Currency Market, Commodity Market, and Government Securities

Lesson -> The Cross Currency pairs

18.1 - All hail King Forex

The Forex futures market is the largest market that people trade in, outside of India. Everybody trades in the forex futures market, from retail to institutional traders. If you examine this closely, you'll see that the largest currency futures traded are -

  1. Euro against the US Dollar – EUR USD
  2. GBP against the US Dollar – GBP USD is also known as 'The Cable.
  3. USD JPY vs. the Japanese Yen

To trade these foreign currency pairs, you would have to open an account at some unknown broker outside India. This broker, likely based in Cyprus or the Isle of Man. Then, wire funds to his bank account and then trade according to the rate he sent. The whole thing was a little shady because there wasn't a regulatory framework.

None of this is necessary. Under the complete regulatory framework, the National Stock Exchange has allowed cross-currency options and futures to be traded on the exchanges.

NSE allows you to trade all the mentioned currency futures. This chapter will provide information about how these contracts are designed so you can trade them easily.

A quick trivia: According to a survey about 88% of international Forex trades involve USD. Half of these trades are USD USD, USD GBP USD, and USD JPY. This should give you an idea of the size of these contracts.

Let's start by reviewing some basics.

If you see a currency pairing, such as EUR/USD, then the Base Currency is the currency and the 2 nd the Quote Currency is the currency. The currency pair is always quoted using the quote currency.

For example, EUR/USD =1.23421 means that 1 EUR equals 1.23421 US dollars.

Take a look at this table -

Currency PairBase CurrencyQuote Currency

Here is an example order book. Assume it is for EUR USD.

Bid Price (price you pay to buy)Ask for Price (price at the time you sell)

If you want to purchase the EUR USD, you will need to pay USD 1.2431 per EUR. You can also sell the EUR USD by selling 1 EUR to 1.2429 US.

18.2 - Futures Contracts

NSE has launched options and futures on these international currencies. It will take some time before the options pick up steam, but I believe the near-month futures will draw traders immediately.

The best thing is that the lot sizes for all three currency pairs are fixed at 1000 Units of Base currency. This is how the lot size can be fixed.

Currency PairBase CurrencyQuote CurrencyLot Size

It is important to keep in mind the lot size convention.

Twelve monthly contracts will be available for trading. Close-to-month contracts expire two days before the end of each month.

18.3 Future Trade

Cross-currency contracts' Profit and Loss will be displayed in the quoted currency, and not INR as it is for normal equity, commodities, and currencies traded in India. Let's look at all three contracts.

The position's Profit and Loss are converted to INR using the Reference Rate (released at 12.30 pm by RBI at the close of trading day). P&L for EURUSD, GBPUSD, and USDINR will be converted to USDINR and USDJPY using the JPYINR rates.

Carryforward positions will result in the daily settlement price being set at the daily settlement price (weighted Average Price of the Last Half Hour of Trading).

18.4 Options Contract

The options contract follows the USDINR options that are traded on the exchange. These are the specifications of the contract.

Optional expiry style European

Premium Quoted in the quotation currency (USD for GBPUSD EURUSD, and JPY USD JPY).

Contract cycle There will be three months and three quarterly contracts. Three monthly contracts will continue, with a quarterly contract every 3 months.

Strikes: 12 in the Money, 12 out of the Money, and 1 near the money options. This leaves you with approximately 25 strike options to choose from.

 Euro US DollarPound = US DollarUS Dollar - Japanese Yen
Interval Strike Price0.0050.0050.50

18.5 The Expiry

All near-month contracts expire 2 business days before the end of the month at 12.30 pm. They will be settled at their final settlement price.

Let's examine how the final settlement price calculation is done. The reference rate in INR will be used to calculate the cross-currency rate.

Refer to Rate65.226179.504189.70550.6107

Futures contracts will go to market at the final settlement prices and be cash-settled within T+2 days.
All in-the-money contracts have an intrinsic value that will be determined at the final settlement price. Let's take an example to illustrate this.

Final Settlement Price in GBPUSD1.3753
Place Strike Price1.3760
Exercise amount per contract(USD)0.7
RBI Reference Rate for USD at 12.30 PM65.2261
Exercise Amount for Contract (INR)Rs 45.65827

18.6 The Margins

Contracts traded will have an initial margin equal to 2% of the contract value, and an extreme loss margin equal to 1%. Margin will be blocked in Indian Rupees. However, currencies will be traded using the quoted currency (USD or JPY). The margin that has been blocked will be converted into the quote currency. Margin blocking will be applied to all trades that are placed before 02:00PM. Trades that are placed after 02:00 PM will apply the trading day’s reference rate.

18.7 The Calendar Spreads

A calendar spread is a futures position that is held in one expiry period and is offset by a position in another expiry month. The exchange sets the margins for the spread and they are

Spread durationMargins
1 MonthRs 1500
2 monthsRs 1800
3 MonthsRs 2100
4 MonthsRs 2400

To Summarize

  1. NSE allows cross-currency pairs to trade for the first time
  2. Lot size $1000 for EUR/USD or PS1000 GBP/USD, and $1,000 for USD/JPY
  3. The pair will be traded in Indian Rupees, but settled in Indian Rupees.
  4. The RBI reference rates will guide the Daily and Final M2M Settlements.
  5. Near-month contracts expire 2 days prior to the end of the trading day at 12.30 PM.