mBusiness risk : It includes strategic risk ,macro economic risk ,

competition risk and technological innovation risk.

Financial risk: This is caused due to financial market activities and

includes liquidity risk and credit risk
V uending/ Borrowing of cash
V Serving as avenues for savings and
investments
V Providing insurance
V Providing means for hedging for the risk-
averse
V R
 trade with an objective to minimize the risk in trading
V ` 
Speculators use derivatives to bet on the future direction of
the markets. They take calculated risks but the objective is to gain when the prices
move as per their expectation.
Based on the duration for which speculators hold a position they are further be
classified as
× Scalpers (for minutes)
× day traders ( for a day)
× position traders (for a long period may be a week, a month or a year).

V  
 rbitrageurs try to make risk-less profit by
simultaneously entering into transactions in two or more markets or two or
more contracts.
V Foreign exchange rate is the value of a foreign currency relative to
domestic currency.
V In a currency pair, the first currency is referred to as the base
currency and the second currency is referred to as the
¶counter/terms/quote· currency. The exchange rate tells the worth
of the base currency in terms of the terms currency, i.e. for a
buyer, how much of the terms currency must be paid to obtain one
unit of the base currency.
V ÷
 
 
   Fixed exchange rate, also known
as a pegged exchange rate, is when a currency's value is maintained at a fixed ratio
to the value of another currency or to a basket of currencies or to any other
measure of value e.g. gold.

V ÷ 
 
 
   a floating exchange rate is
determined by a market mechanism through supply and demand for the currency.

V if demand for a currency is low, its value will decrease, thus making imported
goods more expensive and exports relatively cheaper. The countries buying these
export goods will demand the domestic currency in order to make payments, and
the demand for domestic currency will increase. This will again lead to
appreciation in the value of the currency. Therefore, floating exchange rate is self
correcting
V fundamental factors, technical factors, political
factors and speculative factors.
V ÷

 
 The fundamental factors are basic economic
policies followed by the government in relation to inflation, balance of payment
position, unemployment, capacity utilization, trends in import and export, etc.

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  Political stability also influences the exchange rates.
V ` 

Speculative activities by traders worldwide also affect
exchange rate movements.
V In currency markets, the rates are generally quoted in terms of USD

V ½  The price of a currency in terms of another currency is called

¶quote·.

Direct Quotes :  quote where USD is the base currency is referred to as

a ¶direct quote· (e.g. 1 USD ² INR 48.5000).

Indirect Quotes : while a quote where USD is referred to as the terms

currency is an ¶indirect quote· (e.g. 1 INR = 0.021 USD).
V ny quote not against the USD is referred to as ¶cross· since the rate is calculated
via the USD.
Tick size refers to the minimum price differential at which
traders can enter bids and offers. For example, the Currency
Futures contracts traded at the NSE have a tick size of Rs. 0.0025.
So, if the prevailing futures price is Rs. 48.5000, the minimum
permissible price movement can cause the new price to be either
Rs. 48.4975 or Rs. 48.5025. Tick value refers to the amount of
money that is made or lost in a contract with each price
movement.
V Spreads or the dealer·s margin is the difference between bid price (the price
at which a dealer is willing to buy a foreign currency) and ask price (the price at
which a dealer is willing to sell a foreign currency).

V  bid-ask quot e for USDINR of Rs. 47.5000 ² Rs. 47.8000 means that the dealer is
willing to buy USD by paying Rs. 47.5000 and sell USD at a price of Rs. 47.8000.
The spread or the profit of the dealer in this case is Rs. 0.30.
V The spot market transaction does not imply immediate
exchange of currency, rather the settlement (exchange
of currency) takes place on a value date, which is
usually two business days after the trade date. The
price at which the deal takes place is known as the spot
rate (also known as benchmark price). The two-day
settlement period allows the parties to confirm the
transaction and arrange payment to each other.
V  forward transaction is a currency transaction
wherein the actual settlement date is at a specified
future date, which is more than two working days after
the deal date. The date of settlement and the rate of
exchange (called forward rate) is specified in the
contract. The difference between spot rate and forward
rate is called ´forward marginµ.
V Currency derivatives can be described as contracts between the sellers
and buyers whose values are derived from the underlying which in this
case is the Exchange Rate.
V The market participant wants to exchange the currency at a future date.
Here the market participant may either:
Enter into a futures/forward contract, whereby he agrees to exchange
the currency in the future at a price decided now, or,Buy a currency
option contract, wherein he commits for a future exchange of currency,
with an agreement that the contract will be valid only if the price is
favorable to the participant.
V ÷

 Forward contracts are agreements to
exchange currencies at an agreed rate on a specified future date. The actual
settlement date is more than two working days after the deal date. The agreed
rate is called forward rate and the difference between the spot rate and the
forward rate is called as forward margin. Forward contracts are bilateral
contracts (privately negotiated), traded outside a regulated stock exchange
and suffer from counter -party risks and liquidity risks.
V ÷  

 Futures contracts are also agreements to buy
or sell an asset for a certain price at a future time.
V Unlike forward contracts, which are traded in the over -the-counter
market with no standard contract size or standard delivery arrangements,
futures contracts are exchange traded and are more standardized. They
are standardized in terms of contract sizes, trading parameters, settlement
procedures and are traded on a regulated exchange. The contract size is
fixed and is referred to as lot size.
V Since futures contracts are traded through exchanges, the settlement of
the contract is guaranteed by the exchange or a clearing corporation and
hence there is no counter party risk. Exchanges guarantee the execution
by holding an amount as security from both the parties. This amount is
called as Margin money. Futures contracts provide the flexibility of
closing out the contract prior to the maturity by squaring off the
transaction in the market.
c
  



  




prevailing interest rate (for investment for the given time
period) in the two currencies. The forward rate can be calculated by the
following formula:

Where, F and S are future and spot currency rate. Rh and Rf are simple
interest rate in the home and foreign currency respectively. lternatively, if
we consider continuously compounded interest rate then forward rate can be
calculated by using the following formula:

Where rh and rf are the continuously compounded interest rate

for the home currency and foreign currency respectively, T is
the time to maturity
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outstanding positions are in US Dollar terms.
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trading day.
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  *of the month and the reference rate fixed by RBI two
days prior to the final settlement date is used for final settlement
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USD-INR future contract specification
V 


NSCCu undertakes the Clearing and Settlement activities.

V 
 
Clearing members are trading cum clearing members (TM-CM) and
Professional Clearing members (PCM).

V 

 
V Clearing banks handle the Funds settlement.  separate Bank account needs to be
opened by each clearing member with a NSCCu designated clearing bank for the
purpose of funds settlement.
V The trading of currency futures is subject to maintaining initial, extreme
loss, and calendar spread margins.

V --
The minimum margin percentage is 1.75% on the first day of
currency futures trading and 1 %thereafter.
V   
The applicable extreme loss margin is 1% on the mark to
market value of the gross open positions or as may be specified by the relevant
authority from time to time.
V 
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Daily settlement price for futures contracts is the closing price of such contracts
on the trading day.

V ÷
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The final settlement of futures contracts is effected on
T+2 day basis as per the timelines specified by the clearing corporation. The final
settlement date is the contract expiry date.