Financial Services

FINANCIAL SERVICES
ADDITIONAL EXAMINATION
SYBFM
SANSKAR BAFNA
ROLL NO 4


NON EQUITY
DERIVATIVES
ON NSE



INDEX
1.DERIVATIVES
2.NEED FOR DERIVATIVES
3.CLASSIFICATION OF DERIVATIVES
4.CURRENCY DERIVATIVES
5.NSE BOND FUTURES








INTRODUCTION
DERIVATIVES
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.
As Derivatives are merely contracts between two or
more parties, anything like weather data or amount
of rain can be used as underlying assets.



NEED FOR DERIVATIVES
The derivatives market performs a number of
economic functions. They help in :
Transferring risks
Discovery of future as well as current prices
Catalyzing entrepreneurial activity
Increasing saving and investments in long run.




CLASSIFICATION OF DERIVATIVES


OTC Exchange Traded
Rupee Interest
Rate Derivatives
Forward
Rate
agreements,
Interest rate
Swaps
Interest Rate futures
Foreign
Currency
Derivatives
Forwards,
Swaps,
Options
Currency Futures
Equity
Derivatives
Index Futures, Index
Options, Stock futures,
Stock options
• Future Contract - Futures contract is a
standardized contract between two parties to
exchange a specified asset of standardized quantity
and quality for a price agreed today (the futures price
or the strike price) with delivery occurring at a
specified future date, the delivery date.
• Forward Contracts - Forward is a non-
standardized contract between two parties to buy or
sell an asset at a specified future time at a price
agreed today.
• Options - An option is a derivative financial
instrument that specifies a contract between two
parties for a future transaction on an asset at a
reference price.
• Swaps - The derivative in which counterparties
exchange certain benefits of one party's financial
instrument for those of the other party's financial
instrument.
Equity derivative is a class of derivatives whose value
is at least partly derived from one or more underlying
equity securities. Options and futures are by far the
most common equity derivatives.
NON EQUITY DERIVATIVES
CURRENCY DERIVATIVES
NSE was the first exchange to have received an in-
principle approval from SEBI for setting up currency
derivative segment. The exchange launched its currency
futures trading platform on 29th August, 2008. Currency
futures on USD-INR were introduced for trading and
subsequently the Indian rupee was allowed to trade
against other currencies such as euro, pound sterling and
the Japanese yen. Currency Options was introduced on
October 29, 2010.
A currency future, also known as FX future, 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 NSE the price of a
future contract is in terms of INR per unit of other
currency e.g. US Dollars. Currency future contracts allow
investors to hedge against foreign exchange risk.
Currency Derivatives are available on four currency pairs
viz. US Dollars (USD), Euro (EUR), Great Britain Pound
(GBP) and Japanese Yen (JPY). Currency options are
currently available on US Dollars.

PRODUCTS
Currency Derivatives segment of NSE provides trading in
derivative instruments like Currency Futures on 4
currency pairs, Currency Options on US Dollars and
Interest Rate Futures on 10 Y GS 7 and 91 D T-Bill.
Available Currency and Trading
Specification
• Currency future contracts are available for trade on all
days of the week except Saturday, Sunday and
holidays declared by NSE in advance
• Currency trading time: 9.00 AM to 5.00 PM IST
• Screen based automated trading system are available
for currency future trading
• Internet trading is also available in NSE
• Currency future contracts are available for 12
months trading cycle.
• Quotation: The currency future contracts are quoted
in Rupee term, like INR 55.63/$1
• Tenor of contracts: Currency future contracts have
maximum maturity of12 months
• Available Contracts: All monthly maturities from
one month to 12 months are available
Settlement:
• The currency future contracts are settled in cash in
INR
• Currency future contracts are steeled on last working
day of near month contract.
• Trading of near month future contracts are closed
two days prior to settlement day and a new far month
contract is introduced
• The settlement price is Reserve Bank of India
reference rate on the last trading day
• Settlement Example:
• Contract : FUTCURUSDINR31-AUG-2012 (USD-
INR Future contract ended on August 2012)
• Settlement Day: 31
st
August (last trading day of
August 2012)
• Last Trading Day: 29
th
August (two days prior to
last working day)
• Settlement Price: Reference price of RBI as on 29
th

August






Currency future Contract Specification
 US Dollar
• Symbol: USDINR
• Unit of Trading: 1 unit= $1000
• Tick Size: 0.25 paise or INR 0.0025
• Quantity Freeze: 10,001 or greater
• Price operating range
• Tenure upto 6 months: +/- 3% of base price
• Tenure greater than 6 months: +/- 5% of base price.
• Initial Margin: Span based margin (MTM margin and
extra margin is required as per broker and exchange
norm)
• Settlement: T+1 for daily settlement and T+2 for final
settlement (as discussed is previous slide)
• Daily settlement price: Calculated on the basis of the
last half an hour weighted average price.


• EURO
• Symbol: EURINR
• Unit of Trading: 1 unit=1000 Euro
• Tick Size: 0.25 paise or INR 0.0025
• Quantity Freeze: 10,001 or greater
• Price operating range
• Tenure upto 6 months: +/- 3% of base price
• Tenure greater than 6 months: +/- 5% of base price.
• Initial Margin: Span based margin (MTM margin and
extra margin is required as per broker and exchange
norm)
• Settlement: T+1 for daily settlement and T+2 for final
settlement (as discussed is previous slide)
• Daily settlement price: Calculated on the basis of the
last half an hour weighted average price.
• Mode of settlement: Cash settled in Indian Rupees



 POUND
• Symbol: GBPINR
• Unit of Trading: 1 unit=1000 GBP
• Tick Size: 0.25 paise or INR 0.0025
• Quantity Freeze: 10,001 or greater
• Price operating range
• Tenure upto 6 months: +/- 3% of base price
• Tenure greater than 6 months: +/- 5% of base price.
• Initial Margin: Span based margin (MTM margin and
extra margin is required as per broker and exchange
norm)
• Settlement: T+1 for daily settlement and T+2 for final
settlement (as discussed is previous slide)
• Daily settlement price: Calculated on the basis of the
last half an hour weighted average price.
• Mode of settlement: Cash settled in Indian Rupees




 JAPANESE YEN
• Symbol: JPYINR
• Unit of Trading: 1 unit=1000 YEN
• Tick Size: 0.25 paise or INR 0.0025
• Quantity Freeze: 10,001 or greater
• Price operating range
• Tenure upto 6 months: +/- 3% of base price
• Tenure greater than 6 months: +/- 5% of base
price.
• Initial Margin: Span based margin (MTM margin
and extra margin is required as per broker and
exchange norm)
• Settlement: T+1 for daily settlement and T+2 for
final settlement (as discussed is previous slide)
• Daily settlement price: Calculated on the basis of
the last half an hour weighted average price.
• Mode of settlement: Cash settled in Indian Rupees


Fundamental factors behind Currency
 Inflation trend and government policy regarding
inflation
 Balance of Payment Position
 Prevailing interest rate in domestic and foreign
country
 Trends in Export and Import
 Trends of FDI and FII flow
 Industry capacity utilization
 Unemployment rate
 RBI policy on Forex etc.







PARTICIPANTS

IMPORTERS HEDGERS
AND EXPORTERS



TRADERS SPECULATORS




ARBITRAGERS

Business Growth in CD Segment
Year
Currency Futures Currency Options Total
Average
Daily
Turnover
( cr.)
No. of
contracts
Turnover
( cr.)
No. of
contracts
Notional
Turnover
( cr.)
No. of
contracts
Turnover
( cr.)
2014-2015 5,59,28,633 3,49,067.51 1,33,68,583 80,461.52 6,92,97,216 4,29,529.03 9,337.59
2013-2014 47,83,01,579 29,40,885.92 18,18,90,951 10,71,627.54 66,01,92,530 40,12,513.45 16,444.73
2012-2013 68,41,59,263 37,65,105.33 27,50,84,185 15,09,359.32 95,92,43,448 52,74,464.65 21,705.62
2011-2012 70,13,71,974 33,78,488.92 27,19,72,158 12,96,500.98 97,33,44,132 46,74,989.91 19,479.12
2010-2011 71,21,81,928 32,79,002.13 3,74,20,147 1,70,785.59 74,96,02,075 34,49,787.72 13,854.57
2009-2010 37,86,06,983 17,82,608.04 - - 37,86,06,983 17,82,608.04 7,427.53
2008-2009 3,26,72,768 1,62,272.43 - - 3,26,72,768 1,62,272.43 1,167.43

INTERNET TRADING STATISTICS
No of clients registered in CD (across all members) as on
06-Jun-2014 : 261205
For the period 25-02-2014 to 06-05-2014.





NSE BOND FUTURES
With the commencement of Interest Rate Futures trading
under a new framework, the Indian financial markets
would achieve another milestone. Interest rates are linked
to a variety of economic conditions. They can change
rapidly, influencing investments and debt obligations. In a
market environment where long term debt issuance by the
government is increasing and the demand for it is
growing, there is a strong need for a cost efficient hedging
instrument against interest rate risk. Electronic trading
platform of NSE ensures transparency of prices, volumes
and trade data.
An Interest Rate Futures contract is "an agreement to buy
or sell a debt instrument at a specified future date at a
price that is fixed today." The underlying security for
Interest Rate Futures is either Government Bond or T-
Bill. Exchange traded Interest Rate Futures on NSE are
standardized contracts based on 10-Year Government of
India Security (NBF II) and 91-day Government of India
Treasury Bill (91DTB). All futures contracts available for
trading on NSE are cash settled.

PRODUCTS
Currently, Interest Rate Futures segment of NSE offers
two instruments i.e. Futures on 10-Year Government of
India Security (NBF II) and 91-day Government of India
Treasury Bill (91DTB).
91 Day Treasury Bill
The 91-Day Treasury Bill (91DTB) futures contract is
available on notional 91-day Government of India (GOI)
Treasury Bill.
NSE Bond Futures II (NBF II)
The NSE Bond Futures II (NBF II) contracts are available
for trading based on Government of India (GOI) security
of face value 100 with semi-annual coupon and residual
maturity between 9 and 10 years on the day of expiry of
IRF contract, as decided by stock exchanges in
consultation with FIMMDA. Three serial month contracts
will be made available along with functionality for spread
contract trading on the NSE electronic trading platforms.



Trading
NSE's automated screen based trading, modern, fully
computerised trading system designed to offer investors
across the length and breadth of the country a safe and
easy way to invest. The NSE trading system called
'National Exchange for Automated Trading' (NEAT) is a
fully automated screen based trading system, which
adopts the principle of an order driven market.

Clearing & Settlement
National Securities Clearing Corporation Limited
(NSCCL) is the clearing and settlement agency for all
deals executed in Interest Rate Futures. NSCCL acts as
legal counter-party to all deals on Interest Rate Futures
contract and guarantees settlement.
A Clearing Member (CM) of NSCCL has the
responsibility of clearing and settlement of all deals
executed by Trading Members (TM) on NSE, who clear
and settle such deals through them.



Risk Management
A sound risk management system is integral to an
efficient clearing and settlement system. NSE introduced
for the first time in India, risk containment measures that
were common internationally but were absent from the
Indian securities markets.

NSCCL has put in place a comprehensive risk
management system, which is constantly upgraded to pre-
empt market failures. The Clearing Corporation ensures
that trading member obligations are commensurate with
their networth.

Risk containment measures include capital adequacy
requirements of members, monitoring of member
performance and track record, stringent margin
requirements, position limits based on capital, online
monitoring of member positions and automatic
disablement from trading when limits are breached, etc.





Contracts Specifications 91 DAY TREASURY BILLS

Instrument Type FUTIRC
Symbol
883GS2023 716GS2023
The symbol shall denote coupon, type of bond and Maturity Year. For example 8.83% Central
Government Security having maturity on November 25, 2023 shall be denoted as 883GS2023
Underlying
Futures contracts based on 8.83% Central
Government Security having maturity on
November 25, 2023
Futures contracts based on 7.16% Central Government
Security having maturity on May 20, 2023
Market Type N
Unit of trading
Rs. 2 lakhs face value of GOI securities equivalent to 2000 units. Members shall place orders in
terms of number of lots.
Quotation Similar to the quoted price of GOI security
Contract Value Quoted price * 2000
Tick size Rs.0.0025
Trading hours
Monday to Friday
9:00 a.m. to 5:00 p.m.
Contract trading cycle Three serial monthly contracts
Spread Contract
Near-Mid, Near-Far & Mid-Far
All spread orders shall be placed in terms of price difference only.
Last trading day
Last Thursday of the month. In case the last Thursday is a trading holiday, the previous trading
day shall be the expiry/last trading day
Quantity Freeze 1251 lots or greater i.e. orders having quantity up to 1250 lots shall be allowed.
Base price
Theoretical future price of the 1st day of the contract.
On all other days, daily settlement price of the contract.
Price operating range
+/-3 % of the base price
(Whenever a trade in any contract is executed at the highest/lowest price of the band, Exchange
may expand the price band for that contract by 0.5% in that direction after 30 minutes after
taking into account market trend. Price band may be relaxed only 2 times during the day)
Daily Settlement Daily MTM settlement on T+1 in cash based on daily settlement price
Final Settlement Final settlement on T+1 day in cash based on final settlement price
Daily Settlement Price Volume Weighted Average Futures Price of last half an hour or Theoretical price
Final Settlement Price
Weighted average price of the underlying bond based on the prices during the last two hours of
the trading on NDS-OM. If less than 5 trades are executed in the underlying bond during the last
two hours of trading, then FIMMDA price shall be used for final settlement




Market Timings
Trading on the Interest Rate Futures segment takes place
on all days of the week (except Saturdays and Sundays
and holidays declared by the Exchange in advance). The
market timings of the interest rate futures segment are:
Normal Market Open : 09:00 hrs
Normal Market Close : 17.00 hrs
The trading hours will be aligned with that of underlying
market in case of change of trading hours of underlying
NDS-OM platform.
MARGINS
Calendar Spread Margin
Contracts where futures position at one maturity is hedged
by an offsetting futures position at a different maturity
would be treated as a calendar spread. The calendar
spread margin shall be charged in addition to worst-
scenario loss of the portfolio.
NSE Bond Futures II (NBF II)
The calendar spread charge shall be at a vlue of Rs 800
for spread of one month and Rs 1200 for spread 2mnts

91 Day T-Bill Futures contract
The calendar spread charge shall be at Rs.100/- for spread
of one month, Rs 150/- for spread of two months. Rs
200/- for spread of three months and Rs 250/- for spread
of four months and beyond wiil be levied on such
positions.
The benefit for a calendar spread would continue till
expiry of the near month contract. The relevant authority
may specify levy of normal margins on calendar spread
positions from time to time.
Futures Final Settlement Margin futures contract
Futures Final Settlement Margin is levied at the clearing
member level in respect of the final settlement amount
due. The final settlement margin is levied from the last
trading day of the contract till the completion of pay-in
towards the Final Settlement.
Extreme Loss Margin
Clearing members would be subjected to extreme loss
margins in addition to initial margins.
NSE Bond Futures II (NBF II)
The applicable extreme loss margin for cash settled 10
YGS futures contract would be 0.50% of the value of the
gross open positions of the futures contract.
In case of calendar spread positions, extreme loss margin
will be 0.01% of the value of the far month contract. The
relevant authority may specify levy of normal margins on
calendar spread positions from time to time.
91 Day T-Bill Futures contract
Extreme loss margin will be 0.03% of the notional value
(Rs 200000) of the contract for all gross open positions of
the futures contract or as may be specified by the relevant
authority from time to time. In case of calendar spread
positions in 91-Day GOI T-bill futures extreme loss
margin will be 0.01% of the notional value (Rs 200000)
of the far month contract. The relevant authority may
specify levy of normal margins on calendar spread
positions from time to time.
Extreme Loss margin requirement are computed as under:
For client positions - are netted at the level of individual
client and grossed across all clients, at the trading/
clearing member level, without any set-offs between
clients. For proprietary positions - are netted at trading/
clearing member level without any set-offs between client
and proprietary positions. The margins so computed are
aggregated first at the trading member level and then
aggregated at the clearing member level.



Imposition of additional margins
As a risk containment measure, the Clearing Corporation
may require clearing members to make payment of
additional margins as may be decided from time to time.
This is in addition to the initial margin and extreme loss
margin, which are or may have been imposed from time
to time.












CURRENCY DERIVATIVES AND
INTEREST RATE FUTURES :-
AN
ERA
OF
NEW
REVENUE



THANK YOU