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What is Currency Derivatives?
The term 'Derivatives' indicates it derives its value from some underlying i.e. it has no independent value. Underlying can be securities, stock market index, commodities, bullion, currency or anything else. From Currency Derivatives market point of view, underlying would be the Currency Exchange rate. To put it simply an example of Derivatives is curd which is derived from Milk. Derivatives are unique product, which helps in hedging the portfolio against the future risk. At the same time, derivatives are used constructively for arbitrage and speculation too.
What are the benefits of trading in Currency Derivatives?
Currency Derivatives are very efficient risk management instruments and you can derive the below benefits:
You can protect your foreign exchange exposure in business and hedge potential losses by taking appropriate positions in the same. For e.g. If you are an importer, and have USD payments to make at a future date, you can hedge your foreign exchange exposure by buying USDINR and fixing your pay out rate today. You would hedge if you were of the view that USDINR was going to depreciate. Similarly it would give hedging opportunities to Exporters to hedge their future receivables, Borrowers to hedge foreign currency (FCY) loans for interest and principal payments, Resident Indians, who can hedge their offshore investments.
You can speculate on the short term movement of the markets by using Currency Futures. For e.g. If you expect oil prices to rise and impact India's import bill, you would buy USDINR in expectation that the INR would depreciate. Alternatively if you believed that strong exports from the IT sector, combined with strong FII flows will translate to INR appreciation you would sell USDINR.
You can make profits by taking advantage of the exchange rates of the currency in different markets and different exchanges
You can trade in the currency derivatives by just paying a % value called the margin amount instead of the full traded value.
What are Currency Futures Contracts?
Currency Futures contracts are legally binding agreement to buy or sell a financial instrument sometime in future at an agreed price. Currency Future contracts are standardized in terms of lots and delivery time. The only variable is the price, which is discovered by the market. Currency Futures contracts have different expiry validity and will expire after the completion of the specified tenure.
Who is eligible to trade in Currency Derivatives?
All Resident Indians as defined in section 2(v) of the Foreign Exchange Management Act, 1999 (FEMA, Act 42 of 1999) are eligible to trade in the Currency Derivatives segment. For participation by regulated entities, concurrence from respective regulators should be obtained. Currently, trading facility in Currency Futures at I-Sec will be offered to all Resident Individuals / HUFs / eligible Corporates fulfilling the FEMA criteria.
What documents would I be required to submit for registering myself in for Currency Derivatives? Do I need to submit any proofs along with the documents?
If you have a 3-in-1 account and wish to trade in Currency Derivatives you will be required to submit the duly signed Currency Derivatives form (containing the Agreement, Risk Disclosure Document & the Request letter). No further proofs are required to be submitted.
If you are not already a registered customer of I-Sec, you will have to open a 3-in-1 account with I-Sec. The account opening documentation for the 3-in-1 form has been consolidated for all product offerings and contains the Currency Derivatives documentations also. Proof of identity and address, as prescribed, would be required to be submitted along with the new account opening form.
How will I receive the intimation on registration for Currency Derivatives?
You will receive an e-mail once your form has been successfully processed and you are registered for Currency Derivatives. You will be required to accept the online Terms and conditions applicable to currency derivatives and you can immediately start trading.
How can I start trading in Currency Derivatives?
Once you are registered for Currency Derivatives, you can start trading in Currency Derivatives after completing the below steps:
Login into your account with your user id and password,
Accept the online "Currency Derivatives Terms and Conditions" and
Allocate funds from Modify Allocation link for Currency Derivatives segment
Can I place orders through the Call Centre?
Yes. You can place Currency Derivatives orders through our Call Centre by using the Call N Trade facility.
Can I place overnight orders (orders outside market hours) in Currency Derivatives segment?
Yes. Overnight orders are allowed to be placed in Currency derivatives segment. Only Limit orders are permitted and such orders will be sent to the exchange on the next trading day once the market opens.
What are different order types that are available in Currency Derivatives?
You have the following order types in Currency Derivatives:
Day/Good Till Day orders:
Day orders are orders which remain valid only for one trading session. Any unexecuted order pending at the end of the trading session is expired.
Immediate or Cancel (IOC orders):
IOC order allows the user to buy or sell a contract as soon as the order is released into the system, failing which the order is cancelled by the system. Partial match is possible for the order and the unmatched portion of the order is cancelled immediately.
How is Currency futures trading different from Equity Derivatives trading?
Equities Derivatives trading allows you to trade in Stocks and Index. While Currency futures trading allows you to trade in currencies; currently in USDINR. Settlement in both the segments is presently done in cash.
Can margin be changed during the life of contract?
Yes, margin % can be changed during the life of the contract depending on the volatility in the market. It may so happen that you have taken your position at 4% margin. But later on, due to the increased volatility in the exchange rates, the margin % is increased to 5%. In that scenario, you will have to allocate additional funds to continue with the open position, else such position may come in the MTM loop and get squared off because of insufficient margin. It is advisable to keep higher allocation to safeguard the open positions from being squared off.
What happens if buy or sell orders are placed when there is some open position already existing in the same underlying?
If you place a Buy/Sell orders in an Underlying, in which you already have an open position, margin will be levied as per the following calculations:
First the Marginable buy/sell order lots will be calculated. Marginable Buy Order lot is arrived at by deducting the open net sell position lot from the buy order lot at underlying-group level. Similarly Marginable Sell Order lot is arrived at by deducting the open net buy position lot from the sell order lot at underlying-group level.
Marginable Buy / Sell Order Value is then arrived at by multiplying the respective buy / sell order weighted average price with marginable buy / sell lots.
For Order Level margin, Marginable buy order value and Marginable sell order value would be compared and margin would be levied on higher of the two.
For example, in the above example there is an open sell position of 1 lot of 1000 qty " FUT-USDINR-27-Aug-2009". Marginable buy and sell order quantity would be 1 lot of 1000 qty and 3 lots of 3000 qty respectively. Marginable buy and sell order value would be Rs. 47000 and Rs. 144000 respectively.
What is Intra -Day Mark to Market? How does I-Sec call for additional margin during the Intra-day MTM process?
Once the Available Margin falls below the Minimum Margin, I-Sec may, at its discretion and at a suitable time, run the Intra-day Mark to Market process. Through this process, the system would block additional margin required out of the Limits available, if any.
In case there are no Limits available, the Intra-day Mark to Market process would cancel all pending orders for the underlying group and if still there is additional margin required, the process would square off the positions for which Available Margin is below the Minimum Margin and there exists a margin shortfall.
What is meant by Minimum Margin?
Minimum Margin is the margin amount on a particular position that you should ensure to maintain with I-Sec at all points in time. If the Available Margin with us goes below the required Minimum Margin, the I-Sec system would block additional margin required, if the same is available in the Limits.
How do you calculate available margin?
Available margin is calculated by deducting real time MTM loss from margin blocked and add margin at position level, i.e.
Available Margin = Margin on Positions + Add Margin - MTM Loss
How do you calculate Minimum Margin?
Minimum Margin is calculated by taking MM % instead of IM%. For spread position, Spread minimum margin % would be applied.
How do you call for Additional Margin during the Intra-day MTM process?
Once the available margin falls below the minimum margin required, our system would block Additional Margin required out of the limits available, if any
Can I do anything to safeguard the positions from being squared off during Intra-day MTM process?
Yes, you can always voluntarily Add Margin at the time of placing orders or allocate additional margin, on any open position from the open positions page.
Since the Intra-Day MTM process is triggered when Available Margin is less than the minimum margin required, having adequate margins can avoid calls for any additional margin in case the market turns unfavorably volatile with respect to your position.
You can add margin to your position either at the time of placing orders or once the position is created by clicking on "Modify Margin" link and then do Add margin on the "Open Position - Futures" page by specifying the margin amount to be allocated further. However, you should keep in mind that whatever margin you add during the day will remain there only till the end of day mark to Market (EOD MTM) is run or upto the time you square off your position in that underlying group completely. Next day if you want some more margin to be added towards the same open position, you will have to do a 'Add Margin' again.
What is meant by EOD MTM (End of Day - Mark To Market) process?
Daily EOD MTM is a mandatory feature of Currency futures Settlement Process. Every day the settlement of open Currency futures position takes place at the Settlement Price declared by the exchanges for that day.
The Base price as shown in the Open Position - Futures page is compared with the Settlement price and difference is cash settled. In case of profit/loss in EOD MTM, Limits are increased/reduced by the amount of profit/loss ; net of applicable brokerage, taxes, statutory levies. The position is carried forward to the Next day at the previous trading day's Settlement price at which last EOD MTM was run.
Settlement price for all the contracts are provided by exchange after making necessary adjustment for abnormal price fluctuations. It is different than LTP.
What kind of Settlement obligation will I have in Currency futures?
You can have following two Settlement obligations in Currency futures market:
Daily Settlement Obligations:
Daily settlement obligations arise due to the following:
PayOut/PayIn due to Profit and loss on squared off position
PayOut/PayIn due to Profit and loss on EOD MTM of open position
PayIn due to Brokerage and statutory levies
PayIn due to applicable Taxes
. Final Settlement Obligations:
Daily settlement obligations arise due to the following:
PayOut/PayIn due to Profit and loss on close out
PayIn due to Brokerage and statutory levies on close out
PayIn due to applicable Taxes
What is Volatility Index?
Volatility Index is a measure of expected stock market volatility, over a specified time period, conveyed by the prices of stock / index options. It depicts the collective sentiment of the market on the implied future volatility.
What is the date of Expiry?
All currency contracts expire two working days prior to last business day of the expiry month at 12 noon.
What are the trade timings of currency trading?
In NSE for currency Derivatives the trade timings are as follows:
Trading Session – Monday to Friday – 9.00 A.M to 5.00 P.M
Intraday Square off- Monday to Friday - 30 minutes prior to market closure
What products can I trade in Currency derivatives segment?
You can trade in following products in Currency derivatives segment:
Carry Forward – You can take both Futures and Options position in this product with margin % charged defined by exchange. The Carry Forward positions are carried forward to next trading day unless you square off the position or the expiry date is reached.
Intraday – You can take only Futures position in this product with lower margins, but these positions will have to be necessarily squared off by day end.
You can trade in either of the products in both PIB and Trading website by selecting Product Type in Order entry window.
At what time will the system automatically square-off the Currency Intraday Futures position ?
The system will automatically square off your Currency intraday futures open positions 30 minutes prior to market closure. This timing is subject to change depending on the market conditions on any given day.
Can I convert my Currency F&O position from Carry Forward to Intraday and vice-versa?
Yes, you can convert your Currency F&O position taken on current day from Carry Forward product to Intraday and Vice-versa in Intraday position Report.
Can I partially convert my Currency F&O position from Carry Forward to Intraday or vice-versa ?
Yes, you can partially convert your Currency F&O position from Carry Forward into Intraday or vice-versa through Intraday position Report.
Who is regulatory body that governs Currency trading in India?
The Exchange Traded Currency Derivative market is regulated by SEBI through the recognized stock exchanges. The Foreign Exchange Management Act is the law, which regulates the Foreign Exchange market and the regulatory authority for the Indian Foreign Exchange Market is the Reserve Bank of India (RBI).
How Currency Contracts are settled?
All Currency contracts – Futures and Options on NSE are cash-settled.
Do I require to open a Demat account for Currency Trading?
Demat account is not required for Currency Trading.
How are the margin charged in currency Future and Option Contracts?
Generally, Currency futures and options contracts require a margin percentage of the contract value, i.e. defined by exchange. The exchange also requires the daily profits and losses to be paid in/out on open positions (Mark to Market or MTM) so that the buyers and sellers do not carry a risk for not more than one day.
Can I use same margin to trade in both Equity and Currency segment?
Yes, same margin can be used to trade in both Equity and Currency segment.
Can I use my existing equity payment gateway to transfer funds for trading in currency segment?
Yes, you can use your Equity payment gateway to transfer funds for the purpose of trading in Currency segment.
Is there any price range defined for Currency Future and Option Contract beyond which trading is not allowed?
Yes, there is a daily price range (DPR) to safeguard the interests of general investors from the extreme volatilities in markets for preventing any unexpected fall or rise beyond a limit. In case price goes beyond the range, the contract is freezed for particular time duration by the exchange and new DPR is given by exchange for respective contract.
How Currency Futures and Options are different from Equity futures?
For currency futures and options, underlying asset is the currency pair at currency exchange rate. For equity futures, the underlying asset is the equity share of respective company.
Who are the participants in Currency Trading?
Following are the participants in Currency Trading:
How are derivatives traded?
There are two distinct types of derivatives; each is traded in its own way.
Exchange-traded derivatives are traded through a central exchange with publicly visible prices. Over-the-counter (OTC) derivatives are traded and negotiated between two parties without going through an exchange or other intermediaries. The market for OTC derivatives is significantly larger than for exchange-traded derivatives and was largely unregulated until the Dodd-Frank Wall Street Reform and Consumer Protection Act prescribed new measures to regulate derivatives trading.
The OTC market is composed of banks and other sophisticated market participants, like hedge funds, and because there is no central exchange, traders are exposed to more counterparty risk.
What is the definition of a “standardized” swap?
A swap is a type of derivative where two parties exchange financial instruments, such as interest rates or cash flows. There is still a lot of discussion on the definition of a standardized swap as it relates to central clearing. The CFTC and SEC continue to refine rulemaking around swap definitions and clearing requirements.
What is the difference between Futures and Forwards?
Futures are Exchange traded contracts whereas Forwards are over-the-counter (OTC) contracts. Futures are standardized with respect to quantity, quotation method and date of expiry whereas Forwards are tailored to meet the needs of the individual customers. As futures are exchange traded the counter party risk is minimal. Futures are marked to market (MTM) every day.
What is the Eligibility for trading in Currency Futures?
Only 'persons resident in India' may trade in Currency Futures to hedge an exposure to foreign exchange rate risk or otherwise. Any resident Indian or company including banks and financial institutions can participate in the Currency Futures market. At present Foreign Institutional Investors and Non-Resident Indians are not permitted to participate in the Currency Futures market.
What are the Benefits of trading in Currency Futures?
Currency Futures trading is in a fully regulated and transparent market place.
It does not require one to have an underlying exposure in foreign currency.
If the Client has an underlying exposure in the foreign currency, Currency Futures can be used effectively to hedge the same. It allows hedge for near 12 calendar months.
Currency Futures provide investors with access to a new asset class for their portfolio, i.e., Forex.
Margin trading in Currency Futures allows leverage of funds as it involves buying Currency Futures without having to pay for the entire value of the contract.
Daily settlement of Marked to Market pay-in and pay-out encourages disciplined trading.
Smaller and more affordable contract lot size enables a large number of players to enter the market.
All the trades are done on the recognized stock exchanges guaranteed by the clearing corporations and hence the risks associated with counter party default are eliminated.
Electronic Trading platform is made available for Currency Futures Trading. Without access to a computer, one can also do trades by calling Axis Bank Dealing Room and placing orders with the dealers who will in turn place orders on the Exchange trading platform on the Client's behalf.
Currency Futures are cash settled and offer convenience to trade.
What are derivative instruments?
A derivative is an instrument whose value is derived from the value of one or more underlying, which can be commodities, precious metals, currency, bonds, stocks, stocks indices, etc. Four most common examples of derivative instruments are Forwards, Futures, Options and Swaps.
What do you mean by Closing out contracts?
A long position in futures can be closed out by selling futures while a short position in futures can be closed out by buying futures on the exchange. Once position is closed out, only the net difference needs to be settled in cash, without any delivery of underlying. Most contracts are not held to expiry but closed out before that. If held until expiry, some are settled for cash and others for physical delivery.
Is the settlement mechanism different for Cash and Physical Delivery?
In case it is impossible, or impractical, to effect physical delivery, open positions (open long positions always being equal to open short positions) are closed out on the last day of trading at a price determined by the spot "cash" market price of the underlying asset. This price is called "Exchange Delivery Settlement Price" or EDSP. In case of physical settlement short side delivers to the specified location while long side takes delivery from the specified location of the specified quantity / quality of underlying asset. The long side pays the EDSP to clearing house/ corporation which is received by the short side.
What is central clearing?
Central clearing refers to a post-trade execution process whereby an independent central counterparty (a “CCP”) steps in between the original counterparties to a derivative trade. As opposed to a bilateral derivative that remains in place between the two executing parties for the life of the trade, a cleared derivative is ultimately booked with a clearinghouse. Exchange-traded derivatives are always centrally cleared, but OTC derivative also can be centrally cleared. Clearinghouses are regulated and require their clearing members, and the clearing members’ end-user customers, to post upfront collateral at the outset (i.e., “initial margin”). Additional collateral (i.e., “variation margin”) is required on an at-least daily basis to settle the trade against its current market value, which can fluctuate substantially. A clearinghouse typically will only accept cash or other liquid collateral to be posted as margin. While central clearing is appropriate for trades that are standardized, highly liquid and easy to value (i.e., for margin calculation and settlement purposes), it is not well-suited for more customized and illiquid derivatives. Whereas the parties to a bilateral derivative are exposed to the credit risk of their counterparties (i.e., “counterparty credit risk”), the parties to a cleared derivative are exposed to the credit risk of the clearinghouse.
Can I put take profit and stop loss orders simultaneously with the trade orders?
Client can place orders for taking profits or for restricting the losses by putting “stop loss orders”, once the trade order has been executed, otherwise it there can be a case where “stop loss” or “take profit” orders are executed before the trade orders.
How is the profit or loss recognized for my orders? When are the margins released?
Once the trade executed has been squared off, the profit/loss is credited/ debited in the client’s trading limits.
Margins blocked on a trade position are released only after the Currency Future positions are squared off.
Net amount, after considering the following, is released:
Margin blocked on Positions
+ Add margin released
+/- Profit/Loss incurred on Square off
- Applicable taxes.
What are the factors that affect exchange rate of a currency?
Basically exchange rates are affected by the supply and demand by various market constituents which depends on factors like inflation, trade balance, economic and political scenarios.
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