A DISSERTATION REPORT ON

“A Comprehensive Study of Currency Market in INDIA.”

SUBMITTED IN PARTIAL FULFILLMENT OF REQUIREMENT FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION (M.B.A)

UNDER THE GUIDANCE OF SUBMITTED BY:

Prof. Dharam Vir Sardana Mohd Asjad

SESSION: 2012-2014

JAMIA HAMDARD

NEW DELHI

0

DEPARTMENT OF MANAGEMENT JAMIA HAMDARD (HAMDARD UNIVERSITY)

HAMDARD NAGAR, NEW DELHI-110062

Date………………..

CERTIFICATE

This is to certify that the dissertation report titled,” A Comprehensive Study Of Currency Market in INDIA” is a study undertaken by Mr. Mohd Asjad MBA (Gen)-Finance (2012-2014).

The dissertation report is the result of his own work as declared by the student in “Declaration from Student of Authentic Work” which is attached in this dissertation report.

Prof. Dharam Vir Sardana(Supervisor)

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Declaration

I hereby declare that the dissertation work entitled,” A Comprehensive

Study of Currency Market in INDIA” is my original and exclusively

my own work. I further declare that my work is my own authentic piece

of work and has not been submitted at any Organization/Institution/

University for personal/academic gains and benefits or award of any

Degree/Diploma/Certificate.

Name: …………………………

Signature: ………………………

Dare: ……………………………

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Acknowledgement

I owe thanks to Prof. Dharam Vir Sardana and also extend my sincere gratitude

for the excellent guidance and tremendous support provided by him to accomplish

our project successfully. The project specific discussions were extremely beneficial

and guided me on how to go about this project.

The knowledge about the various sectors of economy has enabled us to analyze in

the right prospective.

The teachings through this project will be a lifetime investment and it has surely

provided us with an insight into the Currency Market.

Mohd Asjad

MBA (Gen)-Finance

4th Semester.

Jamia Hamdard

Delhi.

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EXECUTIVE SUMMARY:

With over 25 million shareholders, India has the third largest investor base in the world after

USA and Japan. Over 7500 companies are listed on the Indian stock exchanges (more than the

number of companies listed in developed markets of Japan, UK, Germany, France, Australia,

Switzerland, Canada and Hong Kong.). The Indian capital market is significant in terms of the

degree of development, volume of trading, transparency and its tremendous growth potential.

Derivatives trading in the stock market have been a subject of enthusiasm of research in the field

of finance the most desired instruments that allow market participants to manage risk in the

modern securities trading are known as derivatives. The derivatives are defined as the future

contracts whose value depends upon the underlying assets. If derivatives are introduced in the

stock market, the underlying asset may be anything as component of stock market like, stock

prices or market indices, interest rates, etc. The main logic behind derivatives trading is that

derivatives reduce the risk by providing an additional channel to invest with lower trading cost

and it facilitates the investors to extend their settlement through the future contracts. It provides

extra liquidity in the stock market

.The Currency Market or Forex Market is a place where banks and other authorized

establishments trade the currencies of various nations. The purpose of the foreign exchange

market is to help international trade and investment. Floating Exchange System is used these

days by almost all the countries. The Indian Currency Market is highly dynamic and volatile.

Bygone are the days of fixed exchange rate system, India now follows Liberalised Exchange

Rate Management System (LERMS). This system was implemented post 1991 when India was

on the spree of globalization. Comprehensive analysis of the major factors influencing the Indian

Currency Market is also undertaken.

The key elements of forex market are:

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Market Size and Liquidity

Market Participants

Determinants of FX rates

Trading and Analysis in Foreign Exchange

Financial Instruments involved

Working of the Forex Market

Benefits and drawbacks of Forex Market

Currency futures trading started in India on August 29, 2008 on National Stock Exchange.

Currency futures are standardised foreign exchange contracts traded on approved stock

exchanges to buy or sell one currency against another on a specified date in the future at a

specified price (exchange rate). . The BSE has failed to generate enough interest in this segment

and the volumes remain abysmally low on the exchange. Although volatility has ensured that

volumes surged after the launch, trading has been concentrated on front-month contracts as

majority of users are traders, small exporters and brokers/banks.

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Table of Contents

S.NO Chapters Page. No1 Acknowledgement. 3

2 Executive Summary. 4-5

3 Overview. 7-12

4 Literature Review. 13-15

5 Research Methodology. 16

6 Introduction about the Topic. 17-31

7 Analysis. 32-35

8 Findings. 36

9 Recommendations. 37

10 Limitations of the study. 38

11 Conclusions. 39-40

12 Questionnaire. 41-58

13 Bibliography. 59-60

14 Appendices. 61-64

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.

OVERVIEW:

The term ‘Derivative’ stands for a contract whose price is derived from or is dependent upon

an underlying asset. The underlying asset could be a financial asset such as currency, stock

and market index, an interest bearing security or a physical commodity. Today, around the

world, derivative contracts are traded on electricity, weather, temperature and even volatility.

According to the Securities Contract Regulation Act, (1956) the term “derivative” includes:

(i) A security derived from a debt instrument, share, loan, whether secured or unsecured,

risk instrument or contract for differences or any other form of security;

(ii) A contract which derives its value from the prices, or index of prices, of underlying

securities.

An equity derivative is a financial instrument referencing an underlying equity asset or other

variable, from which the financial instrument’s price or value is derived, entered into by the

parties for a purpose.

The derivatives market is the financial market for derivatives, financial instruments like futures

contracts or options, which are derived from other forms of assets.

The market can be divided into two, that for exchange-traded derivatives and that for over-the-

counter derivatives. The legal nature of these products is very different as well as the way they

are traded, though many market participants are active in both.

Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated)

directly between two parties, without going through an exchange or other intermediary. Products

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such as swaps, forward rate agreements, exotic options – and other exotic derivatives – are

almost always traded in this way. The OTC derivative market is the largest market for

derivatives, and is largely unregulated with respect to disclosure of information between the

parties, since the OTC market is made up of banks and other highly sophisticated parties, such

as hedge funds. Reporting of OTC amounts is difficult because trades can occur in private,

without activity being visible on any exchange.

According to the Bank for International Settlements, who first surveyed OTC derivatives in

1995, reported that the "gross market value, which represent the cost of replacing all open

contracts at the prevailing market prices, ... increased by 74% since 2004, to $11 trillion at the

end of June 2007 (BIS 2007:24)." Positions in the OTC derivatives market increased to $516

trillion at the end of June 2007, 135% higher than the level recorded in 2004. The total

outstanding notional amount is US$708 trillion (as of June 2011). Of this total notional amount,

67% are interest rate contracts, 8% are credit default swaps (CDS), 9% are foreign exchange

contracts, 2% are commodity contracts, 1% are equity contracts, and 12% are other. Because

OTC derivatives are not traded on an exchange, there is no central counter-party. Therefore, they

are subject to counterparty risk, like an ordinary contract, since each counter-party relies on the

other to perform.

Exchange-traded derivatives (ETD) are those derivatives instruments that are traded via

specialized derivatives exchanges or other exchanges. A derivatives exchange is a market where

individuals trade standardized contracts that have been defined by the exchange. A derivatives

exchange acts as an intermediary to all related transactions, and takes initial margin from both

sides of the trade to act as a guarantee. The world's largest derivatives exchanges (by number of

transactions) are the Korea Exchange (which lists KOSPI Index Futures &

Options),Eurex (which lists a wide range of European products such as interest rate & index

products), and CME Group (made up of the 2007 merger of the Chicago Mercantile

Exchange and the Chicago Board of Trade and the 2008 acquisition of the New York Mercantile

Exchange). According to BIS, the combined turnover in the world's derivatives exchanges

totaled USD 344 trillion during Q4 2005. By December 2007 the Bank for International

Settlements reported that "derivatives traded on exchanges surged 27% to a record $681 trillion."

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The National Stock Exchange of India Limited (NSE) commenced trading in derivatives with the

launch of index futures on June 12, 2000. The futures contracts are based on the popular

benchmark S&P CNX Nifty Index.

The Exchange introduced trading in Index Options (also based on Nifty) on June 4, 2001. NSE

also became the first exchange to launch trading in options on individual securities from July 2,

2001. Futures on individual securities were introduced on November 9, 2001. Futures and

Options on individual securities are available on 208 securities stipulated by SEBI.

The Exchange has also introduced trading in Futures and Options contracts based on CNX-IT,

BANK NIFTY, and NIFTY MIDCAP 50 indices.

PARTICIPANTS IN A DERIVATIVES MARKET

The derivatives market is similar to any other financial market and has following three broad

categories of participants:

Hedgers: These are investors with a present or anticipated exposure to the underlying asset

which is subject to price risks. Hedgers use the derivatives market primarily for price risk

management of assets and portfolios.

Speculators: These are the individuals who take a view on the future direction of the

markets. They take a view whether prices would rise or fall in future and accordingly buy or

sell futures and options to try and make a profit from the future price movements of the

underlying asset.

Arbitrageurs: They take positions in financial markets to earn riskless profits. The

arbitrageurs take short and long positions in the same or different contracts at the same time

to create a position which can generate a riskless profit.

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ECONOMIC FUNCTIONS OF THE DERIVATIVES MARKET

The derivatives market performs a number of economic functions. Some of them are summed up

as follows:

Prices in an organised derivatives market reflect the perception of the market participants

about the future and lead the prices of underlying to the perceived future level. The prices

of derivatives converge with the prices of the underlying at the expiration of the

derivatives contract. Thus, derivatives help in discovery of future as well as current

prices.

The derivatives market helps to transfer risks from those who have them but do not like

them to those who have an appetite for them.

Derivatives, due to their inherent nature, are linked to the underlying cash markets. With

the introduction of derivatives, the underlying market witnesses higher trading volumes.

This is because of participation by more players who would not otherwise participate for

lack of an arrangement to transfer risk.

Speculative trades shift to a more controlled environment in derivatives market. In the

absence of an organised derivatives market, speculators trade in the underlying cash

markets. Margining, monitoring and surveillance of the activities of various participants

become extremely difficult in these kind of mixed markets.

An important incidental benefit that flows from derivatives trading is that it acts as a

catalyst for new entrepreneurial activity. The derivatives have a history of attracting

many bright, creative, well-educated people with an entrepreneurial attitude. They often

energise others to create new businesses, new products and new employment

opportunities, the benefit of which are immense.

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TYPES OF DERIVATIVES

There are various types of derivatives traded on exchanges across the world. They range from the

very simple to the most complex products. The following are the three basic forms of

derivatives, which are the building blocks for many complex derivative instruments:

1. FORWARDS

2. FUTURES

3. OPTIONS

Financial instruments

SpotA spot transaction is a two-day delivery transaction (except in the case of trades between the US

Dollar, Canadian Dollar, Turkish Lira and Russian Rubble, which settle the next business day),

as opposed to the futures contracts, which are usually three months. This trade represents a

“direct exchange” between two currencies, has the shortest time frame, involves cash rather than

a contract; and interest is not included in the agreed-upon transaction. The data for this study

come from the spot market. Spot transactions has the second largest turnover by volume after

Swap transactions among all FX transactions in the Global FX market NNM.

ForwardOne way to deal with the foreign exchange risk is to engage in a forward transaction. In this

transaction, money does not actually change hands until some agreed upon future date. A buyer

and seller agree on an exchange rate for any date in the future, and the transaction occurs on that

date, regardless of what the market rates are then. The duration of the trade can be a one day, a

few days, months or years. Usually the date is decided by both parties.

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FutureForeign currency futures are exchange traded forward transactions with standard contract sizes

and maturity dates — for example, $1000 for next November at an agreed rate [4],[5]. Futures

are standardized and are usually traded on an exchange created for this purpose. The average

contract length is roughly 3 months. Futures contracts are usually inclusive of any interest

amounts.

SwapThe most common type of forward transaction is the currency swap. In a swap, two parties

exchange currencies for a certain length of time and agree to reverse the transaction at a later

date. These are not standardized contracts and are not traded through an exchange.

OptionA foreign exchange option (commonly shortened to just FX option) is a derivative where the

owner has the right but not the obligation to exchange money denominated in one currency into

another currency at a pre-agreed exchange rate on a specified date. The FX options market is the

deepest, largest and most liquid market for options of any kind in the world.

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LITERATURE REVIEW:

Cho (1998) points out the reasons for which reforms were made in Indian capital market stating

the after reform developments.

Shah (1999) describes the financial sector reforms in India as an attempt at developing financial

markets as an alternative vehicle determining the allocation of capital in the economy.

Bose. S, Money and Finance, ICRA Bulletin, Jan-June, 2006.

The emergence of the market for derivative products, most notably forwards, futures and options,

can be traced back to the willingness of risk-averse economic agents to guard themselves against

uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets

are marked by a very high degree of volatility. Through the use of derivative products, it is

possible to partially or fully transfer price risks by locking-in asset prices. As instruments of risk

management, these generally do not influence the fluctuations in the underlying asset prices.

However, by locking-in asset prices, derivative products minimize the impact of fluctuations in

asset prices on the profitability and cash flow situation of risk-averse investors.

Derivative products initially emerged, as hedging devices against fluctuations in commodity

prices and commodity-linked derivatives remained the sole form of such products for almost

three hundred years. The financial derivatives came into spotlight in post-1970 period due to

growing instability in the financial markets. However, since their emergence, these products

have become very popular and by 1990s, they accounted for about two-thirds of total

transactions in derivative products. In recent years, the market for financial derivatives has

grown tremendously both in terms of variety of instruments available, their complexity and also

turnover. In the class of equity derivatives, futures and options on stock indices have gained

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more popularity than on individual stocks, especially among institutional investors, who are

major users of index-linked derivatives.

Even small investors find these useful due to high correlation of the popular indices with various

portfolios and ease of use. The lower costs associated with index derivatives vis-vis derivative

products based on individual securities is another reason for their growing use.

S. Asani, The Oxford Companion to Economics in India, 2006, Oxford university Press,

New Delhi

In terms of the growth of derivatives markets, and the variety of derivatives users, the Indian

market has equalled or exceeded many other regional markets. While the growth is being

spearheaded mainly by retail investors, private sector institutions and large corporations, smaller

companies and state-owned institutions are gradually getting into the act. Foreign brokers such

as JP Morgan Chase are boosting their presence in India in reaction to the growth in derivatives.

The variety of derivatives instruments available for trading is also expanding.

There remain major areas of concern for Indian derivatives users. Large gaps exist in the range

of derivatives products that are traded actively. In equity derivatives, NSE figures show that

almost 90% of activity is due to stock futures or index futures, whereas trading in options is

limited to a few stocks, partly because they are settled in cash and not the underlying stocks.

Exchange-traded derivatives based on interest rates and currencies are virtually absent.

As Indian derivatives markets grow more sophisticated, greater investor awareness will become

essential. NSE has programmes to inform and educate brokers, dealers, traders, and market

personnel. In addition, institutions will need to devote more resources to develop the business

processes and technology necessary for derivatives trading.

Srivastava, S., Yadav, S. S., Jain, P. K. (2008), had conducted a survey of brokers in the

recently introduced derivatives markets in India to examine the brokers’ assessment of market

activity and their perception of benefits and costs of derivative 50 trading. The need for such a

study was felt as previous studies relating to the impact of derivatives securities on Indian Stock

market do not cover the perception of market participants who form an integral part of the

functioning of derivatives markets. The issues covered in the survey included: perception of

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brokers about the attractiveness of different derivative securities for clients; profile of clients

dealing in derivative securities; popularity of a particular derivative security out of the total set;

different purposes for which the clients are using these securities in order of preference; issues

concerning derivatives trading; reasons for non-usage of derivatives by some investors.

The investors are using derivative securities for different purposes after its penetration into the

Indian Capital market. They use these securities not only for risk management and profit

enhancement but also for speculation and arbitrage. High net worth individuals and proprietary

traders account for a large proportion of broker turnover. Interestingly, some retail participation

was also witnessed despite the fact that these securities are beyond the reach of retail investors

(because of complexity and high initial cost).

Naresh, G., (2006), studied the dynamic growth of the Derivatives market, particularly Futures

& Options and the perceived risks to the financial sector continue to stimulate debate on the

proper regulation of these instruments. Even though this market was initially fuelled by various

expert teams survey, regulatory framework, recommendations byelaws and rules there is still a

debate on the existing regulations such as why is regulation needed? When and where regulation

needed? What are reasonable and attainable goals of these regulations? Therefore this article

critically examines the views of market participants on the existing regulatory issues in trading

Derivative securities in Indian capital market conditions.

The emergence and growth of the market for derivative instruments is because of the willingness

of risk-averse economic agents to guard themselves against uncertainties arising out of

fluctuations in asset prices. By providing investors and issuers with a wider array of tools for

managing risks and raising capital, derivatives improve the allocation of credit and the sharing of

risk in the global economy, lowering the cost of capital formation and stimulating economic

growth. Now that world markets for trade and finance have become more integrated, derivatives

have strengthened these important linkages between global markets, increasing market liquidity

and efficiency, and have facilitated the flow of trade and finance.

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RESEARCH METHODOLOGY:

Research Methodology refers to the method adopted for collection of information, which forms

the basis of written report. The data collection techniques used are:

RESEARCH DESIGN

In this project descriptive research design is used.

SOURCES OF DATA

Secondary data is used in this study.

The Secondary information is collected from various research works and journals available on

the topic and from website.

OBJECTIVES

To study the basic concept of derivatives.

To Understand the importance foreign Exchange market & there working in context

of Indian currency market.

To analyse different derivatives products.

To understand main factors influencing Indian currency market.

The importance of currency future With the Indian context & how the traders

grasped the opportunities in the currency future market.

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INTRODUCTION ABOUT THE TOPIC:

Working of Foreign exchange market

The forex market comprises of banks, commercial companies, hedge funds, investment

management firms, brokers and retail investors. The market does not have any centralized

exchange. Trading generally takes place through the interbank market, which is a network of

more than a thousand banks. Each bank in the network trades directly with others with the help

of an Electronic Broking System (EBS), where buy and sell orders are placed and then matched

on the basis of price.

Interbank forex trading continues 24 hours a day, 5.5 days a week, from Monday through midday

on Saturday. On a single trading day, the market opens in Australia and shifts operations

throughout the day to Asia, Tokyo, Hong Kong, Singapore, Europe and New York. The forex

trading day ends with the close of trading in New York.

In the forex market, trading always occurs in currency pairs. The pricing of a currency pair in

this market is determined by the demand and supply of a currency in relation to the other in the

pair. Apart from banks, currency pairs are bought and sold by individual investors via brokers.

W ORKING OF INDIAN CURRENCY MARKET

Foreign Exchange Market in India works under the central government in India and executes

wide powers to control transactions in foreign exchange.

The Foreign Exchange Management Act, 1999 or FEMA regulates the whole foreign exchange

market in India. Before this act was introduced, the foreign exchange market in India was

regulated by the reserve bank of India through the Exchange Control Department, by the FERA

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or Foreign Exchange Regulation Act, 1947. After independence, FERA was introduced as a

temporary measure to regulate the inflow of the foreign capital. But with the economic and

industrial development, the need for conservation of foreign currency was urgently felt and on

the recommendation of the Public Accounts Committee, the Indian government passed the

Foreign Exchange Regulation Act, 1973 and gradually, this act became famous as FEMA.

Foreign Exchange Market in India, Indian Economy Until 1992 all foreign investments in India

and the repatriation of foreign capital required previous approval of the government. The

Foreign-Exchange Regulation Act rarely allowed foreign majority holdings for foreign exchange

in India. However, a new foreign investment policy announced in July 1991, declared automatic

approval for foreign exchange in India for thirty-four industries. These industries were

designated with high priority, up to an equivalent limit of 51 percent. The foreign exchange

market in India is regulated by the reserve bank of India through the Exchange Control

Department.

Initially the government required that a company`s routine approval must rely on identical

exports and dividend repatriation, but in May 1992 this requirement of foreign exchange in India

was lifted, with an exception to low-priority sectors. In 1994 foreign and non-resident Indian

investors were permitted to repatriate not only their profits but also their capital for foreign

exchange in India. Indian exporters are enjoying the freedom to use their export earnings as they

find it suitable. However, transfer of capital abroad by Indian nationals is only allowed in

particular circumstances, such as emigration. Foreign exchange in India is automatically made

accessible for imports for which import licenses are widely issued.

Indian authorities are able to manage the exchange rate easily, only because foreign exchange

transactions in India are so securely controlled. From 1975 to 1992 the rupee was coupled to a

trade-weighted basket of currencies. In February 1992, the Indian government started to make

the rupee convertible, and in March 1993 a single floating exchange rate in the market of foreign

exchange in India was implemented. In July 1995, Rs 31.81 was worth US$1, as compared to Rs

7.86 in 1980, Rs 12.37 in 1985, and Rs17.50 in 1990.

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Foreign Exchange Dealers Association of India (FEDAI) is a voluntary association that also

provides some help in regulating the market. The Authorized Dealers and the attributed brokers

are qualified to participate in the foreign Exchange markets of India. When the foreign exchange

trade is going on between Authorized Dealers and RBI or between the Authorized Dealers and

the overseas banks, the brokers usually do not have any role to play. Besides the Authorized

Dealers and brokers, there are some others who are provided with the limited rights to accept the

foreign currency or traveller’s cheque, they are the authorized moneychangers, travel agents,

certain hotels and government shops. The IDBI and Exim bank are also permitted at specific

times to hold foreign currency.

Benefits of the Forex Market

Highest liquidity: With a daily turnover exceeding $3 trillion, the forex market is the

world’s most liquid market. A single trade amounting to $200-$500 million is not

uncommon.

24-hour market: The market is open throughout the day at some part of the world. Hence,

investors have the flexibility of making their own trading schedule.

Extensive leverage: In this market, leverage can range from 50:1 to up to 500:1. This means

that if you have $5,000 in your trading account and your broker is offering 150:1 leverage,

you have the option of trading up to $750,000. This kind of leverage offers you an

opportunity to earn immense profits, even with limited capital.

Market trends: Trends in this market are never bearish, as a decline in the value of one

currency represents a rise in the exchange value of another. Thus, investors have the

opportunity to earn profits at all times.

No cap on the lot size: An investor can trade a lot of an unlimited size at any given time and

price.

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Drawbacks of Forex Market

Highly unpredictable: Since the exchange value of a currency pair is dependent on several

factors, it is extremely difficult to predict the course of the market.

High losses: As investors can trade with large amounts of cash due to the high leverage

offered by brokers, they can suffer substantial losses.

Extremely volatile: The forex market is extremely volatile, with the exchange value of a

currency pair changing several times within a trading day. A novice investor might get

flustered with the volatility and suffer huge losses.

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CURRENCY MARKET IN INDIA

Every major development in Indian or world economy affects the Indian currency market. India

follows the Liberalised Exchange Rate Management System (LERMS), under which it is

absolutely essential for corporate executives to understand how the exchange rate moves, and

why. Considering the large volume of transactions, a movement of even 2-3 paisa in the

exchange rate can hit the bottom line of any corporate.

There are several factors that influence the currency market. Some of the important ones among

them, which have impacted the market recently, are discussed below:

CHANGE OF INTEREST RATEThe value of the currency of any country depends on the interest rate of that country. In case of

upward movement of interest rate in the United States, the US Dollar (USD) appreciates against

other currencies as well as against the Indian Rupee (INR). Any change of interest rate by the

Federal Reserve Bank of New York (FED) through the Federal Open Market Committee

(FOMC) has a great impact on the currency market. In the recent past there have been instances

of rate hikes by the FED, as a result of which the USD had appreciated against major

international currencies as well as the Indian Rupee.

Even an expectation of change of interest rate has a great impact on currency market. Whenever

there is any such expectation, the market reacts sharply. The possibility of changes in interest

rate is a speculative move, and the market reacts only for a short period of time. The market

generally discounts some portion of such expectations well in advance, before they actually

happen. Change of interest rate by the European Commercial Bank (ECB) is now equally

important. The value of the Euro is influenced by a change of interest rate by ECB. Recently,

there have been several occasions when the Euro strengthened against the USD following a hike

in interest rate, or even the expectation of a hike in interest rate by the ECB.

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INFLOW OF FOREIGN FUNDSThe exchange rate depends on demand and supply of currency. Strong economic fundamentals

and good ratings by international rating agencies have boosted foreign investors’ confidence in

the Indian market. Huge foreign investments have already come to India, while big investments

through Foreign Institutional Investors (FIIs) and Foreign Direct Investment (FDI) are expected

in the near future. In the last couple of months, substantial foreign funds have been infused into

the Indian market. Since most of these have been in the form of USD, the supply of USD against

the Indian Rupee became high, and it depreciated against the Rupee. On the other hand, at the

time when FIIs wanted to withdraw funds from the market, the demand for USD in the Indian

market became high, and it appreciated against the Rupee.

During the last one to one-and-a-half years, the Indian rupee has shown a tendency to appreciate

due to a huge inflow of foreign funds in the Indian market by FIIs or through FDIs in the form of

External Commercial Borrowings (ECB) and Foreign Currency Convertible Bonds (FCCBs). A

direct relationship may be drawn between the USD–INR exchange rate and the BSE index.

Considering all other factors to be constant, whenever overseas FIIs buy shares from the Indian

market, there is an upward movement of the BSE index. At the same time, due to inflow of

foreign funds (foreign investors have USD to sell—they will buy INR to invest in Indian market

against USD) in the Indian market, the supply of USD increases in the market and it depreciates

against INR, or INR appreciates against USD. On the other hand, if there is any negative flow of

funds by FIIs, there would be a downward movement of the BSE index, and consequently USD

would appreciate against INR.

RBI INTERVENTIONThe RBI, which regulates the Indian currency market, does intervene whenever it feels it is

required to stabilise the market, or to keep market volatility under control. It is the responsibility

of the RBI to keep the exchange rate unaffected at a time of volatility in the foreign currency

market. It has been observed that RBI intervenes in the currency market whenever there is any

abnormal movement in the exchange rate, either upward or downward. The RBI buys foreign

currency (USD) to depreciate the domestic currency, and sells foreign currency when the

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domestic currency depreciates abnormally. Sometimes the RBI does not intervene at all. In April

and May 2006, the Indian Rupee depreciated heavily in the wake of the fall of the BSE Index,

but the RBI did not intervene, much as previously the Indian Rupee had appreciated (in January

and February 2006) to such a level that it needed to be depreciated solely by market forces.

OPTIONS

Options give the buyer (holder) a right but not an obligation to buy or sell an asset in future.

Options are of two types:

CALLS

PUTS

Calls give the buyer the right but not the obligation to buy a given quantity of the underlying

asset, at a given price on or before a given future date.

Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying

asset at a given price on or before a given date. One can buy and sell each of the contracts.

When one buys an option he is said to be having a long position and when one sells he is said to

be having a short position.

In the first two types of derivatives contracts (forwards and futures) both the parties (buyer and

seller) have an obligation i.e. the buyer needs to pay for the asset to the seller and the seller needs

to deliver

the asset to the buyer on the settlement date. In case of options only the seller (also called option

writer) is under an obligation and not the buyer (option purchaser). The buyer has a right to buy

(call options) or sell (put options) the asset from/to the seller of the option but he may or may not

exercise this right. In case the buyer of the option does exercise his right, the seller of the option

must fulfil whatever his obligation is. An option can be exercised at the expiry of the contract

period or anytime up to the expiry of the contract period.

INDEX OPTIONS

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A financial derivative that gives the holder the right, but not the obligation, to buy or sell a

basket of stocks, such as the S&P 500, at an agreed upon price and before a certain date. An

index option is similar to other option contracts, the difference being the underlying instruments

are indexes. Options contracts, including index options, allow investors to profit from an

expected market move or to reduce the risk of holding the underlying instrument.

YEAR No of Contracts Turnover (Rs Cr)

2000-01 - -

2001-02 1,75,900 3,765

2002-03 4,42,241 9,246

2003-04 17,32,414 52,816

2004-05 32,93,558 1,21,943

2005-06 1,29,35,116 3,38,469

2006-07 2,51,57,438 7,91,906

2007-08 5,53,66,038 13,62,110.88

2008-09 21,20,88,444 37,31,501.84

2009-10 34,13,79,523 80,27,964.20

2010-11 65,06,38,557 1,83,65,365.76

2011-12 86,40,17,736 2,27,20,031.64

2012-13 25,76,98,642 66,22,635.23

Table: Annual Growth in Index Options

24

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

0

100000000

200000000

300000000

400000000

500000000

600000000

700000000

800000000

900000000

1000000000

175,900

442,241

1,732,414

3,293,558

12,935,116

25,157,438

55,366,038

212,088,444

341,379,523

650,638,557

864,017,736

257,698,642

No of Contracts

No of Contracts

25

STOCK OPTIONS

A privilege, sold by one party to another, that gives the buyer the right, but not the

obligation, to buy (call) or sell (put) a stock at an agreed-upon price within a certain period or

on a specific date.

Year No of Contracts Turnover (Rs Cr)

2000-01 - -

2001-02 10,37,529 25,163

2002-03 35,23,062 1,00,131

2003-04 55,83,071 2,17,207

2004-05 50,45,112 1,68,836

2005-06 52,40,776 1,80,253

2006-07 52,83,310 1,93,795

2007-08 94,60,631 3,59,136.55

2008-09 1,32,95,970 2,29,226.81

2009-10 1,40,16,270 5,06,065.18

2010-11 3,25,08,393 10,30,344.21

2011-12 3,64,94,371 9,77,031.13

2012-13 1,53,06,914 4,13,052.09

Table: Annual Growth in Stock Options

26

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

0

5000000

10000000

15000000

20000000

25000000

30000000

35000000

40000000

1,037,529

3,523,062

5,583,071

5,045,112

5,240,776

5,283,310

9,460,631

13,295,97014,016,270

32,508,393

36,494,371

15,306,914

No of Contracts

No of Contracts

27

Currency Futures

Currency futures were first created in 1970 at the International Commercial Exchange in New

York. But the contracts did not "take off" due to the fact that the Bretton Woods system was still

in effect. They did so a full two years before the Chicago Mercantile Exchange (CME) in 1972,

less than one year after the system of fixed exchange rates was abandoned along with the gold

standard. Some commodity traders at the CME did not have access to the inter-bank exchange

markets in the early 1970s, when they believed that significant changes were about to take place

in the currency market. The CME actually now gives credit to the International Commercial

Exchange (not to be confused with the ICE for creating the currency contract, and state that they

came up with the idea independently of the International Commercial Exchange). The CME

established the International Monetary Market (IMM) and launched trading in seven currency

futures on May 16, 1972. Today, the IMM is a division of CME. In the fourth quarter of 2009,

CME Group FX volume averaged 754,000 contracts per day, reflecting average daily notional

value of approximately $100 billion. Currently most of these are traded electronically.

IntroductionCurrency futures are standardised foreign exchange contracts traded on approved stock

exchanges to buy or sell one currency against another on a specified date in the future at a

specified price (exchange rate). The price is fixed on the purchase date. This price can be

different from the price that is quoted in the spot foreign exchange markets. This will help

investors to hedge against foreign exchange risk arising due to price fluctuations in the particular

currency in a future date. This is different from forward exchange contracts, which are private

agreements between two parties and are not as rigid in their stated terms and conditions. There

can be a chance that one of the parties may default on his side of the agreement. This is not

exchange traded, whereas futures contracts are exchange traded and the clearing house guarantee

the transactions (principle of novation). This drastically lowers the probability of default to

almost nil.

Currency futures are traded according to the rules and regulations that are drawn by the futures

exchanges. The trading can be done either on the floors of these futures exchanges or these

exchanges can facilitate electronic trading for its members. The currency futures market is also

28

used by some companies for hedging. These companies either purchase currency futures for their

future payables, or sell the futures on currencies for their future receipts. Speculators may also

buy or sell futures on a foreign currency as a protection against the strengthening or weakening

of the US dollar.

Currency futures or forex trading are fraught with high levels of risk. A small unfavourable

fluctuation in the exchange rate may result in loss of an investor’s entire deposit. Investors are

advised to enter into this field only if they have in-depth knowledge of how risky this segment of

financial market really is.

CURRENCY FUTURES IN INDIA

Currency futures trading started in India on August 29, 2008 on National Stock Exchange. This

was the first time currency derivatives got listed on an exchange in India. Till this time, the

currency futures trading took place over the counter and were unorganized. With the entry of the

National Stock Exchange in the picture, currency trading became more organized with the NSE

acting as a counter party to all the transactions. Soon after, the BSE and MCX also marked their

entry into the currency derivatives market.

29

Figure 3: Turnover in currency futures on NSE and MCX (USD mn)

Volumes on currency futures exchanges (mainly NSE and MCX) have consistently increased

over the period from $ 60 million per day (on NSE in early Sept 2008) to around $ 700 million

per day (on NSE and MCX together in end Jan 2009). The traded volumes in currency futures

has increased substantially in January 2009, with the average total volumes traded on the two

exchanges being around Rs 2,500 crore (around $0.5 billion) a day. This could soon rise to

$1billion per day if more currency pairs are allowed. Both MCX and NSE have almost 50%

share on an average in terms of volumes. The BSE has failed to generate enough interest in this

segment and the volumes remain abysmally low on the exchange. Although volatility has

ensured that volumes surged after the launch, trading has been concentrated on front-month

contracts as majority of users are traders, small exporters and brokers/banks. For this particular

quarter i.e. FY13 the combined volume is more than 25000 crores.

30

Growing opportunities for traders in currency futures market

The currency futures market is growing in popularity, as the main participants of this organized

market comprise bankers, importers, exporters, multinational corporations and private

speculators.

Decent Intra-day Volatility: There is an opportunity for the intraday traders to make

short term profits as the median intraday volatility for the last 6 months on NSE has been

about 43 paise. On the MCX, the median trading range has been wider at about 52 paise.

Traders can capitalize on the same and make intraday profits.

Lower Margins: The margins on the trades on NSE have been reduced. At the start of

the currency futures trading on NSE, the margins per contract were about Rs.2900, which

have been reduced by about 50%. This works out to 3-3.5% of contract value compared

to average10-15% on index/stock futures.

Low Brokerage Charges: The brokerage charges vary between 3 to 10 bps depending

on volumes and squaring up period.

Low Transaction Costs: No transaction charges are being levied by NSE/MCX till

March/April 2009 and STT has so far not been charged on the value of transactions

conducted. This makes trading on currency futures exchanges more feasible and

competitive even for small profits.

Growing Volumes: The volumes have been increasing consistently since the start of the

currency futures trading on the exchanges in August. This provides more liquidity and

makes trading more feasible. Given the fact that the international currency futures

volumes are about 2.5% of spot market volumes, Indian currency market holds a lot of

potential as their volumes currently are 1.5% of spot market volumes and the spot market

itself is slated to grow fast, as India’s forex trade continues to grow.

31

ANALYSIS:

Currencies have developed over centuries and most major currencies have free floating exchange

rates today, which help increase financial stability. Globalisation in trade and later in services

increased the exposure to other than the home currency among global market participants. Thus,

investors became aware of the highly liquid and global FX market and over time came to regard

currencies as an asset class with diversification benefits. The market’s biggest players are

financial institutions, which actively use exchange rate movements to generate returns rather

than to simply hedge currency exposure.

India is well placed to attract FII flows over the long term. As economic growth accelerates and

tax compliance improves over the next few years, fiscal deficit could be expected to come under

control. FII flows into India will continue to be strong. India may also get its fair share of inflows

by way of increased allocations made to BRIC (Brazil, Russia, India and China) countries as the

group will continue to hold the interest of long-term investors.

India officially does not have a fully open capital account, but its economy is more open to

foreign capital flows than meets the eye. Direct and indirect limited foreign investment is

allowed in most business sectors. This has led to an increase of foreign capital into the country.

At present, the import cover condition as stated in the Tarapore Committee Report has been met

except the fiscal deficit of 3.5%. The average NPL ratio for Indian banks was a mere 1% in

2008, according to central bank statistics. This is well below the 5% benchmark and the budget

deficit for fiscal year 2008/2009 is recorded at 7.8%, way above the 3.5% recommendation. As

both the global and domestic economy are in a bad shape, a further  opening of the capital

account now would not be the smartest of ideas.

But at the same time, the numerous advantages of CAC can’t be ignored. CAC is considered to

be one of the major features of a developed economy. It helps attract foreign investment. It offers

foreign investors a lot of comfort as they can re-convert local currency into foreign currency

anytime they want to and take their money away. At the same time, it makes it easier for

32

domestic companies to tap foreign markets. At the moment, India has current account

convertibility. This means one can import and export goods or receive or make payments for

services rendered.

So, the government can look forward to implement CAC when the external macroeconomic

environment has stabilized and the focus can turn to preparing the economy for a higher level of

openness. First and foremost, a more transparent and simpler regulatory framework concerning

foreign investment, further financial sector reforms, and greater fiscal discipline are required to

successfully open the capital account.

Market statistics of the first seven months of the launch of exchange traded currency futures

reveal growing interest in the markets. However, these markets have not been able to evince the

kind of activity that OTC markets are witnessing. Many corporates using currency derivatives for

hedging their foreign currency exposure find requirement of margin and settlement of daily

mark-to-market differences cumbersome especially since there is no such requirement for OTC

trades. It would perhaps take some time for them to realize the concomitant benefits of these risk

containment measures. There is a perceive resistance to change or switch over from OTC to

Exchange traded framework with the grip and comfortability level in the OTC markets.

The two markets i.e. forward market and futures market are not integrated and there is scope for

arbitrage which will bring about convergence in the markets, as we cannot have two prices in

two markets for the same product — one is notional and the other is based on real transactions.

Also, given the size of the forward market of around $50 billion and the current size of $0.5

billion in futures, there is enormous scope and opportunity for the volumes in the currency

futures market to rise exponentially which will enable trading/hedging opportunities for all

market participants.

33

Figure 6: Daily NSE and MCX turnover and open interest

If we follow the evolution of the USD since roughly the end of WW2, it gradually became the

world reserve currency, and that was intended. It started with the Breton woods agreement, and

also during WW2 when the European allies currencies were collapsing as Hitler was conquering

Europe. The US at the time was by far the world’s biggest industrial power, and was wealthy

enough to backstop Europe’s currencies as well as rebuilding the West after WW2. And of

course, like any power of that magnitude, it got taken advantage of – as today the US is running

horrendous fiscal deficits and is abusing this world reserve currency, the USD. But, ultimately,

since the world economies are all linked now, none can stand alone whatsoever, so then the idea

of individual currencies is fading. In fact, all individual currencies do now is cause trade and

currency frictions, like the US complaining the Chinese are using a cheap Yuan to manipulate

their trade to their advantage, and the Chinese are complaining the US is running ruinous deficits

and devaluing the USD.

What is happening is that primarily through the US Fed, interest rates worldwide are being

pushed down to zero. Japan did this ahead of everyone else starting around 1992 roughly,

fighting their simultaneous stock and real estate bubbles that collapsed. Ultimately, since the

USD is now headed toward Japanese esque zero interest rates, the whole world will be pulled

34

down to zero rates to compete with the stimulus, and ultimately, the public treasuries of the

world will be the only lenders left out there. The rest of the real money out will move to the

sidelines. Less capital means less investment, leaving only the public left to lend money.

Ultimately, synchronizing world interest rates to zero effectively creates a one world currency

regime (interest rates are what determine currency values fundamentally), and the USD will be

the facilitator of this process, even if itself is replaced in the end. Deflation will remain with us, it

will cause relentless simulative monetary policy, there will be ever lower rates worldwide,

private capital will flee, and the only lenders left will be the public purses, and ultimately

competitive currency devaluations and probably trade wars. Ultimately, that will lead to so many

trade pressures and monetary strains that some new financial crisis will emerge, and some one-

world currency will be moved in to fix the controversies.

And it won’t be the Yuan either. China is caught in their own banking bubble, and an

irreconcilable wealth disparity in their economic build out. They will fail and they will see

domestic chaos. The Yuan will not be the solution to the world’s problems. Gold is not the

ultimate solution either. If we look at any market over the last two years, there are only two real

ones that held up or improved consistently over the last two years, Gold and US treasuries. Gold

benefits because of the abusive monetary policies being incurred, not only in the US but

worldwide, the Chinese figure large here, they are printing the hell out of the Yuan, either

growing their own money supply by hundreds of percent, or by making cheap money available in

their own horrific home grown Asian credit bubble that is perhaps two years behind the US in its

evolution.

35

FINDINGS:

The investments in the equity derivatives market is raising at a great pace.

The number of contracts in Index futures rose from 90,580 in 2000-01 to

3,68,49,287 in the year 2012-13.

The turnover for Index Futures rose from 2,365 Cr in the year 2000-01 to

8,87,165.22 Cr in the year 2012-13.

In Stock Futures the number of contracts rose from 19,57,856 2001-02 to

4,28,76,791 in 2012-13.

The turnover for Stock Futures rose from 51,515 Cr in 2001-02 to

11,02,711.07 Cr in 2012-13.

In case of Index Options the number of contracts rose from 1,75,900 in

2001-02 to 25,76,98,642 in the current year.

For Index Options, the turnover increased from 3,765 Cr in 2001-02 to

66,22,635.23 Cr in the current year.

The number of contracts for Stock Options increased from10,37,529 in

2001-02 to 1,53,06,914 in 2012-13.

The turnover for Stock Options increased from 25,163 Cr in the year 2001-

02 to 4,13,052.09 Cr in the current year.

Major portion of the investments of the derivatives market is flowing into

the Index Options.

36

RECOMMENDATIONS:

1. People should be provided with all the information required so that they may be interested in spending in currency market

2. All the advantages should be described in such a way that people take interest in it.

3. From past 5 years there has been an increase of about 17% investors in the market.

4. Online ease should be provided to the customers or investors to deal online without wasting much time in visiting places.

5. People should be encouraged to invest in derivatives as well as in other elements.

37

LIMITATIONS OF THE STUDY:

1). The time period of the study is very short. In such a short span of

time it’s not necessary to gain proper insight about the problem.

2).The study is primarily based on secondary data; hence any mistake in

previous works may lead to discrepancy.

3). Requires extensive monitoring of the price performance.

4). The risk of loss may be unlimited when issuing options.

5). Online monitoring for the price performance of the derivative

instrument and the underlying exchange rate is complex enough for

customers.

6). High level of knowledge is required to deal in derivative.

7). Chances of profit are uncertain.

8). There is no guarantee of future return.

38

CONCLUSION:

The survey I have carried out on Impact of currency market in India. The conclusion of the

survey is as follows.

The awareness of the forex market in India is very low in compare to other financial instruments.

Only fewer people know about the currency trading. As the gender wise male investors are more

investing than women investors. But the education level is as well as positive sign of women also

taking interest in forex market. The equity and commodity investors are as well investing in

currency. In India USD, EURO, GBP, and JPY are the currencies been traded most.USD and

EURO are the most preferred currency in response from the respondents. There is high volume

in this two currency pair in India. USD is on first position to trade in India, as per the data of

MCX-SX the volume of USD/INR of June contract 3588917 in lots as on 3 rd June 2011. The

EURO is on second to be traded in India. The data of MCX-SX volume in EURO/INR is 156556

in lots, as on 3rd June 2011. GBP and JPY are been traded in India on3rd and the position

respectively. The volume in GBP/INR was 58255 in lots and volume in JPY/INR was 23628 in

lots as on 3rd June 2011 respectively. In future 36% & 32% of respondent are relay on USD &

EURO respectively. But in future as per the report of Bank Of Japan Change in the total quantity

of domestic currency in circulation and current account deposits held at BOJ, It's positively

correlated with interest rates-early in the economic cycle an increasing supply of money leads to

additional spending and investment, and later in the cycle expanding money supply leads to

inflation. This release would be affecting the JPY rate. The earning in currency market is low in

comparison of Equity or Commodity market. The volatility in currency rates is very less. It

doesn’t volatile as equity or commodity market. The risk is also very less in the currency market.

The main or primary object of investing in currency market by investor is hedging. More number

of respondents is connected in the business of Import-Export. They use to hedge the currency

market for future payment and earn the deference. The impact of currency market in Indian

economy can be measure from the Gross Domestic product and Gross national product. The

GDP of current year if 7.8%. It is a positive in comparison to last financial year; the second

factor is foreign reserve. As on May 2011 India is having $ 3010 billion of foreign reserve as per

the IMF data. Export of the country is as well increased as exports surged by 37.5 per cent for

39

the financial year ended March 31, 2011 to touch $245.9 billion shooting well past the $200-

billion target set for the year. Currency market in India is having a wide scope for development

in future.

40

Questionnaire:

1. People involved with share market.

TRADE/INVEST IN SHARE MARKET

YES NO

93 27

77

23

Respondents

yesno

Analysis:

According to the survey, 77% people of total respondents are involved with share market. They

are active in the share market either for doing any trading or long term investment purpose. The

rest of 23% are not active in share market.

41

2. Awareness about currency futures among respondents.

AWARENSS OF CURRENCY FUTURES AMONG RESPONDENTS.

YES NO

91 29

76

24

Respondents

yesno

Analysis:

76% among all respondent are aware about the currency futures and they know that the currency

is used as an instrument to trade. But 24% respondents are not having any knowledge about

currency futures.

This 76% (i.e. 91) people also include 12 people who are not active in stock market but still

aware about the currency market.

42

3. Traders in currency futures market.

TRADING IN CURRENCY FUTURES

YES NO

22 98

18

82

Respondents

YESNO

Analysis:

According to the survey 18% people among the respondent are trading in currency market and

they are having sound knowledge about the currency market. The rest of 82% are do not trade in

currency market and they are not much familiar with currency market.

43

4. Reasons for not trading in currency futures.

REASONS NO. PERCENTAGE

Lack of knowledge 44 44.90

Less interest 23 23.47

Past losses 10 10.20

Other 21 21.43

Lack of knowledge Lack of interest Past loss Other0

5

10

15

20

25

30

35

40

45

50

44

23

10

21

44.9

23.47

10.2

21.43# of respondentsPercentageColumn1

Analysis:

There are different reasons of not trading in currency futures market by the respondents. Main

reason for not trading is lack of knowledge about the mechanism of currency futures.

From survey we can find that 46% respondents are not trading in currency futures because of

insufficient knowledge about working of currency futures. About 23% respondents are not

trading in currency futures because of their less interest toward currency futures.

44

About 10% respondents are not trading in currency futures because of losses occurred in past.

23% respondents are not trading because of many other reasons like…. Investing in stock

market, investing in real-estate and insufficient fund with respondents.

45

5. Ready to trade in currency futures if appropriate knowledge and advisory services are

provided.

READY TO TRADE PERCENTAGE

YES 31 70.45%

NO 13 29.55%

YES NO0

10

20

30

40

50

60

70

80

31 13

70.45

29.55

NUMBER OF RESPONDENTS

# OF RESPONDENTSPERCENTAGE

Analysis:

There are total 98 respondents who are not trading in currency futures. Out of them 44

respondents are not trading because of lack of knowledge about mechanism of currency futures

which consists 44.90% of total respondents.

Out of this, 31 respondents are ready to trade in currency futures if they would be provided with

knowledge of currency futures mechanism and this comes to 70.45%.

This shows that if appropriate knowledge and advisory services are provided then people are

ready to get involved with this area also.

46

6. Sources of information for awareness about currency futures.

SOURCE NO. PERCENTAGE

Seminar 3 3.29

Leaflet 4 4.40

Newspaper/magazines 27 29.67

Friends/relatives 14 15.38

Brokers 26 28.57

Other 17 18.68

Seminar

Leaflet

Newspap

er/maga

zines

Frien

ds/rela

tives

Broker

sOther

0

5

10

15

20

25

30

35

3 4

27

14

26

17

3.29 4.4

29.67

15.38

25.57

18.68

NUMBER OF RESPONDENTS PERCENTAGE

47

Analysis:

People use different source of information to acquire knowledge about currency futures. Here we

used 5 major sources of information point which may be used by them through which they get

information about the currency futures.

29.67% respondents got the information from newspaper, 28.57% persons get the information

from brokers, 15.38% respondents got it from friends and relatives, 4.40 got it from leaflets,

3.29% got it from the seminar on currency futures and rest 18.68% respondents got the

information from other sources.

48

7. Purpose of trading in currency futures.

PURPOSE NO. PERCENTAGE

Hedging 15 68.19

Speculation 4 18.19

Arbitrage 2 9.09

Other 1 4.55

Hedging Speculation Arbitrage Other0

10

20

30

40

50

60

70

80

15

4 2 1

68.19

18.19

9.094.55

NUMBER OF RESPONDENTSPERCENTAGE

Analysis:

People who are trading in currency market have different purposes. Main purpose of trading is

hedging in currency futures. There are also other purposes like speculation, arbitrage and

different other purposes like swapping, warrants etc.

49

68.19% traders use hedging strategy for foreign exposure and through this they can minimize

their risk and maximize the loss.

18.19% Trader use speculation strategy and it includes the maximum risk maximum profit.

9.09% respondent use arbitrage for their forex exposure and they minimize their risk and try to

maximize its profit. In that case the trader take two different positions at the same time. The

trader takes position of selling and buying both. And then by closing both the positions they may

make overall profit.

4.55% Use swap, warrants and other techniques for foreign exposure and try to maximize its

profit. But at the same time the loss and risk is also at the maximum point.

50

8. Preference of respondent for exchange.

1ST RANK 2ND RANK 3RD RANK Wi/w

MCX’SX 13*3

= 39

7*2

= 14

2*1

= 2

55/6

=9.16

NSE 6*3

=18

11*2

=22

5*1

=5

45/6

=7.5

BSE 3*3

=9

4*2

=8

15*1

=15

32/6

=5.33

WEIGHTED AVG.

NO

RANK

MCX’SX 9.16 1

NSE 7.5 2

BSE 5.33 3

51

MCX’SX NSE BSE0

2

4

6

8

10

12

9.167.5

5.33

1

2

3Column1RANK

Analysis:

MCX’SX is the most preferred exchange by people

2nd most preferred exchange is NSE.

And 3rd preference goes to BSE.

52

9. Preferred currency pair for trading in currency market.

1st RANK 2nd RANK 3rd RANK 4th RANK Wi/w

USD/INR 10*4

=40

6*3

=18

3*2

=6

3*1

=3

67/10

=6.7

EUR/INR 3*4

=12

4*3

=12

5*2

=10

10*1

=10

44/10

=4.4

JPY/INR 2*4

=8

3*3

=9

10*2

=20

7*1

=7

44/10

=4.4

GBP/INR 7*4

=28

9*3

=27

4*2

=8

2*1

=2

65/10

=6.5

WEIGHTED AVG.

NO.

RANK

USD/INR 6.7 1

EUR/INR 4.4 3.5

JPY/INR 4.4 3.5

GBP/INR 6.5 2

53

USD/INR EUR/INR JPY/INR GBP/INR0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

6.7

4.4 4.4

6.5

1

3.5 3.5

2

Column1RANK

Analysis:

There are 4 currencies permissible in India to trade upon and the rank in which they are preferred

is like this..

Dollar is the most preferred currency to trade.

2nd rank has been given to British Pound.

And in the survey we found that Yen and Euro is used in equality.

54

10. Preferred brokerage house.

1ST

RANK

2ND RANK 3RD RANK 4TH

RANK

5TH

RANK

Wi/w

Anagram 15*5

=75

18*4

=72

32*3

=96

34*2

=68

21*1

=21

332/15

=22.13

Sharekhan 27*5

=135

23*4

=96

15*3

=45

20*2

=40

35*1

=35

351/15

=23.4

Religare 21*5

=105

22*4

=88

37*3

=111

19*2

=38

11*1

=11

353/15

=23.53

Motilal

oswal

31*5

=155

30*4

=120

12*3

=36

24*2

=48

33*1

=33

392/15

=26.13

Others 26*5

=130

27*4

=108

24*3

=72

23*2

=46

20*1

=20

376/15

=25.06

WEIGHTED AVG.

NO.

RENK

Anagram 22.13 5

Sharekhan 23.4 4

Religare 23.53 3

Motilal oswal 26.13 1

Others 25.06 2

55

Anagram Sharekhan Religare Motilal oswal Others 0

5

10

15

20

25

30

22.1323.4 23.53

26.1325.06

54

31

2

WEIGHTED AVG. NO.RANK

Analysis:

There is a large number of Broking firms involved in this industry so people have lot of options

to choose among them.

In the survey we have found that Motilal Oswal is the most favored broking house.

At the 2nd position a list of broking house whose name is not included in the questionnaire can be

selected.

Religare has secured 3rd position; Sharekhan stands at 4th position and Anagram at the 5th

position.

56

11. Criteria for selecting brokerage house.

1ST

RANK

2ND

RANK

3RD

RANK

4TH

RANK

5TH

RANK

Wi/w

BROKERAG

E

50*5

=250

34*4

=136

20*3

=60

12*2

=24

4*1

=4

474/15

=31.6

ONLINE/OFF

LINE

12*5

=60

17*4

=68

24*3

=72

30*2

=60

37*1

=37

297/15

=19.8

REASERCH 35*5

=175

27*4

=108

28*3

=84

20*2

=40

10*1

=10

417/15

=27.8

SERVICES 12*5

=60

20*4

=80

23*3

=69

30*2

=60

35*1

=35

304/15

=20.26

OTHER 9*5

=45

22*4

=88

25*3

=75

28*2

=56

34*1

=34

298/15

=19.87

WEIGHTED

AVG.NO.

RANK

BROKERAGE 31.6 1

ONLINE/OFF LINE 19.8 5

REASERCH 27.8 2

SERVICES 20.26 3

OTHER 19.87 4

57

BROKERAGE

ONLINE/OFF LINE

REASERCH

SERVICES

OTHER

0 5 10 15 20 25 30 35

31.6

19.8

27.8

20.26

19.87

1

5

2

3

4

RANKWEIGHTED AVG.NO.

Analysis:

There are various reasons for selecting a particular Broking firm. We have noted few of those

reasons and asked respondents to rank them.

Brokerage became the prime most reason for selecting a particular broking firm.

Research facility and the tips which came out from that research became the 2nd reason.

Services are the 3rd reason. Online/offline trading facility is the 4th reason.

Few other reasons are also accountable for selecting a broking firm such as personal relation

with the company etc.

58

Bibliography:

India Economy Watch(http://www.economywatch.com/indianeconomy/indian-economy-overview.html)(http://www.economywatch.com/indianeconomy/india-development.html)(http://www.economywatch.com/economy-articles/globalization-in-india.html)(http://www.economywatch.com/budget/india/)(http://www.economywatch.com/foreign-direct-investment/fdi-india/index.html)

Ministry of Commerce and Industryhttp://dipp.nic.in/fdi_statistics/india_fdi_index.htm

Ministry of Industrial Policy and Promotion

Newspapers and Magazines

Zee Newshttp://www.zeenews.com/news319587.html

Rediff News

59

http://inhome.rediff.com/money/2006/sep/04faq.htm

Outlookhttp://www.outlookindia.com/article.aspx?232627

India Summary (Economics)(www.indiasummary.com/2009/06/18/negative-inflation-in-india-deflation-for-the-first-time-since/)

New Era http://www.welcome-nri.com/cac.htm

India Investment Centrehttp://iic.nic.in/iic3_j.htm

Market Oraclewww.marketoracle.com

Nse siteNseindia.com

60

Appendices:

1) Floating exchange rate

A floating exchange rate or fluctuating exchange rate is a type of exchange rate regime wherein

a currency's value is allowed to fluctuate according to the foreign exchange market. A currency

that uses a floating exchange rate is known as a floating currency. It is not possible for a

developing country to maintain the stability in the rate of exchange for its currency in the

exchange market. There are two options open for them- [1] Let the exchange rate be allowed to

fluctuate in the open market according to the market conditions, or [2] An equilibrium rate may

be fixed to be adopted and attempts, should be made to maintain it as far as possible. But, if there

is a fundamental change in the circumstances, the rate should be changed accordingly. The rate

of exchange under the first alternative is known as fluctuating rate of exchange and under second

alternative, it is called flexible rate of exchange. In the modern economic conditions, the flexible

rate of exchange system is more appropriate as it does not hamper the foreign trade.

There are economists who think that, in most circumstances, floating exchange rates are

preferable to fixed exchange rates. As floating exchange rates automatically adjust, they enable a

country to dampen the impact of shocks and foreign business cycles, and to pre-empt the

possibility of having a balance of payments crisis. However, in certain situations, fixed exchange

rates may be preferable for their greater stability and certainty. This may not necessarily be true,

considering the results of countries that attempt to keep the prices of their currency "strong" or

"high" relative to others, such as the UK or the Southeast Asia countries before the Asian

currency crisis. The debate of making a choice between fixed and floating exchange rate regimes

is set forth by Mundell-Fleming model, which argues that an economy cannot simultaneously

maintain a fixed exchange rate, free capital movement, and an independent monetary policy. It

can choose any two for control, and leave third to the market forces.

In cases of extreme appreciation or depreciation, a central bank will normally intervene to

stabilize the currency. Thus, the exchange rate regimes of floating currencies may more

technically be known as a managed float. A central bank might, for instance, allow a currency

price to float freely between an upper and lower bound, a price "ceiling" and "floor".

61

Management by the central bank may take the form of buying or selling large lots in order to

provide price support or resistance, or, in the case of some national currencies, there may be

legal penalties for trading outside these bounds.

2) Fear of floating

A free-floating exchange rate increases foreign exchange volatility. There are economists who

think that this could cause serious problems, especially in emerging economies. These economies

have a financial sector with one or more of following conditions:

• High liability dollarization

• Financial fragility

• Strong balance sheet effects

When liabilities are denominated in foreign currencies while assets are in the local currency,

unexpected depreciations of the exchange rate deteriorate bank and corporate balance sheets and

threaten the stability of the domestic financial system.

For this reason emerging countries appear to face greater fear of floating, as they have much

smaller variations of the nominal exchange rate, yet face bigger shocks and interest rate and

reserve movements. This is the consequence of frequent free-floating countries' reaction to

exchange rate movements with monetary policy and/or intervention in the foreign exchange

market.

3) Exchange rate regime

The exchange rate regime is the way a country manages its currency in respect to foreign

currencies and the foreign exchange market. It is closely related to monetary policy and the two

are generally dependent on many of the same factors.

62

The basic types are a floating exchange rate, where the market dictates the movements of the

exchange rate, a pegged float, where the central bank keeps the rate from deviating too far from a

target band or value, and the fixed exchange rate, which ties the currency to another currency,

mostly more widespread currencies such as the U.S. dollar or the euro.

Types

• Float: Floating rates are the most common exchange rate regime today. For example, the

dollar, euro, yen, and British pound all float. However, since central banks frequently

intervene to avoid excessive appreciation or depreciation, these regimes are often

called managed float or a dirty float.

• Pegged float: Here, the currency is pegged to some band or value, either fixed or

periodically adjusted. Pegged floats are:

• Crawling bands: the rate is allowed to fluctuate in a band around a central value,

which is adjusted periodically. This is done at a preannounced rate or in a

controlled way following economic indicators.

• Crawling pegs : Here, the rate itself is fixed, and adjusted as above.

• Pegged with horizontal bands: The currency is allowed to fluctuate in a fixed

band (bigger than 1%) around a central rate.

• Fixed: Fixed rates are those that have direct convertibility towards another currency. In

case of a separate currency, also known as a currency board arrangement, the domestic

currency is backed one to one by foreign reserves. A pegged currency with very small

bands (< 1%) and countries that have adopted another country's currency and abandoned

its own also fall under this category.

• Currency board: A currency board is a monetary authority which is required to maintain

a fixed exchange rate with a foreign currency. This policy objective requires the

conventional objectives of a central bank to be subordinated to the exchange rate target.

63

• Dollarization: Dollarization occurs when the inhabitants of a country use

foreign currency in parallel to or instead of the domestic currency. The term is not only

applied to usage of the United States dollar, but generally to the use of any foreign

currency as the national currency.

64