NATIONAL INSTITUTE OF SECURITIES MARKETS

Established by the Securities and Exchange Board of India

NISM-Series-I: Currency Derivatives Certification Examination (NISM-Series-I:

CD Examination)

Test Objectives

Unit 1: Introduction to Currency Markets

1.1 Commonly used terms in currency markets

Define:
Spot
Forward Outright
Base Currency
Terms Currency
Swaps
1.2 Exchange Rate Mechanism
Define Foreign Exchange
Explain the rationale behind Foreign Exchanges
Explain the price discovery mechanism in Foreign Exchange markets
Explain the motives of the various participants in the Foreign Exchange market
Describe in brief the exchange rate mechanism
1.3 Major currencies of the world and their characteristics.
Describe the following currencies:
Indian Rupee
US Dollar
Euro
Japanese Yen
British Pound
Swiss Franc
1.4 Overview of the international currencies markets
Describe
The infrastructure of the international currency markets
The operations of the international currency markets
How the difference in timing for various markets impacts the exchange rate
1.5 Economic variables impacting exchange rate movements
List and understand the impact of economic variables on the movement of exchange.
Describe how the government policies can strengthen the home currency

Unit 2: Foreign Exchange Derivatives

2.1 Derivatives – Definition

Describe the evolution of derivatives
Define a derivative as per SC(R)A and RBI Act
2.2 Derivative Products
Briefly describe the various derivative products
Forwards
Futures
Options
Swaps
Warrants
Swaptions
LEAPS
Baskets

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 NATIONAL INSTITUTE OF SECURITIES MARKETS
Established by the Securities and Exchange Board of India

2.3 Growth Drivers of Derivatives

Describe the factors that have driven the growth in derivatives market
2.4 Market Players
List the various players in the Foreign Exchange market
Describe how the Foreign Exchange market presents different opportunities for all the
Players
2.5 Key Economic Functions of Derivatives
Describe how
Derivatives help in price discovery
Derivatives market helps in transfer of risk
Derivatives market is linked to underlying cash market
Speculative trade impacts the Forex market
Understand advantages and disadvantages of speculative trading in Foreign Exchange
market
2.6 Exchange-Traded Vs. Over-the-Counter Derivatives
Understand
Differences between Exchange Traded and OTC Derivatives
Features of OTC Derivatives that may give rise to instability in the financial system

Unit 3: Exchange Traded Currency Futures

3.1 Currency Futures - Definition

Define:
Futures Contract
Currency Futures Contract
Tick size
3.2 Futures Terminology
Define:
Spot price
Futures price
Contract cycle
Value Date/Final Settlement Date
Expiry date
Contract size
Basis
Cost of carry
Initial margin
Marking-to-market
3.3 Rationale behind Currency Futures
Define the Standardized items in a futures contract
Understand the rationale behind introducing currency futures in the Indian context
3.4 Distinction between Futures and Forward Contracts
Understand
Advantages of Futures Contracts
Limitations of Futures Contracts
3.5 Interest Rate Parity and Pricing of Currency Futures
Understand the relationship between spot price, future price and term to maturity
Calculate one given the rest:
Future price
Spot price
Term to maturity
Calculate Forward or Spot rates given either one of them; rates of interest and basis

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 NATIONAL INSTITUTE OF SECURITIES MARKETS
Established by the Securities and Exchange Board of India

Unit 4: Strategies Using Currency Futures

4.1 Speculation in Futures Markets

Understand the role of speculation in currency futures markets
4.2 Long Position in Futures
Understand speculative transactions and payoffs using long position in futures
4.3 Short Position in Futures
Understand speculative transactions and payoffs using short position in futures
4.4 Hedging Using Currency Futures
Understand
Concept of hedging
Types of hedgers
Proper size of the hedging position
Possible hedging strategies that can be used by Corporate Bodies and Retail
Customers and their impact in various possible market situations
4.5 Trading Spreads Using Currency Futures
Understand the concept of spread and the factors that influence its movement
4.6 Arbitrage
Understand
Concept of arbitrage
Use of arbitrage in currency futures markets
Calculate arbitrage opportunities under various conditions

Unit 5 Trading

5.1 Currency Futures Contract Specification

Define the contract specifications for currency futures market segment
5.2 Trading Parameters
Define and understand the trading parameters
Base Price
Closing Price
5.3 Tenors of Futures Contract
Define and understand the tenor of a futures contract:
Expiry Date
Settlement Price
5.4 Trader Workstation Screen (TWS)
Understand basic features of a TWS (Exchange specific TWS details may be obtained from
Exchanges)
5.5 Entities in the Trading System
Define and understand the role of various entities in the trading system for currency futures:
Trading Members
Clearing Members
Trading-cum-Clearing Members
Professional Clearing Members
Participants
5.6 Types of Orders
Define and understand the types of orders that can be entered in the trading system
Understand the conditions that can be attached to orders that are entered including time /
price and other conditions
Understand applicability of price limit circuit filters

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 NATIONAL INSTITUTE OF SECURITIES MARKETS
Established by the Securities and Exchange Board of India

5.7 Mark-to-Market
Understand
Concept of mark- to- market
Applicability of the concept in trading in currency futures
5.8 Position Limits
Define maximum allowable open position limits for members trading in currency futures
Understand the rules related to monitoring and enforcement of position limits in the currency
futures market
Understand the objectives and broad functioning of the surveillance systems and procedures
of exchanges

Unit 6 Clearing, Settlement and Risk Management

6.1 Clearing Entities

Define and understand the role of various entities involved in clearing system for currency
futures
6.2 Clearing Mechanism
Understand the clearing mechanism
Calculate the open positions and obligations of clearing members under various situations
6.3 Settlement Mechanism
Understand the concept of MTM settlement
Calculate end of day MTM under various situations
Understand the final settlement for currency futures contract
6.4 Risk Management Measures
Understand the salient features of the exchange risk management measures
6.5 Margin Requirements
Understand the concept and applicability of
Initial margin
Portfolio based margin
Calendar spread margin
Extreme loss margin
Liquid net worth
Liquid assets
Real time computation
MTM settlement
Understand
Margin collection processes by Clearing Corporations
Enforcement mechanisms employed by Clearing Corporations

Unit 7 Regulatory Framework for Currency Derivatives

7.1 Securities Contracts (Regulation) Act, 1956 [SC(R)A]

Know basic features of SC(R)A
Define
Securities
Derivative
Know the provisions of Section 18 A
7.2 Securities and Exchange Board of India Act, 1992
Know
Basic features of the SEBI Act, 1992
Powers of SEBI

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 NATIONAL INSTITUTE OF SECURITIES MARKETS
Established by the Securities and Exchange Board of India

7.3 RBI-SEBI Standing Technical Committee on Exchange Traded Currency and Interest Rate
Derivatives
Know
` Objectives of the Committee
Major recommendations of the Committee
7.4 Foreign Exchange Management Act, 1999 – Provisions
Know
Basic features
Amendments that impacted introduction of currency futures trading
Salient features of RBI notification ‘Currency Futures (Reserve Bank) Directions,
2008 ‘
Salient features of RBI Circular, ‘Guidelines on trading of Currency Futures in
Recognised Stock / New Exchanges’ etc.
7.5 Regulatory Framework for Exchanges
Know salient features of SEBI Regulations for Currency Futures Exchanges
7.6 Regulatory Framework for Clearing Corporations
Know salient features of SEBI Regulations for Clearing Corporations
7.7 Governing Council of the Exchange and Clearing Corporation
Know
Requirement for separate Governing councils for Currency Futures exchanges/
segments
Representation of Trading/ Clearing members on Governing Council
7.8 Eligibility Criteria for Members
Know
Entities eligible for membership of currency futures exchanges
Eligibility criteria for each of these types of entities

Unit 8 Accounting And Taxation

8.1 Accounting
Understand Accounting treatment for derivative contracts at:
Inception of contract
Daily Settlement
Final Settlement
In case of Default
8.2 Taxation Of Derivative Transaction In Securities
Understand tax treatment of profit/ loss on derivative transaction in securities

Unit 9 Codes of Conduct and Investor Protection Measures 60

9.1 Adherence to SEBI Codes of Conduct for Brokers/ Sub-Brokers

Understand basic features of SEBI Code of Conduct for Brokers
Understand basic features of SEBI Code of Conduct for Sub-brokers
9.2 Adherence to Codes of Conduct Specific to ETCF Segment
Understand basic features of Codes of Conduct for Trading Members
9.3 Grievance Redressal Mechanism for Investors
Understand
Investor Grievance Redressal Process
Nature of complaints considered by exchanges
Arbitration Mechanism at exchanges

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