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FAQs on CDS
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1. What is hedging?
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Hedging refers to an investment made in order to reduce the risk of adverse price
movements in a security, by taking an offsetting position in a related security,
such as an option or a short sale.
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2. What are the different ways of hedging?
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- Bank forwards( OTC markets)
- Currency Futures
- Swaps
- Options
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3. What is Currency Futures?
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Currency futures are standardized contracts used by international traders to hedge
against currency risk. This is a contract to exchange a certain amount of a particular
currency, at a specific exchange rate on a specified date.
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4. What are the differences between Currency Futures and bank forwards?
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FACTORS
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FORWARDS
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FUTURES
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Size of Contacts
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Tailored to individual needs
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Standardized
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Delivery date
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Tailored to individual needs
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Standardized
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Contract prices
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Established by bank or broker
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Fully market determined i.e. by open auctions amongst buyers & sellers
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Participants
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Banks, brokers, MNC’s, FIIs etc.
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Banks, Brokers, MNC’s, FIIs, small traders, HNI’s, speculators etc.
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Commissions
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Set by spread between dealer’s buy and sell price
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Published brokerage fees by the regulatory authorities
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Margins
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None but compensating bank balances are required e.g. FDs
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Margin deposit is required
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Clearing operations
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Counter party risk due to the absence of separate clearing house
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Handled by exchange clearing house so absolutely zero counter party risk
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Market place
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Over the telephone
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Central exchange floor with worldwide communication
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Regulation
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Self- regulating
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Self- regulating & also by SEBI
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Frequency of delivery
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Settled by physical delivery
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Absence of any physical delivery ; Cash settled in nature
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Price fluctuations
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No daily limit
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Daily limit specified by exchange
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Price transparency
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Limited transparency
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Complete transparency with access to live trading platform
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5. What are the advantages of Currency Futures?
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- Most liquid market
- No underlying exposure required
- Absolutely zero counterparty risk
- Complete price transparency
- Very small orders (1 Lot = 1000USD)
- Standardized Contact size and settlement cycles
- Narrow spread minimizing risk
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6. Who are the players in Currency Futures market?
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- Banks
- Corporates
- Retail investors
- Securities firms
- Hedge funds
- Institutional investors
- Retail investors
- HNI’s
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7. Am I eligible to trade in the Currency futures?
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Yes, anyone can participate in this market (except NRI’s) with or without any underlying
exposure.
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8. How to start Currency futures trading with Karvy?
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- New Client
The new clients have to fill the Client registration
form and submit the following details to start trading:
- Copy of PAN Card
- Copy of address Proof
- Copy of bank statement
- ECN confirmation mail
- A passport size photograph
- Existing Client
If you are an existing client of Karvy you can complete
the documentation under CDS for a currencies account and start trading.
- Corporate Client
For exporters and importers the booking of futures
contract requires the following documents (in specific formats) along with completely
filled the registration form:
- MOA and AOA
- PAN Card of Company
- Bank Statement of Company
- Last 2 years Audited Financials
- Address Proof of Company
- Board Resolution of Company
- List of directors and shareholders
- ID Proof and address proofs of all Authorized Signatories
- Signature and photograph attestation letter by banker
- ECN Confirmation mail
- 1 photograph of authorized signatory
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9. What are the contract specifications for Currency Futures?
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Presently, USD/INR, EUR/INR, GBP/INR and JYP/INR pairs are available for trading.
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10. What are the factors affecting Currency Futures market?
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The fundamental factors affecting the exchange rate
fluctuations (in India) are:
- Economic indicators like inflation, interest rates, GDP, trade balances etc.
- Foreign Currency reserve with RBI
- Socio-political conditions
- Investment flows
- Movements in equity market
- Dollar index
- Prices of commodities like Gold, Crude oil etc.
- Global currency movements
- RBI reference rate
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11. What are the risks involved in speculating in Currency Futures?
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The risk involved refers to the fluctuation of the currency exchange rates. There
are no strict methods to correctly predict the movements in the rates. In depth
study of fundamental & technical aspects can only provide a direction and an effective
range of the movement.
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