Currency Derivatives
What this domain covers
NISM Series I tests the mechanics of exchange-traded currency derivatives in India: quoting conventions, forward and futures pricing, hedging, speculation, arbitrage, margining, settlement and the regulatory split between RBI and SEBI. Expect calculation questions on cross rates, forward premia and futures profit and loss.
Core rules and concepts
- In a quote such as USD/INR 83.50/83.52, USD is the base currency and INR the quote currency. The bid is where the dealer buys the base; the ask is where it sells it. The spread compensates the dealer.
- In India, USD/INR is a direct quote for a resident: rupees per dollar. A rising number means the rupee has depreciated, not appreciated.
- Exchange-traded currency futures are standardised, traded on a recognised exchange and cash-settled in INR. The final settlement price for USD/INR is the RBI reference rate (now published by FBIL). OTC forwards are customised, bilateral and carry counterparty risk.
- Pricing follows cost of carry: F ≈ S × (1 + domestic rate × t) / (1 + foreign rate × t). When the domestic interest rate exceeds the foreign rate, the future trades at a premium.
- Clearing corporations novate trades, so daily mark-to-market and SPAN margins manage default risk. RBI regulates the OTC and spot market under FEMA; SEBI regulates exchange-traded currency derivatives.
Worked example
An importer must pay USD 1,000,000 in three months and buys 1,000 USD/INR futures (lot size USD 1,000) at 83.80. At expiry the settlement price is 84.10. Futures gain = (84.10 − 83.80) × 1,000 × 1,000 = ₹300,000. In the spot market the dollars cost ₹84.10 million instead of ₹83.52 million at the time of hedging, ₹580,000 more, but the futures gain offsets part. Effective cost = 84.10 − 0.30 = ₹83.80 per dollar. The hedge locked in the futures rate, not the original spot rate, and margin funding costs are ignored here.
Traps that cost marks
- Reversing base and quote when calculating a cross rate.
- Treating a forward premium as a forecast of the future spot rate.
- Forgetting daily mark-to-market debits and credits before expiry.
- Assuming dollars will be delivered; the contracts are cash-settled.
- Omitting the contract multiplier from a profit-and-loss calculation.