Popularity quotient of Currency Derivatives

BRM Presentation

Currency

Derivatives

Nikhil Gupta Saurabh Ashok Thadani Srikanth Kumar Konduri Tarun KSG Tushar Gupta Currency Vishal Aggarwal

Derivatives

10FN-121 10FN-102 10FN-109 10DM-162 10FN-115 10DM-176

Key Topics of discussion

S.No.
1. 2. 3. 4. 5. 6. 7.

Slide Name
Introduction to Currency Futures Literature Review Research Objectives Adhered Methodology Validation through Crosstabulation Conclusions of the study Research recommendations

Slide No
3 8 10 11 25 27 28

Currency Derivatives

Introduction to Currency Futures

Financial Markets

Equity

Commodity

Currency

Others

Financial Derivatives

Over the Counter

Forwards Exotic options Futures

Exchange Traded
Swaps Options

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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 or similar product between two or more markets.

Currency Derivatives

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

Currency Derivatives

Fintoon demystifies Future Contract

Currency Derivatives

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 cross-border Currency trade.

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

Currency Derivatives

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 (Apr-Mar) 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)

Currency Derivatives

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

Currency Derivatives

Research objectives
This Research Project has been taken up to 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

Currency Derivatives

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 was 115

Currency Derivatives

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.

Currency Derivatives

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 72 70

60

50

40 32 30

20 11 10

Yes

No, but planning to invest after performing research

Never, What's Currency derivatives?

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Number of respondents invested in diff. asset markets

9% 16%
Equity Commodity

75%

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Expertise of respondents in diff. asset markets

100% 4 0 3 15 90% 2

80%

44 38

39

70%

60%

Expert
50%

Intermediate Beginner Zero

71 62

40%

44

30%

20%

10%

23

0%

Currency Derivatives

Equity

Commodity

Currency

Trading strategy in diff. asset markets

70 60

50

40 64

30

20 29 10 6 Hedger Speculator Arbitrager Equity Hedger 27

43 32 15 34

15

Speculator Arbitrager Commodity

Hedger

Speculator Arbitrager

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Mean Allocation of money clusters across markets

700 642 600 585 636

500

400

Equity
300
230 200 186 176 169 110 100

Commodity
254

Currency Derivatives

Yes

No, but planning to invest after performing research

Never, What's Forex?

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Driving attributes for diff. asset markets

100% 90% 80% 36 37 27 32

23 40
40 30 40 Currency Commodity Equity 14 78 48 59 20

70%
60% 50% 40% 30% 20% 10% 0%

Returns

Market Volatility

Portfolio Diversification

Hedging

Arbitrage

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Reasons of restraint from currency derivatives market

50 45 40 40 35 35 30 25 20 15 10 5 0 12 9 7 5 7 13 19 24 20 32 30 47 45

Not enough Self-Knowledge Less popular among peers Lack of Govt. initiatives

0.713 0.695 0.461

Very Insignificant Insignificant

Neutral

Significant

Very Significant

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Factors to boost currency derivatives trading in India

1 6
1-star 39 27 2-star 3-star 4-star 43 5-star

Improving investor knowledge through media broadcasts

1 16 22 1-star 2-star

34

3-star 42
4-star 5-star

Opportunity to trade in non-US currency futures

1 12 1-star 2-star 3-star 40 4-star 5-star

37

Relaxation of regulatory framework by SEBI

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Trading as a function of Annual salary

90 80 70 60 50 40 30 20 12 10 0 7 20 15 30 20 30 20 65

81 75

50

50

Equity Commodity Currency Derivatives

17 8

0 to 2.5

2.5 to 5

5 to 8

8 to 11

above 11

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Cumulative allocated amount across markets

15.8 21.65

Shares Commodities 62.5 Currencies derivatives

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Validation through Crosstabulation

Driving Factors considered during survey Asset Market Forex Commodity Equity Total Portfolio diversification 26 39 59 125 Total

Returns 36 39 78 153

Market volatility 37 39 41 118

Hedging 33 30 21 83

Arbitrage 23 15 8 46 155 164 205 524

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

Currency Derivatives

Test of Independence
Chi-Square Test results

Value Pearson Chi-Square Likelihood Ratio Linear-by-Linear Association N of Valid Cases 34.590a 35.431 18.521 524

df 8 8 1

Asymp. Sig. (2-sided) .000 .000 .000

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

Currency Derivatives

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

Currency Derivatives

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

Currency Derivatives

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 http://www.iforex.com

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Currency Derivatives

Thank You

Currency Derivatives