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CURRENCY T RADING A SMART INVESTMENT

IDEA- BUSTING THE MYTH

SUBMITTED TO: Mr. KAILAS. K P PREPARED BY: Mr. HARIS .A

ASSISTANT PROFESSOR S4 MBA, IMT PUNNAPRA

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IMT, PUNNAPRA

SYNOPSIS

1. INTRODUCTION

Globalization and integration of financial markets, coupled with progressive increase of cross-border flow of capital, have transformed the dynamics of Indian financial markets. This has increased theneed for dynamic currency risk management. The steady rise in Indias foreign trade along withliberalization in foreign exchange regime has led to large inflow of foreign currency into the system inthe form of FDI and FII investments. In order to provide a liquid, transparent and vibrant market for foreign exchange rate risk management, Securities & Exchange Board of India (SEBI) and ReserveBank of India (RBI) have allowed trading in currency futures on stock exchanges for the first time inIndia, initially based on the USDINR exchange rate and subsequently on three other currency pairs EURINR, GBPINR and JPYINR. The USDINR futures contract is already being traded on MCX-SX

with more than US$ 2 billion average daily turnover. This would give Indian businesses another toolfor hedging their foreign exchange risk effectively and efficiently at transparent rates on an electronictrading platform. The primary purpose of exchange-traded currency derivatives is to provide amechanism for price risk management and consequently provide price curve of expected future pricesto enable the industry to protect its foreign currency exposure. The need for such instrumentsincreases with increase of foreign exchange volatility. A host of benefits are available to a wide rangeof financial market participants, including hedgers (exporters, importers, corporate and Banks),investors and arbitrageurs on MCX-SX.

Hedgers: A high-liquidity platform for hedging against the effects of unfavourable fluctuations in theforeign exchange markets is available on exchange. Banks, importers, exporters and corporate houseshedge on MCX-SX. Investors: All those interested in taking a view on appreciation (or depreciation)of exchange rate in the long and short term can participate in the MCX-SX currency futures. For

example, if one expects depreciation of the Indian Rupee against the US dollar, then he can hold onlong (buy) position in USDINR contract for returns. Contrarily, he can sell the contract if he seesappreciation of the Indian Rupee. Arbitrageurs: Arbitrageurs get the opportunity of trading incurrency futures by simultaneous purchase and sale in two different markets, taking advantage of

price differential between the markets.

Since the economy is made up of businesses of all sizes, anything that is good for business is alsogood for the national economy. Any resident Indian or company including Banks and financialinstitutions can participate in the futures market. However, at present, Foreign Institutional Investors(FIIs) and Non-Resident Indians (NRIs) are not permitted to participate in currency futures market.RBI has allowed Banks to participate in currency futures market. The AD Category I Banks whichfulfil stipulated prudential requirements are eligible to become a clearing member and / or tradingmember of the currency derivatives segment of MCX-SX. AD Category I Banks which are urban co-operative banks or state co-operative banks can participate in the currency futures market only as aclient, subject to approval thereof, from the respective regulatory department of RBI. The minimumsize of the USDINR futures contract is USD 1,000. Similarly EURINR future contract is EURO 1000,GBPINR future contract is GBP 1000 and JPYINR future contract is YEN 1,00,000. These are wellwithin the reach of most small traders. All transactions on the Exchange are anonymous and areexecuted on a price time priority ensuring that the best price is available to all categories of market

participants irrespective of their size. As the profits or losses in the futures market are also paid /collected on a daily basis, the scope of accumulation of losses for participants gets limited. On acurrency exchange platform, you can buy or sell currency futures. If you are an importer, you can buyfutures to lock in a price for your purchase of actual foreign curren cy at a future date. You thusavoid exchange rate risk that you would otherwise have faced. On the other hand, if you are anexporter, you sell currency futures on the exchange platform and lock in a sale price at a future date.However, it may be noted that the contract will be marked to market at the daily settlement price and

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profit or loss will be paid / collected on a daily basis. Risks in currency futures pertain to movementsin the currency exchange rate. There is no rule of thumb to determine whether a currency rate will riseor fall or remain unchanged. A judgement on this will depend on the knowledge and Understanding of the variables that affect currency rates. Internationally, exchanges such as Chicago Mercantile Exchange (CME), Johannesburg Stock Exchange, Euronext.liffe, BM&FBOVESPA and TokyoFinancial Exchange provide trading in currency futures. Indian currency futures enable individualsand companies in India to hedge and trade their Indian Rupee risk. Most international exchanges offer contracts denominated in other currencies. The contract size of the USDINR futures contract is USD1,000, EURINR future contract is EURO 1,000, GBPINR future contract is GBP 1,000 and JPYINR future contract is YEN 1,00,000. The contracts shall have a maximum maturity of twelve months. Allmonthly maturities from 1 to 12 months are available. The trading of currency futures is subject tomaintenance of initial, extreme loss, and calendar spread margins with the clearing house /corporation. The details of the margins levied are mentioned in the respective product specifications.

Each country has its own currency through which both national andinternational transactions are performed. All the international business transactions involve anexchange of one currency for another. The foreign exchange markets of a country provide themechanism of exchanging different currencies with one and another, and thus facilitating transfer of

purchasing power from one country to another. With the multiple growths of international trade andfinance all over the world, trading in foreign currencies has grown tremendously over the past severaldecades. Since the exchange rates are continuously changing, so the firms are exposed to the risk of exchange rate movements. As a result assets or liabilities or cash inflows of a firm which aredenominated in foreign currencies undergo a change in value over a period of time due to variation inexchange rates. This variability in value of assets or liabilities or cash flows is referred to exchangerate risk. Since the fixed exchange rate system has been fallen in the early 1970s, specifically indeveloped countries, the currency risk has become substantial for many business firms that was thereason behind development of currency derivatives.

Pa 2. STATEMENT OF THE PROBLEM

A project titled Currency trading a smart investment idea busting the myth will beconducted at Religare securities Ltd Alleppey branch in order to understand & analyse thecurrency trading and to give necessary suggestions where required. Various aspects of currency trading will be studied. The study is very important to gain a practical experience &to have a better knowledge of this segment.

3. OBJECTIVES

To understand currency trading

To identify factors deciding currency fluctuations To study the fluctuation risk involved in currency trading and hedging in currencytrading

To get a deep knowledge of the growth and performance of currency trading in India To know at what extent currency trading a smart investment idea utilised by Indian

investors To analyse the pulse of currency trading segment To gain practical knowledge of corporate environment and exposure

4. SIGNIFICANCE

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In India currency trading has started just 3 years ago, so it is at budding stage. While trade isinternational, currencies are national. As international transactions are settled in globalcurrencies, usually they are brought/sold for one another and this constitutes currencytrading. A countrys currency exchange rate is typically affected by the supply and demandfor the countrys currency in the international foreign exchange market. The demand andsupply dynamics is principally influenced by factors like interest rates, inflation, trade balanceand economic & political scenarios in the country. The level of confidence in the economy of a particular country also influences the currency of that country. There are several reasons. Arise in export earnings of a country increases foreign exchange supply. A rise in importsincreases demand. These are the objective reasons, but there are many subjective reasons too.Some of the subjective reasons are: directional viewpoints of market participants,expectations of national economic performance, confidence in a countrys economy and soon. A currency futures contract is a standardized version of a forward contract that is tradedon a regulated exchange. It is an agreement to buy or sell a specified quantity of anunderlying currency on a specified date in future at a specified rate (e.g., USD 1 = INR

46.00). (Note: USD is abbreviation for the US Dollar and INR for the Indian Rupee).Currency futures are needed if your business is influenced by fluctuations in currencyexchange rates. If you are in India and are importing something, you have done the costing of your imports on the basis of a certain exchange rate between the Indian Rupee and therelevant foreign currency. By the time you actually import, the value of the Indian Rupee mayhave gone down and you may lose out on your income in terms of Indian Rupees by payinghigher. On the contrary, if you are exporting something and the value of the Indian Rupee hasgone up, you earn less in terms of Rupees than you had anticipated. Currency futures help youhedge against these exchange rate risks. Every business exposed to foreign exchange risk needs to have a facility to hedge against such risk. Exchange-traded currency futures, as on

MCX-SX, are a superior tool for such hedging because of greater transparency, liquidity,counterparty guarantee and accessibility.

5. SCOPE

This project is focused on the various aspects of currency trading. The projects will beconducted at Religare securities Ltd Alleppey branch provides hand on experience withregard to currency trading. I will cover the following aspects through the research

Listing the factors that affect currency trading

Projecting the growth of currency trading market in India Relevance of currency trading as far as Indian securities markets & foreign exchangeare concerned.

6. METHODOLOGY

The research design selected is Descriptive in nature.

(a) DATA BASE DESIGN(i) PRIMARY DATA

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Primary data will be collected through direct observation of currency tradingmovements, lively and interactive interviews & discussions with 50 currencytrading dealers.

(ii) SECONDARY DATASecondary data are collected from official reports of various institutions, websites& company profile

(b) MEASUREMENT DESIGN Nominal, ordinal and likert scale may be used in accordance with the data type.

(c) SAMPLING DESIGNConvenience sampling may be under taken for the study. The study will cover a samplesize of 50 dealers.

(d) STATISTICAL DESIGNAppropriate mathematical and statistical tools will be used depending on the nature of data.

7. LIMITATIONS

This Project is limited to currency trading; other segments of securities market will not becoming under study. Some of the respondents may be reluctant or negative in this approach,most of them will be busy. The information to be collected from respondents may be biased.

8. CHAPTERISATION

The project report consist of five chapters

Chapter 1. Introduction

Chapter 2. Industry Profile

Chapter 3. Company Profile

Chapter 4. Data analysis and interpretation

Chapter 5. Findings, Conclusion and Suggestions.