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FAQs

Q.

What are value dates?

A.

A value date is a day on which the transaction takes place. For foreign currency transaction it takes T+2 days to settle the transaction. We have Four type of rates available with banks : Spot rate, Cash, Tom and Forward rate: Cash/Spot rate: Value today Tom/Spot rate: Value Tomorrow Spot rate: Value at T+2 Forward rate: Value beyond T+2 days

Q.

What are Nostro and Vostro accounts?

A.

A Nostro account is an account held in a foreign country by a domestic bank, denominated in the currency of that country. A Vostro account is a local currency account maintained by a local bank for foreign bank. Nostro and Vostro accounts are used to facilitate settlement of foreign exchange and trade transactions.

Q.

What is an EEFC A/c?

A.

Exchange Earners' Foreign Currency Account (EEFC) is an account maintained in foreign currency with a bank. It is a facility provided to exporters, to credit 100 per cent of their foreign exchange earnings to the account, so that the account holders do not have to convert foreign exchange into Rupees and vice versa, thereby minimizing the transaction costs. No interest is payable on EEFC accounts.

Q.

What are the permissible Credits and Debit into this account?

A.

Permissible Credits • Inward remittance through normal banking channels • Advance remittance received by an exporter • Payment received for export of goods and services from India • Professional earnings like consultancy fees, etc Permissible Debits • Payment outside India towards a permissible current account transaction • Payment of customs duty etc.

Q.

How are forward premiums/discounts determined?

A.

Forward premiums and discounts is an interest rate differential between two currency. If the difference between forward exchange rate and spot exchange rate of one currency is a positive value, it is known as forward premium and if it is a negative value it is known as forward discount. In other words if the spot ‘futures exchange rate’ is higher than the spot exchange rate then it is known as forward premium and if it is lower than spot exchange rate then it is known as forward discount.

Q.

What determines forward premiums for the dollar against the rupee?

A.

In USD/INR market forward premiums determined by two factors a. Interest rate differential and Demand and supply of currencies due to partial convertibility of rupee and immature money market in India.

Q.

What is a foreign exchange contract ?

A.

An agreement made to convert one currency into another currency at a specific rate on a specific date. Forward contracts are used to lock in exchange rates (a forward rate) for a specific future date, or for a range of dates. Forward contracts are often used as a tool to eliminate the impact of adverse currency moments. A forward rate is calculated by taking the spot rate and adding or subtracting forward points. Forward rates are determined by the interest rate differential between the countries of the two currencies which are being exchanged.

Q.

What are export finance facility available to exporter ?

A.

Export can avail following working capital finance At Pre-shipment stage: Packing Credit in Rupee and Packing Credit in Foreign Currency At Post shipment stage: Export Bill Discounting in Rupee and Export Bill Discounting in Foreign currency

Q.

What are Import finance facility available to Importer?

A.

Ans Export can avail following working capital finance Non funded Working Capital finance: Letter of credit and Bank Guarantee Trade Credits : Buyer Credit and Supplier Credit

Q.

Can forward contracts be cancelled and rebooked freely in India?

A.

Under contracted exposures, forward contracts, booked to hedge export/ import exposures were allowed to be cancelled and rebooked. W.e.f 15th, Dec. 2011 as per new RBI circular the above facility has been withdrawn. Forward contracts booked of the underlying exposure, once cancelled, cannot be rebooked. Under probable exposures based, forward contracts booked by both exporters and importers will be on fully deliverable basis. In case of cancellations, exchange gain, if any, should not be passed on to the customer

Q.

Why the US dollar is appreciating in spite of crucial US data surfacing weak?

A.

Being a strong global power and having the status of being a global currency with full convertibility and highest liquidity, the Greenback enjoys the title of being referred to as the “safe haven”. Therefore, in tumultuous times investors and traders are comfortable parking their monies in this asset class.

Q.

In spite of a weakness in the rupee as per your view why the rupee has open stronger in the morning?

A.

Many factors affect the opening rate of the currency for e.g. the closing of the US markets and the opening in Asian markets. If the markets trade substantially higher than previous closing, traders and investors expect the rupee to open strong against its counterparts. It does not change the underlying fundamentals of India or the rupee though. Also some orders kept pre market may cause adversity.

Q.

I have an import exposure arising in six months, what should I do according to you?

A.

The costing of your company is important and if it is below current market price, then cover 40-50 % of import exposure. In the current scenario of a weaker Rupee, one should look to cover on every dip.

Q.

Should I take long term covers in the current scenario?

A.

Advisable to do so when premiums are good and costing is taken under consideration. Although, booking long forwards at higher rates and cancelling at lower levels yields no gains as per latest RBI policy.

Q.

I have export exposure in this and next month what should I do?

A.

According to Risk Management policy, one must be covering 50 – 60% of generated exposures and seek expert advice for the same.

Q.

Why rupee is depreciating in spite of an appreciation in the stock markets?

A.

Because of the presence of Derivatives in the markets. E.g. short covering doesn’t require rupee to be purchased in the markets. Dollar demand from Oil, Gold and other importer would also cause rupee to depreciate despite positive stock markets.

Q.

What is PCFC?

A.

Pre Shipment Credit in Foreign Currency. It is a treasury product made available by the Government of India to the Exporters to give them a boost to their business wherein they can borrow money from banks for working capital at LIBOR related rates in foreign currency like USD, EUR, GBP & JPY

Q.

How can I use PCFC as an instrument for hedging?

A.

PCFC liability can be paid off by converting pre shipment credit into post shipment credit in foreign currency and Post shipment credit needs be liquidated out of the export proceeds of the relevant shipment. So exporter isn’t exposed to currency risk as dollar liability is being squared off by dollar receivable.

Q.

Can I take Buyer’s credit when rupee has depreciated? Currently the rate is unfavorable for me as an importer

A.

Buyer’s Credit is an interest rate arbitrage instrument to Importer and availing it would defer import payment. In current market, Rupee may touch to 55 levels also. One is suggested to cover 25 – 30 % of the same on every dip.

Q.

I have exposure in Euro. Currently Euro has depreciated and Dollar has appreciated against the INR and globally. Can I convert EUR to USD and then when USD/INR favorable can convert USD to INR?

A.

Yes, one can do the above transaction through 2 legs. First convert Euros into Dollars when EUR/USD is trading at higher levels. Then take the dollars and convert to rupees through USD/INR quote when Rupee depreciates against the USD.

Q.

What is the interrelationship between gold and oil as well as an inter relation between gold and USD?

A.

Economic is in slowdown oil price goes down and gold and USD is in demand to due safe haven assets.

Q.

Why should I maintain a stop loss when you are predicting a particular level?

A.

We don’t put client’s portfolio at risk. The markets are volatile, especially in the current scenario and predictions change quickly. The stop loss strategy is best risk management tool in the financial markets.

Q.

When to take and when not to take long term covers and why? What is the relevance of this strategy for importers?

A.

When Rupee is in appreciating mode and long term forward annualized premium quoting at higher you can go for long term covers. So pre-utilized long term covers whenever rupee appreciate sharply.

Q.

What is currency trading?

A.

"While trade is international, currencies are national. As international transactions are settled in global currencies, usually they are brought/sold for one another and this constitutes ‘currency trading’."

Q.

What are the factors that affect the exchange rate of a currency?

A.

"A country’s currency exchange rate is typically affected by the supply and demand for the country’s currency in the international foreign exchange market. The demand and supply dynamics is principally influenced by factors like interest rates, inflation, trade balance and economic & political scenarios in the country. The level of confidence in the economy of a particular country also influences the currency of that country."

Q.

How and why does the demand and supply of a currency increase and decrease?

A.

There are several reasons. A rise in export earnings of a country increases foreign exchange supply. A rise in imports increases demand. These are the objective reasons, but there are many subjective reasons too. Some of the subjective reasons are: directional viewpoints of market participants, expectations of national economic performance, confidence in a country’s economy and so on.

Q.

What is a currency futures contract?

A.

"A currency futures contract is a standardized version of a forward contract that is traded on a regulated exchange. It is an agreement to buy or sell a specified quantity of an underlying currency on a specified date in future at a specified rate (e.g., USD 1 = INR 46.00). (Note: USD is abbreviation for the US Dollar, and INR for the Indian Rupee)."

Q.

What is the need of currency futures?

A.

Currency futures are needed if your business is influenced by fluctuations in currency exchange rates. If you are in India and are importing something, you have done the costing of your imports on the basis of a certain exchange rate between the Indian Rupee and the relevant foreign currency. By the time you actually import, the value of the Indian Rupee may have gone down and you may lose out on your income in terms of Indian Rupees by paying higher. On the contrary, if you are exporting something and the value of the Indian Rupee has gone up, you earn less in terms of Rupees than you had anticipated. Currency futures help you hedge against these exchange rate risks.

Q.

Does the national economy of India need currency futures?

A.

Every business exposed to foreign exchange risk needs to have a facility to hedge against such risk. Exchange-traded currency futures, as on MCX-SX, are a superior tool for such hedging because of greater transparency, liquidity, counterparty guarantee and accessibility. Since the economy is made up of businesses of all sizes, anything that is good for business is also good for the national economy.

Q.

Why exchange-traded futures? What’s wrong with the currency forward market that has been existing in India for a long time?

A.

The exchange-traded futures, as compared to OTC forwards, serve the same economic purpose, yet differ in fundamental ways. Exchange-traded contracts are standardised. In an exchange-traded scenario where the market lot is fixed at a much lesser size than the OTC market, equitable opportunity is provided to all classes of investors whether large or small to participate in the futures market. The other advantages of an Exchange traded market would be greater transparency, efficiency and accessibility. The counterparty risk (credit risk) in a futures contract is eliminated by the presence of a clearing house/ corporation, which by assuming counterparty guarantee, eliminates default risk. Thus, introduction of exchange-traded futures help in overall development of the forex market in the country.

Q.

Who can participate in a currency futures market?

A.

Any resident Indian or company including Banks and financial institutions can participate in the futures market. However, at present, Foreign Institutional Investors (FIIs) and Non-Resident Indians (NRIs) are not permitted to participate in currency futures market.

Q.

What are the terms and conditions set by RBI for Banks to participate in exchange traded fx futures?

A.

RBI has allowed Banks to participate in currency futures market. The AD Category I Banks which fulfill stipulated prudential requirements are eligible to become a clearing member and / or trading member of the currency derivatives segment of MCX-SX. AD Category I Banks which are urban co-operative banks or state co-operative banks can participate in the currency futures 09 market only as a client, subject to approval thereof, from the respective regulatory department of RBI.

Q.

If I am an AD Category I Bank, why should I become a member of a currency futures exchange? I have the interbank market, anyway.

A.

"The interbank market is a market for Banks. Small and mediumsized clients of Banks cannot directly participate in the interbank market. If a Bank is a member of a currency futures exchange, it can trade on behalf of its small and medium-sized clients, who otherwise would not have been able to benefit from fluctuations in currency exchange rates. Thus, Banks can increase their customer base if they become a member of a currency futures exchange. Banks themselves can also benefit from a currency futures exchange by arbitraging between the existing interbank market and the currency futures exchange. Larger participation in a currency futures exchange gives the exchange platform a greater vibrancy than the interbank market, which is limited to Banks."

Q.

Can currency futures help small traders?

A.

Yes. The minimum size of the USDINR futures contract is USD 1,000. Similarly EURINR future contract is EURO 1000, GBPINR future contract is GBP 1000 and JPYINR future contract is YEN 1,00,000. These are well within the reach of most small traders. All transactions on the Exchange are anonymous and are executed on a price time priority ensuring that the best price is available to all categories of market participants irrespective of their size. As the profits or losses in the futures market are also paid / collected on a daily basis, the scope of accumulation of losses for participants gets limited.

Q.

If I am an individual with no exposure to foreign exchange risks, does a currency futures exchange mean anything to me?

A.

Yes, it does, if you want to invest purely as an investor. You can benefit from exchange rate fluctuations just as you can benefit by investing in equities in the stockmarket. However, as in the stockmarkets, you also stand to lose money if the price movements are not in keeping with what you had anticipated. Participating in a currency futures exchange is risky, just as the stockmarket is. You should therefore be knowledgeable about the currency market if you want to participate as an investor.

Q.

How do exchange-traded currency futures enable hedging against currency risk?

A.

On a currency exchange platform, you can buy or sell currency futures. If you are an importer, you can buy futures to “lock in” a price for your purchase of actual foreign currency at a future 10 date. You thus avoid exchange rate risk that you would otherwise have faced. On the other hand, if you are an exporter, you sell currency futures on the exchange platform and “lock in” a sale price at a future date. However, it may be noted that the contract will be marked to market at the daily settlement price and profit or loss will be paid / collected on a daily basis.

Q.

What are the risks involved in currency futures market?

A.

Risks in currency futures pertain to movements in the currency exchange rate. There is no rule of thumb to determine whether a currency rate will rise or fall or remain unchanged. A judgement on this will depend on the knowledge and understanding of the variables that affect currency rates.

Q.

Which are the global exchanges that provide trading in currency futures?

A.

Internationally, exchanges such as Chicago Mercantile Exchange (CME), Johannesburg Stock Exchange, Euronext.liffe, BM&FBOVESPA and Tokyo Financial Exchange provide trading in currency futures.

Q.

Why should one trade in Indian exchanges as compared to international exchanges?

A.

Indian currency futures enable individuals and companies in India to hedge and trade their Indian Rupee risk. Most international exchanges offer contracts denominated in other currencies.

Q.

What is the minimum trading unit (i.e. contract size) and tenure of the USDINR, EURINR, GBPINR and JPYINR futures contract?

A.

The contract size of the USDINR futures contract is USD 1,000, EURINR future contract is EURO 1,000, GBPINR future contract is GBP 1,000 and JPYINR future contract is YEN 1,00,000. The contracts shall have a maximum maturity of twelve months. All monthly maturities from 1 to 12 months are available.

Q.

What are benefits of spread contract?

A.

Spread contract give users the benefit to enter two calendar contracts simultaneously without the risk of partial (one leg) execution and at a lower impact cost.

Q.

What is the last trading day of these currency futures contract?

A.

The last trading day of a futures contract on MCX-SX shall be two working days prior to the last working day (excluding Saturdays) of the month. The settlement price is the Reserve Bank of India’s reference rate on the last trading day.

Q.

In which currency are the currency futures contracts settled?

A.

They are settled in cash in Indian Rupees.

Q.

What are the various types of margins that are levied to manage the risk?

A.

The trading of currency futures is subject to maintenance of initial, extreme loss, and calendar spread margins with the clearing house / corporation. The details of the margins levied are mentioned in the respective product specifications.

Q.

What are the currencies traded on MCX-SX?

A.

In the first phase of operations, only the USDINR currency pair was traded on MCX-SX. With the changing need of the participants, the regulators have allowed MCX-SX to facilitate trading in other major currency pairs as EURINR, GBPINR and JPYINR future contracts.

Q.

What are the trading hours on MCX-SX?

A.

Trading in currency futures is on all working days from Monday to Friday and is between 9.00 am to 5.00 pm.

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