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Chapter 3

Currency Contract Specifications

Currency futures trading were introduced in India on the NSE in 2008. Since then, the gamut of products has expanded to include Rupee pair futures, Rupee pair options, Cross currency pair futures and Cross currency pair options. Currency futures are also known as FX futures (Forex Futures). It is a futures contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the purchase date. On the NSE and the BSE, the price of a future contract is typically expressed in terms of INR per unit of other currency. For example, the USD-INR future is expressed in terms of rupees per US$ (like 71/$) where the dollar is the principal currency and the rupee is the secondary currency. How are these currency futures used? US Dollars currency futures contracts allow investors to hedge against foreign exchange risk, especially when the concerned individual or institution has a dollar payable or a dollar receivable.

Currency Derivatives are available on the NSE and the BSE for four currency pairs viz. US Dollars (USD), Euro (EUR), Great Britain Pound (GBP) and Japanese Yen (JPY). In addition, options are also available on each of these currencies. Apart from the rupee pairs, the exchange also offers Cross Currency Futures & Options contracts on EUR-USD, GBP-USD and USD-JPY.

A. CONTRACT SPECIFICATIONS FOR CURRENCY FUTURES

Currency futures trading can be done using the existing normal trading account of the trader / investor. For example, if you buy a USD-INR future at Rs71.50. And the dollar strengthens to Rs73.50/$, then the Rs.2 becomes your profit if you are long on USD-INR futures. On the other hand, if you have a view that the dollar will weaken or that the rupee will strengthen, then you can sell USD-INR futures. This is also known as short on USD. In this case if the dollar weakens to Rs.70/$, then the difference of Rs.1.50 (71.50 – 70.00) will be your profit. Irrespective of whether you are long USD-INR or you are short USD-INR, your profits and losses can be unlimited.

Symbol USDINR EURINR GBPINR JPYINR
Market Type N N N N
Instrument Type FUTCUR FUTCUR FUTCUR FUTCUR
Unit of trading 1 - 1 unit denotes 1000 USD. 1 - 1 unit denotes 1000 EURO. 1 - 1 unit denotes 1000 POUND STERLING. 1 - 1 unit denotes 100000 JAPANESE YEN.
Underlying / Order Quotation The exchange rate in Indian Rupees for US Dollars The exchange rate in Indian Rupees for Euro. The exchange rate in Indian Rupees for Pound Sterling. The exchange rate in Indian Rupees for 100 Japanese Yen.
Tick size 0.25 paisa  or INR 0.0025
Trading hours Monday to Friday
9:00 a.m. to 5:00 p.m.
Contract trading cycle 12 month trading cycle.
Last trading day Two working days prior to the last business day of the expiry month at 12:30 pm.
Final settlement day Last working day (excluding Saturdays) of the expiry month.
The last working day will be the same as that for Interbank Settlements in Mumbai.
Quantity Freeze 10,001 or greater
Base price Theoretical price on the 1st day of the contract.
On all other days, DSP of the contract.
Theoretical price on the 1st day of the contract.
On all other days, DSP of the contract.
Theoretical price on the 1st day of the contract.
On all other days, DSP of the contract.
Theoretical price on the 1st day of the contract.
On all other days, DSP of the contract.
Price operating range Tenure up to 6 months +/-3 % of base price.
Tenure greater than 6 months +/- 5% of base price.
Position limits Position Limits for CDS Segment
Initial margin SPAN Based Margin
Extreme loss margin 1% of MTM value of gross open position 0.3% of MTM value of gross open position 0.5% of MTM value of gross open position 0.7% of MTM value of gross open position
Calendar spreads Rs.400 for spread of 1 month
Rs.500 for spread of 2 months
Rs.800 for spread of 3 months
Rs.1000 for spread of 4 months and more
Rs.700 for spread of 1 month
Rs.1000 for spread of 2 months
Rs.1500 for spread of 3 months and more
Rs.1500 for spread of 1 month
Rs.1800 for spread of 2 months
Rs.2000 for spread of 3 months and more
Rs.600 for spread of 1 month
Rs.1000 for spread of 2 months
Rs.1500 for spread of 3 months and more
Settlement Daily settlement: T + 1
Final  settlement: T + 2
Mode of settlement Cash settled in Indian Rupees
Daily settlement price (DSP) Calculated on the basis of the last half an hour weighted average price.
Final settlement price (FSP) RBI reference rate RBI reference rate Exchange rate published by RBI in its Press Release captioned RBI reference Rate for US$ and Euro Exchange rate published by RBI in its Press Release captioned RBI reference Rate for US$ and Euro

As can be seen from the above table, the minimum lot size for the USD, GBP and the EUR contract is the equivalent of 1000 of the foreign currency. Only for the JPY it is 100,000. Like in stock futures and commodity futures, there is a combination of SPAN margin and Extreme Loss Margins (ELM) that is charged to the client as Initial Margin for all open positions. In addition, MTM margins are also collected to the extent price movement against the trader. All currency futures are necessarily cash settled only. The RBI reference rate is the reference price for the settlement on a daily basis.

B. CONTRACT SPECIFICATIONS FOR CURRENCY OPTIONS

Currency options trading can also be done using the existing normal trading account of the trader / investor. If you are bullish on the dollar or expect the dollar to appreciate against the rupee then you can look to buy a call option on the rupee by paying the premium. The premium will be the sunk cost on the option. On the other hand, if you believe that the dollar will not appreciate then you can look to sell call option on the USD-INR.

Buying a call option on the USD INR is an affirmative bullish view on the dollar but selling the call is not an affirmative bearish view. Rather it is a negative view on the chances of the dollar appreciating beyond a point. Buying a put option on the USD INR is an affirmative bearish view on the dollar but selling the put is not an affirmative bullish view. Rather it is a negative view on the chances of the dollar depreciating beyond a point. Like in the case of currency futures, the currency options are also cash settled. All currency options are European in nature, which means they can only be exercised on the expiry date.

Symbol USDINR EURINR GBPINR JPYINR
Market Type N
Instrument Type OPTCUR OPTCUR OPTCUR OPTCUR
Option Type Premium style European Call & Put Options
Premium Premium quoted in INR
Unit of trading 1 contract unit denotes USD 1000 1 contract unit denotes EUR 1000 1 contract unit denotes GBP 1000 1 contract unit denotes JPY 100000
Underlying / Order Quotation The exchange rate in Indian Rupees for US Dollars The exchange rate in Indian Rupees for Euro The exchange rate in Indian Rupees for Pound Sterling The exchange rate in Indian Rupees for 100 Japanese Yen
Tick size 0.25 paisa i.e. INR 0.0025
Trading hours Monday to Friday
9:00 a.m. to 5:00 p.m. IST
Contract trading cycle 3 serial monthly contracts followed by 3 quarterly contracts of the cycle March/June/September/December For Weekly USDINR Options- 11 serial weekly contracts expiring on Friday, excluding expiry week wherein monthly contracts expires on a Friday. New serial weekly options contracts shall be introduced after expiry of the respective week's contract.
No. of Strikes Minimum 12 In-the-money, Minimum 12 Out-of-the-money and 1 Near-the-money. (25 CE and 25 PE)
Strike price intervals INR 0.25 INR 0.25 INR 0.25 INR 0.25
Price Operating Range A contract specific price range based on its delta value is computed and updated on a daily basis
Quantity Freeze 10,001 or greater
Base price Theoretical price on the 1st day of the contract.
On all other days, DSP of the contract.
Initial margin SPAN Based Margin
Extreme loss margin 1.5% of Notional Value of open short position
Settlement of premium Premium to be paid by the buyer in cash on T+1 day
Settlement Daily settlement: T + 1
Final settlement: T + 2
Expiry/Last trading day Two working days prior to the last business day of the expiry month at 12:30 pm. For Weekly USDINR Options -Every Friday of the week. In case the Friday is a trading holiday, the previous trading day shall be the expiry/last trading day. All contracts shall expire at the 12:30 pm. on the expiry day.
Final settlement day Last working day (excluding Saturdays) of the expiry month.
The last working day will be the same as that for Interbank Settlements in Mumbai.
Position limits Position Limits for CDS Segment
Mode of settlement Cash settled in Indian Rupees
Final settlement price (FSP) RBI reference rate on the date of the expiry of the contact

Like in the case of futures, the lot sizes for options will also be USD1000, GBP1000 and EUR 1000 respectively per lot. Only in case of the Japanese Yen it will be JPY100,000 per lot. In case you buy call or put option, there is no margining except the premium margin. In case of selling of calls and puts, the Initial Margin (SPAN margin + ELM) is collected in the same way as in short futures or long futures. In addition, the MTM margins are also collected if the price movement is against the trader.

C. CONTRACT SPECIFICATIONS FOR CROSS CURRENCY FUTURES & OPTION PAIRS

Cross currency pairs are useful to a trader when they have dual currency exposure. For example, if you are importing from the US and have a dollar exposure then a USD-INR pair is good enough. Similarly, if you are exporting to Germany and have payables in Euros then a EUR-INR pair is good enough. But, what if you have a dual currency exposure? If you are importing from one country and exporting to another country, you are likely to be exposed to be exposed to two currencies. For example, if the raw materials are being imported from US and being sold to Japan, then you need to hope that the dollar does not strengthen and the Yen does not weaken. Instead of doing a USDINR contract and a JPYINR contract, you can simply buy the USD-JPY cross currency pair.

Symbol EURUSD GBPUSD USDJPY
Market Type N N N
Instrument Type FUTCUR FUTCUR FUTCUR
Unit of trading 1 - 1 unit denotes 1000 EURO. 1 - 1 unit denotes 1000 GBP. 1 - 1 unit denotes 1000 USD.
Underlying / Order Quotation The contract would be quote in USD. The outstanding positions would be in EURO terms The contract would be quote in USD. The outstanding positions would be in GBP terms The contract would be quote in JPY. The outstanding positions would be in USD terms
Tick size 0.0001 0.0001 0.01
Trading hours Monday to Friday
9:00 a.m. to 7:30 p.m. IST
Contract trading cycle 12 serial monthly contracts.
Calendar spreads Spread Combinations available for trading would be M1 - M2, M1 - M3, M1 - M4, M2 - M3, M2- M4, M3 - M4 All spread orders shall be placed in terms of price difference only.
Expiry/Last trading day Two working days prior to the last business day of the expiry month at 12:30 pm. If last trading day is a trading holiday, then the last trading day shall be the previous trading day
Quantity Freeze 10,001 or greater
Price operating range Tenure up to 6 months +/-3 % of base price.
Tenure greater than 6 months +/- 5% of base price.
Base price Theoretical price on the 1st day of the contract.
On all other days, DSP of the contract.
Position limits Position Limits for CDS Segment
Mode of settlement Cash settled in Indian Rupees

Like the rupee pairs, cross currency pairs are also cash settled. Calendar spread combinations are also available on these cross currency pairs. Even though the currencies may be non-rupee currencies in cross currency pairs, the settlement happens in cash in Indian rupees only. Compared to multiple rupee pairs, the cross currency spreads not only reduce the margining requirements but also entail lower transaction costs, especially when the trader has exposure to multiple currencies with offsetting positions. Liquidity in cross currency options is yet to pick up in a big way and as of now only dollar pairs are offered in the Indian markets.

Cross Currency Options

Can we also trade in cross currency options? There are European calls and put options available on the EURUSD, GBPUSD and the USDJPY cross currency contracts. The logic of the call or put needs to be understood. Buying a call option on the EURUSD is an affirmative bullish view on the Euro versus the dollar but selling the call is not an affirmative bearish view. Rather it is a negative view on the chances of the Euro appreciating beyond a point against the dollar. Buying a put option on the EURUSD is an affirmative bearish view on the Euro versus the dollar but selling the put is not an affirmative bullish view. Rather it is a negative view on the chances of the Euro depreciating beyond a point against the dollar.

Symbol EURUSD GBPUSD USDJPY
Market Type N N N
Instrument Type OPTCUR OPTCUR OPTCUR
Option Type Premium Style: European, Call & Put Options (CE/PE)
Unit of trading 1 contract unit denotes 1000 EURO. 1 contract unit denotes 1000 GBP. 1 contract unit denotes 1000 USD.
Underlying / Order Quotation The contract would be quote in USD. The outstanding positions would be in EURO terms The contract would be quote in USD. The outstanding positions would be in GBP terms The contract would be quote in JPY. The outstanding positions would be in USD terms
Tick size 0.0001 0.0001 0.01
Trading hours Monday to Friday
9:00 a.m. to 7:30 p.m. IST
Contract trading cycle 3 serial monthly contracts, followed by 3 quarterly contracts of the cycle March/June/September/December.
No. of Strikes Minimum 12 In-the-money, Minimum 12 Out-of-the-money and 1 Near-the-money. (25 CE and 25 PE)
Strike price intervals 0.005 0.005 0.5
Expiry/Last trading day Two working days prior to the last business day of the expiry month at 12:30 pm.
Quantity Freeze 10,001 or greater
Price operating range Contract specific price range based on the delta of the option contract
Base price Theoretical price on the 1st day of the contract.
On all other days, DSP of the contract.
Position limits Position Limits for CDS Segment
Mode of settlement Cash settled in Indian Rupees

Like in case of rupee pair options, cross currency options are also intended to give hedgers an opportunity to protect the risk with limited risk. That is because when you buy call or puts on cross currency options your maximum loss is limited to the total premium paid on the contract. Like in the case of all other currency futures and options, the options on cross currency pairs are also settled in INR, irrespective of the underlying currency in which the pair is done. Settlement will always be done in INR only.

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