Popularity quotient of Currency

BRM
Presentation
Derivatives

Currency
Derivative
s

Nikhil Gupta
10FN-121
Saurabh Ashok Thadani 10FN102
Srikanth Kumar Konduri 10FN109
Tarun
KSG
10DM-162
Currency
Derivativ
Tushar
Gupta
10FN-115

Key Topics of discussion

S.No.

Slide Name

Slide No

1.

Introduction to Currency Futures

2.

Literature Review

3.

Research Objectives

10

4.

Adhered Methodology

11

5.

Validation through Crosstabulation

25

6.

Conclusions of the study

27

7.

Research recommendations

28

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Introduction to Currency Futures

Financial
Markets
Equity

Commodi
ty

Currency

Others

Financial
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es
Over the
Counter
Forwards

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Exotic
options

Exchange
Traded
Futures

Swaps

Options

Types of Traders

Hedgers: Traders that make purchases and sales in the future

market solely for the purpose of establishing a known price
level weeks or months in advance for something they intend to
buy/sell in the cash market
Speculators: Traders that expect the value of rupee to
appreciate or depreciate, he can sell or buy a USD/INR contract
and earn a profit if the market moves in the direction that he
expects it to move.
Arbitragers: Traders who take advantage of difference in price
of the same orsimilar product between two or more markets.

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Currency Derivatives in India

Started in August 2008

Only Currency Futures permitted
Trading hours: 9AM-5PM
$(USD), (GBP), (JPY), (EUR),`(INR)
pairs
Its volume may equity markets soon
Trade seen touching ` 1 Trillion by FY12

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Fintoon demystifies Future Contract

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Future contract demystified

Helps in future price
discovery
Forex
is the largest financial
market globally, followed by
Commodities and Equities.
Investors, speculators and
corporates are involved in crossborder Currency trade.

YOUTUBE LINK FOR THE VIDEO

ON CURRENCY FUTURES

Transfers the Risk

Futures contract is widely used by

merchant traders to insure
against the risk arising out of
changing economic/political
conditions across nations

http://www.youtube.com/watch?v=TClcxy4Ku28

Trading in currency derivatives in India has shown a

healthy uptrend since 2008

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Literature Review

The market watchdog is planning to introduce more currency

derivatives products, beginning with options, to give a wider
choice to investors. (C B Bhave, Chairman of the Indian
securities board SEBI,The Economic Times, April 16 2010)
Average daily trade volume in currency derivatives market in
India is expected to surge to 1 trillion INR in 2011-12 (AprMar) from about 300 billion INR currently.(Pramit Brahmbatt,
CEO, Alpari Forex (India), on Sulekha.com Money, May 20
2010)
Though several brokers and banks, such as State Bank of
India (SBI) and Axis Bank, offer the currency trading platform,
the participation of retail investors is yet to pick up.
(Narayana Swami, Business Today, Betting on the money
game, January 31,2011)

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Pros And Cons of reviewed literature

Pros
Present scenario covered in great details by authors
Realistically predicted future road map
Mentioned reasons for low momentum in derivatives

Cons
Research is based on secondary data and not primary one.
Not suggested ways to promote currency derivatives

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Research objectives
This ResearchProject has been taken upto study the popularity
quotient of Currency Derivatives trading in India. Specific
objectives are:
To know the percentage of traders already into currency
derivatives trading or interested in it.
To know the driving attributes of retail investors for each asset
market.
To know the reasons why Indian retail investors are less inclined
towards currency derivatives trading.
To know the factors that would be most helpful to boost
currency derivative trading in India

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Adhered Methodology

Research Design
o Exploratory Research: Conducted focus group interviews initially to
find out possible reasons behind the slow but steady growth of this
market & later floated the questionnaire to domain specific population,
through a convenient sampling
o Communication approach: Direct, through online questionnaires.

Sampling Design

o Sampling Method: Convenience sampling was used, based on the

willingness
and availability of the respondents. In the survey the non probability
convenience
sampling is followed.
o Sampling Size: The sample size achieved from online questionnaire wa
115

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Adhered Methodology

Methodology
o Formulated data collection process &explored possible reasons
based on the information available through secondary sources of
data

Sources of Data
o The data is basically primary in nature, collected through a
questionnaire.
o The questionnaires were made to be filled online from finance
industry experts, people into trading or wanting to get into trading
or otherwise having knowledge about financial markets.

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Limitations of our research study

The behaviour of the customer while approaching them to fill the

questionnaire was unpredictable.
The research was conducted in a limited area.
Smaller sample may not always give better results. Sample may
not be true representative of the whole population.
There may be error due to bias of respondent

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Variables chosen for study

Nominal scale
To observe major factors driving investors in trade in different asset
markets

Likert scale
From very insignificant to very significant scale is chosen to
determine root
causes leading to restraint in currency derivatives trading

Interval scale
To determine level of significance associated to various reforms,
which would
boost currency derivatives trading

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Currency derivatives as an investment option

80
70
60
50
40
30
20
10
0

72

32

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11

Number of respondents invested in diff. asset markets

16

Equity
Commodity
Currency Derivatives
75

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Expertise of respondents in diff. asset markets

100%

2
3

15
90%

80%

39

44
38

70%

60%

Ex pert
Intermediate
Beginner
Zero

50%

40%

44
71

30%
62
20%

10%

23

0%

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Equity

Commodity

Currency

Trading strategy in diff. asset markets

70

60

50

40
64

30

43

20
29

32

27

10

15
6

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34

15

Mean Allocation of money clusters across markets

700
600

642

585

636

500
400
300

230

200
100

186

254
176

169

110

Equity
Commodity
Currency Derivatives

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Driving attributes for diff. asset markets

100%
90%

36

37

27
32

80%
70%

23
40

60%

40
40

50%

30

40%
30%
20%
10%
0%

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14
78
48

59

Currency
Commodity
Equity

20

Reasons of restraint from currency derivatives market

47

50
45

45
40

40

35
32

35

30

30
24

25
19

20
15

13

12
9

10
5
0

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20

Not enough SelfKnowledge

Less popular among
peers

0.713
0.695
0.461

Factors to boost currency derivatives trading in India

16
39

1-star
27

2-star
3-star
4-star

43

5-star

16 1 22

1-star
3-star

34
42

1 1 12
37

4-star

Opportunity to trade in
non-US currency futures

5-star

1-star
2-star
3-star

40

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2-star

Improving investor
knowledge through media
broadcasts

4-star
5-star

Relaxation of regulatory
framework by SEBI

Trading as a function of Annual salary

90
80

81
75

70
65

60
50

50

Equity
Commodity
Currency Derivatives

50

40
30

30
20

20

15

12
10

30
20

20

17
8

0
0 to 2.5

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2.5 to 5

5 to 8

8 to 11

above 11

Cumulative allocated amount across markets

15.8
21.65

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62.5

Shares
Commodities
Currencies
derivatives

Validation through Crosstabulation

Driving Factors considered during survey
Asset
Market

Total

Returns

Market volatility

Portfolio
diversification

Forex
Commodit
y

36

37

26

33

23

155

39

39

39

30

15

164

Equity

78

41

59

21

205

Total

153

118

125

83

46

524

Hedging

Arbitrage

Feeling about the Market * Driving Factor where survey is done

Note that 78 of the 153 respondents chosen the returns (51%)
as driving factor for Equity
but only 8 of 46 respondents chosen Arbitrage (17%) for equity
Are these differences occurring by chance?
Chi-Square test is used to validate the above hypothesis

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Test of Independence
Chi-Square Test results

Value
Pearson Chi-Square

Asymp. Sig. (2sided)

df

34.590a

.000

Likelihood Ratio

35.431

.000

Linear-by-Linear Association

18.521

.000

N of Valid Cases

524

a. 0 cells (.0%) have expected count less than 5. The minimum expected count
is 13.61.

degrees of freedom = (3 - 1) (5 - 1) = 8
As the significance value is 0.000, at the 95%
confidence interval, it can be stated that:
The driving factors mentioned are significantly
dependent on the basis of chosen asset markets to
invest

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Conclusions of the study

Only 9% of traders are already into this trading, while 63% are
interested in trading after performing research
Hedging is considered as a major driving factor for trading in
currency markets(21%), compared to Equity(10%) &
Commodity(18%)
70% quote improving investors self-knowledge will increase the
retail participation in Currency derivatives
68% feel a relaxation in the norms of SEBI in terms of lot size
and percentage margins will spurt a rise in currency derivatives
trading

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Research recommendations

Government should take steps to increase liquidity in the

market by introducing crosscurrency pairs as well as more
products and by opening doors for other players like foreign
institutional investors to trade in this market
Efforts have to be made to penetrate the perception of currency
derivatives as an insuring instrument to reduce risk rather just
as a speculative trading product
Improving investor knowledge through web portals, learning
documents and media broadcasts

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Bibliography
Derivatives in India by Asani Sarkar
www.ny.frb.org/research/economists/sarkar/derivatives_in_
india.pdf
Foreign exchange derivative markets in India
by Invest India Economic Foundation
www.iief.com/Research/CHAP10.PDF
Betting of the money game article in Business Today Jan.31,
2011
http://
businesstoday.intoday.in/bt/story/12653/1/high-leverage-currencyderivatives-can-benefit-you.html
Currency Derivatives Segment NSE India
http://www.nse-india.com/content/circulars/cd13462.pdf
Indias leading currency derivatives portal IFOREX
Currency
http://www.iforex.com
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Currency
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es

Thank You

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