and Pamela S Schindler, Business Research Methods 9th Edition.

Websites

www.rbi.org

www.nseindia.com

www.bseindia.com

www.babypips.com

www.fxcm.com

www.dailyfx.com

www.wikipedia.com

46