Analysis of Investors Behavior On Currency Derivatives

“ANALYSIS OF INVESTORS BEHAVIOR ON CURRENCY DERIVATIVES”
REVIEW OF LITERATURE AND PROBLEM STATEMENT:

Each country has its own currency through which both national and
international transactions are performed. All the international business transactions involve an
exchange of one currency for another.
For example,
If any Indian firm borrows funds from international financial market in US dollars for
short or long term then at maturity the same would be refunded in particular agreed currency
along with accrued interest on borrowed money. It means that the borrowed foreign currency
brought in the country will be converted into Indian currency, and when borrowed fund are paid
to the lender then the home currency will be converted into foreign lender’s currency. Thus, the
currency units of a country involve an exchange of one currency for another. The price of one
currency in terms of other currency is known as exchange rate.
The foreign exchange markets of a country provide the mechanism of exchanging different
currencies with one and another, and thus, facilitating transfer of purchasing power from one
country to another.
With the multiple growths of international trade and finance all over the world, trading in foreign
currencies has grown tremendously over the past several decades. Since the exchange rates are
continuously changing, so the firms are exposed to the risk of exchange rate movements. As a
result the assets or liability or cash flows of a firm which are denominated in foreign currencies
undergo a change in value over a period of time due to variation in exchange rates.
This variability in the value of assets or liabilities or cash flows is referred to exchange rate risk.
Since the fixed exchange rate system has been fallen in the early 1970s, specifically in developed
countries, the currency risk has become substantial for many business firms. As a result, these
firms are increasingly turning to various risk hedging products like foreign currency futures,
foreign currency forwards, foreign currency options, and foreign currency swaps.
OBJECTIVES OF THE PROPOSED STUDY:
The basic idea behind undertaking Currency Derivatives project:
o To differentiate risk and allocate it to those investors most able and willing to take it.
o To provide the right platform for the trading in currency future.
o To show how currency future covers ground in comparison with other available
derivative instruments and to provide awareness in market and attract the investors.
RESEARCH METHODOLOGY:
TYPE OF RESEARCH
In this project Descriptive research methodologies were use. The research methodology
adopted for carrying out the study was at the first stage theoretical study is attempted and at the
second stage observed online trading on NSE/BSE.
SOURCE OF DATA COLLECTION

Secondary data were used such as various books, report submitted by RBI/SEBI committee and
NCFM/BCFM modules.
SCOPE OF PROPOSED STUDY:
Currency-based derivatives are used by exporters invoicing receivables in foreign currency,

willing to protect their earnings from the foreign currency depreciation by locking the currency
conversion rate at a high level. Their use by importers hedging foreign currency payables is
effective when the payment currency is expected to appreciate and the importers would like to
guarantee a lower conversion rate. Investors in foreign currency denominated securities would
like to secure strong foreign earnings by obtaining the right to sell foreign currency at a high
conversion rate, thus defending their revenue from the foreign currency depreciation.
Multinational companies use currency derivatives being engaged in direct investment overseas.
They want to guarantee the rate of purchasing foreign currency for various payments related to
the installation of a foreign branch or subsidiary, or to a joint venture with a foreign partner.
A high degree of volatility of exchange rates creates a fertile ground for foreign exchange
speculators. Their objective is to guarantee a high selling rate of a foreign currency by obtaining
a derivative contract while hoping to buy the currency at a low rate in the future. Alternatively,
they may wish to obtain a foreign currency forward buying contract, expecting to sell the
appreciating currency at a high future rate. In either case, they are exposed to the risk of currency
fluctuations in the future betting on the pattern of the spot exchange rate adjustment consistent
with their initial expectations.
The most commonly used instrument among the currency derivatives are currency forward
contracts. These are large notional value selling or buying contracts obtained by exporters,
importers, investors and speculators from banks with denomination normally exceeding 2 million
USD. The contracts guarantee the future conversion rate between two currencies and can be
obtained for any customized amount and any date in the future. They normally do not require a
security deposit since their purchasers are mostly large business firms and investment
institutions, although the banks may require compensating deposit balances or lines of credit.
Their transaction costs are set by spread between bank's buy and sell prices.
Exporters invoicing receivables in foreign currency are the most frequent users of these
contracts. They are willing to protect themselves from the currency depreciation by locking in
the future currency conversion rate at a high level. A similar foreign currency forward selling
contract is obtained by investors in foreign currency denominated bonds (or other securities) who
want to take advantage of higher foreign that domestic interest rates on government or corporate
bonds and the foreign currency forward premium. They hedge against the foreign currency
depreciation below the forward selling rate which would ruin their return from foreign financial
investment. Investment in foreign securities induced by higher foreign interest rates and
accompanied by the forward selling of the foreign currency income is called a covered interest
arbitrage.
LIMITATION OF THE PROPOSED STUDY

The analysis was purely based on the secondary data. So, any error in the secondary data might
also affect the study undertaken. The currency future is new concept and topic related book was
not available in library and market.
CONCLUSIONS:
By far the most significant event in finance during the past decade has
been the extraordinary development and expansion of financial derivatives…These instruments
enhances the ability to differentiate risk and allocate it to those investors most able and willing
to take it- a process that has undoubtedly improved national productivity growth and standards
of livings.
The currency future gives the safe and standardized contract to its investors and individuals
who are aware about the forex market or predict the movement of exchange rate so they will get
the right platform for the trading in currency future. Because of exchange traded future contract
and its standardized nature gives counter party risk minimized.
Initially only NSE had the permission but now BSE and MCX has also started currency future. It
is shows that how currency future covers ground in the compare of other available derivatives
instruments. Not only big businessmen and exporter and importers use this but individual who
are interested and having knowledge about forex market they can also invest in currency future.
Exchange between USD-INR markets in India is very big and these exchange traded contract
will give more awareness in market and attract the investors.
REFERENCES
Books and Journals
Financial Derivatives (theory, concepts and problems) By: S.L. Gupta.
NCFM: Currency future Module.

BCFM: Currency Future Module.
Center for social and economic research) Poland
Recent Development in International Currency Derivative Market by: Lucjan T. Orlowski)

Report of the RBI-SEBI standing technical committee on exchange traded currency futures)
2008
Report of the Internal Working Group on Currency Futures (Reserve Bank of India, April 2008)

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“ANALYSIS OF INVESTORS BEHAVIOR ON CURRENCY DERIVATIVES”

REVIEW OF LITERATURE AND PROBLEM STATEMENT:

SOURCE OF DATA COLLECTION

SCOPE OF PROPOSED STUDY:

Currency-based derivatives are used by exporters invoicing receivables in foreign currency,

LIMITATION OF THE PROPOSED STUDY

NCFM: Currency future Module.

Recent Development in International Currency Derivative Market by: Lucjan T. Orlowski)

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