NISM Series I (Currency Derivatives) flashcards

33 cards. Read the term and the definition here. The deck at the top of this page is optional.

Currency futures contract

A standardized exchange-traded agreement to buy or sell a fixed amount of a foreign currency at a price agreed today, with daily mark-to-market settlement and expiry on a specified date.

USD/INR contract size

On Indian exchanges the USD/INR futures contract is for USD 1,000, so a one-rupee move in the quote changes contract value by INR 1,000.

JPY/INR quotation convention

JPY/INR is quoted as INR per 100 Japanese yen, and the contract size is JPY 100,000, so a 0.01 quote move equals INR 10 per contract.

Tick size

The minimum permitted price increment in a futures contract; for USD/INR it is INR 0.0025, and for EUR/INR, GBP/INR and JPY/INR it is INR 0.01.

Tick value calculation

Tick value equals tick size multiplied by contract size, adjusted for quotation units; USD/INR gives INR 2.50 per tick, while EUR/INR and GBP/INR give INR 10 per tick.

Cost-of-carry model

Futures price equals spot price multiplied by the ratio of domestic to foreign interest-rate factors over the contract tenor, reflecting the cost of financing the currency position.

Interest rate parity

The rule that the currency with the higher interest rate trades at a forward discount, so covered interest arbitrage equalizes returns across currencies and prevents riskless profit.

Forward premium

A forward or futures price higher than the spot price; it arises when the domestic interest rate exceeds the foreign interest rate for the contract tenor.

Forward discount

A forward or futures price lower than the spot price; it arises when the foreign interest rate exceeds the domestic interest rate for the contract tenor.

Basis

The difference between the spot price and the futures price of a currency; it narrows as expiry nears and reaches zero at contract maturity through convergence.

Convergence

The tendency of a futures price to move toward the spot price as expiry approaches, because settlement at maturity occurs at the spot rate.

Mark-to-market

Daily settlement of the change in a futures position's value: profit is credited to and loss debited from the margin account based on the daily settlement price.

Initial margin

The deposit required before opening a futures position, set by the exchange as a percentage of contract value to cover potential one-day losses; it is returned on close-out.

Variation margin

The daily cash flow into or out of a margin account equal to the change in settlement price times contract size, keeping the account at the required level.

Maintenance margin

The minimum margin balance a trader must maintain; a fall below it triggers a margin call requiring a top-up back to the initial margin level.

Position limit

The maximum open interest a client or trading member may hold in a currency futures contract, specified separately for near, next and far month contracts.

Underlying exposure requirement

The rule that resident users may hold exchange-traded currency derivative positions only up to their genuine foreign-currency exposure, with contracts cash-settled in INR.

Importer hedge

An importer with future USD payables buys USD/INR futures; a rise in USD/INR produces a futures gain that offsets the higher rupee cost of the payable.

Exporter hedge

An exporter expecting USD receivables sells USD/INR futures; a fall in USD/INR produces a futures gain that offsets the lower rupee value of the receivable.

Long futures payoff

For a long position, profit or loss equals the difference between the settlement or sale price and the purchase price, multiplied by the contract size.

Short futures payoff

For a short position, profit or loss equals the difference between the sale price and the settlement or repurchase price, multiplied by the contract size.

Rollover

Closing a near-month futures position and reopening it in the next month to extend a hedge beyond expiry, incurring the cost or benefit of the new basis.

Cash settlement

Settlement of exchange-traded currency derivatives in rupees rather than by delivery of foreign currency, with final settlement referenced to the exchange's expiry-day reference rate.

Last trading day

The final day on which a currency futures contract can be traded, typically two working days before the last business day of the contract month.

Settlement price

The official daily price fixed by the exchange, used to compute mark-to-market variation margin; final settlement uses the expiry-day reference rate.

Open interest

The total number of outstanding futures contracts not yet closed out; it measures the depth of positions and is monitored against position limits.

Spread position

A position holding opposite exposures in two contract months or currencies; exchanges allow a lower margin because the offsetting legs reduce risk.

Hedging effectiveness

The degree to which gains or losses on futures offset changes in the value of the underlying exposure, limited by basis risk and contract-size mismatches.

Basis risk

The risk that the basis changes between the hedge's inception and close-out, so the hedge does not perfectly offset the underlying exposure even if prices move as expected.

Speculative position

A currency futures position taken without an underlying foreign-currency exposure, permitted only within the limits and framework set by the exchange and regulator.

Arbitrage condition

When the actual futures price differs from the cost-of-carry fair value, traders borrow, buy spot and sell futures, or the reverse, until the mispricing closes.

Contract value

The rupee value of a futures position, computed as the futures price multiplied by the contract size and adjusted for the quotation unit.

Expiry-day reference rate

The exchange-specified benchmark rate used to settle expiring currency futures in rupees, drawn from the spot market on the contract's final settlement day.