CURRENCY TRADING A SMART INVESTMENT IDEA- BUSTING THE MYTH

SUBMITTED TO: Mr. KAILAS. K P ASSISTANT PROFESSOR

PREPARED BY: Mr. HARIS .A S4 MBA, IMT PUNNAPRA

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 the need for dynamic currency risk management. The steady rise in Indias foreign trade along with liberalization in foreign exchange regime has led to large inflow of foreign currency into the system in the 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 Reserve Bank of India (RBI) have allowed trading in currency futures on stock exchanges for the first time in India, 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 tool for hedging their foreign exchange risk effectively and efficiently at transparent rates on an electronic trading platform. The primary purpose of exchange-traded currency derivatives is to provide a mechanism for price risk management and consequently provide price curve of expected future prices to enable the industry to protect its foreign currency exposure. The need for such instruments increases with increase of foreign exchange volatility. A host of benefits are available to a wide range of 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 the foreign exchange markets is available on exchange. Banks, importers, exporters and corporate houses hedge 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 on long (buy) position in USDINR contract for returns. Contrarily, he can sell the contract if he sees appreciation of the Indian Rupee. Arbitrageurs: Arbitrageurs get the opportunity of trading in currency 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 also good for the national economy. Any resident Indian or company including Banks and financial institutions 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 which fulfil stipulated prudential requirements are eligible to become a clearing member and / or trading member of the currency derivatives segment of MCX-SX. AD Category I Banks which are urban cooperative banks or state co-operative banks can participate in the currency futures market only as a client, subject to approval thereof, from the respective regulatory department of RBI. The minimum size 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 well within the reach of most small traders. All transactions on the Exchange are anonymous and are executed 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 a currency exchange platform, you can buy or sell currency futures. If you are an importer, you can buy futures to lock in a price for your purchase of actual foreign currency at a future date. You thus avoid exchange rate risk that you would otherwise have faced. On the other hand, if you are an exporter, 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

profit or loss will be paid / collected on a daily basis. Risks in currency futures pertain to movements in the currency exchange rate. There is no rule of thumb to determine whether a currency rate will rise or 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 Tokyo Financial Exchange provide trading in currency futures. Indian currency futures enable individuals and 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 USD 1,000, 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. All monthly maturities from 1 to 12 months are available. The trading of currency futures is subject to maintenance 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 and international transactions are performed. All the international business transactions involve an exchange of one currency for another. The foreign exchange markets of a country provide the mechanism 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 and finance all over the world, trading in foreign currencies has grown tremendously over the past several decades. 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 are denominated in foreign currencies undergo a change in value over a period of time due to variation in exchange rates. This variability in value of assets or liabilities or cash flows is referred to exchange rate risk. Since the fixed exchange rate system has been fallen in the early 1970s, specifically in developed countries, the currency risk has become substantial for many business firms that was the reason behind development of currency derivatives.

Pa2.STATEMENT OF THE PROBLEM A project titled Currency trading a smart investment idea busting the myth will be conducted at Religare securities Ltd Alleppey branch in order to understand & analyse the currency 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 currency trading 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

In India currency trading has started just 3 years ago, so it is at budding stage. While trade is international, currencies are national. As international transactions are settled in global currencies, usually they are brought/sold for one another and this constitutes currency trading. A countrys currency exchange rate is typically affected by the supply and demand for the countrys currency in the international foreign exchange market. The demand and supply dynamics is principally influenced by factors like interest rates, inflation, trade balance and 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. A rise in export earnings of a country increases foreign exchange supply. A rise in imports increases 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 so on. A currency futures contract is a standardized version of a forward contract that is traded on a regulated exchange. It is an agreement to buy or sell a specified quantity of an underlying 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 currency exchange 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 the relevant foreign currency. By the time you actually import, the value of the Indian Rupee may have gone down and you may lose out on your income in terms of Indian Rupees by paying higher. On the contrary, if you are exporting something and the value of the Indian Rupee has gone up, you earn less in terms of Rupees than you had anticipated. Currency futures help you hedge 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 be conducted at Religare securities Ltd Alleppey branch provides hand on experience with regard 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 exchange are concerned. 6. METHODOLOGY The research design selected is Descriptive in nature. (a) DATA BASE DESIGN (i) PRIMARY DATA

Primary data will be collected through direct observation of currency trading movements, lively and interactive interviews & discussions with 50 currency trading dealers. (ii) SECONDARY DATA Secondary 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 DESIGN Convenience sampling may be under taken for the study. The study will cover a sample size of 50 dealers. (d) STATISTICAL DESIGN Appropriate 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 be coming 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.