International

International Academic Institute Academic Journal of

for Science and Technology Accounting
International Academic Journal of Accounting and Financial and
Management Financial Management
Vol. 3, No. 7, 2016, pp. 59-69.

ISSN 2454-2350 www.iaiest.com

Study on Currency Derivatives and Their Impact on Value of

Currency

Aabha S Singhvia, Rutu A Pandyab

a
Research scholar at PAHER, Udaipur And Assistant .Professor, GIDC Rajju Shroff ROFEL Institute of Management Studies, Vapi
b
Master of Business Admnistration, Gujarat Technological university, Vapi

Abstract

Graph of Currency trading has increased dramatically in last few years in India, so the need for more
effective ways for better analysis of movements in currency has been arise. Currency is highly uncertain
and unpredictable instrument. There are number of factors affecting movement of currency future. People
have started using Currency futures as an investment option and they can trade various currencies as per
the current economic condition of the country. Before investment it is important to identify effect of
various factors on index value of currency. The purpose of this paper is to indicate the impact currency
future, to check rules of the currency and useful predictionmodels for currency futures closing prices.

Keywords: Nifty, Contract, Futures, Forwards.

Introduction of Currency Derivatives:

Executive Summary
The currency derivatives market is the largest asset market in the world, even larger than equity and the
commodity markets. However the Indian scenario is quite different .currency derivatives market happens
to be smaller than the other two in India. The daily trading volumes in this market are but a trifle when
compared to that of equity market.
In this research paper we aim at finding the reasons as to why this market has not been able to pick up
momentum in India. We find people’s perspective, thoughts and the reason they invest in different asset
markets. We try to explore what restrains them from investing in these markets, specifically the currency

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derivatives market. We also mean to suggest steps that can be taken to boost its growth in India. So we
ask respondents to rate these steps to know how effective each one will be.

Currency futures were first created at the Chicago mercantile exchange (CME) in 1972. Today, CME
offers 41 individuals FX futures and 31 options contracts on 19 currencies, all of which trade
electronically on the exchange’s CME Global exchange platform. It is the largest regulated marketplace
for FX trading.
The various currency derivatives are:
Hedging: Hedgers are those who want to reduce price risk using futures contracts. Producers of
commodities and the users of these commodities use commodity futures contracts so that the price risk of
the commodities can be eliminated.
Speculation: if a trader has a view on the direction of the market, that is he expects the value of rupee to
appreciate or depreciate, he can sell or buy a USD/INR contract and earn a profit if the market moves in
the direction that he expects it to move.
Arbitrage: It means making a riskless profit by entering into transaction in two or more markets
simultaneously. The purpose of an arbitrage is to even out the price of assets in the markets in which they
are traded.
Currency future
 Currency Futures:
Currency futures also called forex futures or foreign exchange futures are exchange-traded futures
contracts to buy or sell a specified amount of a particular currency at a set price and date in the future.
Similar to other futures products, they are traded in terms of contract months with standard maturity dates
typically falling on the third Wednesday of March, June, September and December.
 Currency future trading:
The forex spot market is the largest market in the world. Currency futures trade at a fraction of the
volume, with many currency futures contracts trading under high volume and good liquidity. Currency
futures are exchange-traded and are regulated like other futures markets.

Typically one of the currencies is the US dollar. The price of a future is then in terms of US dollars per
unit of other currency. This can be different from the standard way of quoting in the spot foreign
exchange markets. The trade unit of each contract is then a certain amount of other currency, for instance
€125,000.

Indian currency derivative market

How Currencies Traded:
In most markets US dollar is the vehicle currency Viz. the currency used to denominate international
transactions. This is despite the fact that with currencies like Euro, US dollar and Yen gaining larger
share, the share of US dollar in the total turnover is shrinking.
 Physical Market:
At these physical markets;
The banks meet and in the presence of the representative of the central bank and on the basis of bargains,
fix rates for a number of major currencies. This practice is called fixing. The rates thus fixed are used to

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execute customer orders previously placed with the banks. An advantage claimed for this procedure is
that exchange rate for commercial transactions will be market determined not influenced by the any one
bank. However, it is observed that the large banks attending such meetings with large commercial orders
backing up tend to influence the rates.

Research Background
Adrangi and Chatrath (1998) studied the impact of currency futures commitments and found that the
overall growth in currency futures commitments has not caused exchange rates to be more volatile They
concluded that margin requirements that penalize speculators and small traders may serve to promote
stability in the market.The overall growth in currency futures commitments has not caused exchange rates
to be a more volatile. They check the data is stationary or non-stationary.

Brooks, Rew and Ritson (2001) investigated the lead-lag relation for FTSE 100 index for 1996-1997 by
incorporating error correction model, error correction model with cost of carry, ARIMA and VAR. They
compared the forecasting ability of models, and different trading strategies under error correction model
with cost of carry models. They found the leading power of futures market and underline the higher
predictive ability of error correction model.

Chris (2001) based on the results obtained; they develop a trading strategy based on the predictive
abilities of the futures market. The study is conducted using Co-integration and Error Correction model,
ARMA model and vector auto-regressive model. The results indicate that futures lead the spot market
attributable to faster flow of information into futures market mainly due to lower transaction costs.

Kavussanos and Nomikos (2003) investigated the causal relationship between futures and spot prices in
the freight futures market. They found that price discovery first takes position in the futures market and
then it is transmitted to underlying cash market. Their findings indicate that futures prices tend to discover
new information more rapidly than spot prices. They also reported that the information incorporated in
futures prices, when formulated as a vecm, produces more accurate forecasts of spot prices than the var,
ARIMA and random-walk models.

Pradhan and Bhat (2009) investigated the causal relationship between spot and futures prices in Nifty
futures markets, using Vector Error Correction Model (VECM). Their study is compared the forecasting
ability of futures prices on spot prices with three major forecasting techniques namely ARIMA, VAR and
VECM model. The findings indicated the importance of taking into account the long-run relationship
between the futures and the spot prices in forecasting future spot prices.

Problem statement:Lot of fluctuation takes place in foreign exchange so an attempt has been made to
understand the use of currency futures and to reduce risk.

Objective of the study:To study the Currency futures trading in Indian market.
To study the impact of currency futures on the Indian stock market.
Hypothesis of Arima Model:
H0- There is no significant impact of past currency future and value of currency Indian market in present.
H1- There is significant impact of past currency future and value of currency Indian market in present.

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Research methodology
Research design:Descriptive Analytical Research.
Source of Data: The data is collected mainly from websites as corporate announcement data is not
published directly in business dailies, to find out effective announcement date of the event, data available
on nseindia.com and investing.com.
Data collection and Data sample:The analysis will be done with the help of secondary data. And To
achieve the above stated objectives, from 2011 to 2015 were taken from sample frame of current
constitute of currency future.
Tools and techniques: Appropriate statistical tool like ARIMA will be used.

Data Analysis and Interpretation

In our study we have considered the Closing Price, Nifty 50 and Contract closing price as base index. The
time frame which I have selected is 5 years, i.e.2011 to 2015 for which the information regarding the
currency’s data are collected.
Arima Model:
H0 - There is no significant impact of past currency future and value of currency Indian market in
present.
H1 - There is significant impact of past currency future and value of currency Indian market in present.

 USDINR:
 Currency_cp& nifty_50_cp:
Model Description: Table 1

Model Type
Model ID V2 Model_1 ARIMA(1,0,1)

Model Statistics Table 2

Model Fit
statistics Ljung-Box Q(18)

Number of Stationary Statistic Number of

Model Predictors R-squared s DF Sig. Outliers
V2-
1 .990 39.364 16 .001 0
Model_1

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Graph 1: Source: SPSS 23

Interpretation:The relationship between currency_cp and Nifty_50_cp that gives the coefficient
of correlation at 0.990 which is a high degree of correlation. The significant value is 0.001 which
is not more than the critical value of 0.05 which shows that currency_cp have a significant
impact on Nifty_50_cp.
 Contract_cp& nifty_50_cp:
Model Description: Table 3

Model Type
Model ID V4 Model_1 ARIMA(1,0,1)

Model Statistics: Table 4

Model Fit
statistics Ljung-Box Q(18)
Number of Stationary Statistic Number of
Model Predictors R-squared s DF Sig. Outliers
V4-
1 .990 35.807 16 .003 0
Model_1

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Graph 2 Source: SPSS 23

Interpretation: The relationship between contract_cp and Nifty_50_cp that gives the coefficient
of correlation at 0.990 which is a high degree of correlation. The significant value is 0.003 which
is not more than the critical value of 0.05 which shows that contract_cp have a significant impact
on Nifty_50_cp.

 EUROINR:

 Currency_cp& nifty_50_cp:
Model Description: Table 5

Model Type
Model ID V2 Model_1 ARIMA(1,0,1)

Model Statistics: Table 6

Model Fit
statistics Ljung-Box Q(18)
Number of Stationary Statistic Number of
Model Predictors R-squared s DF Sig. Outliers
V2-
1 .983 68.953 16 .000 0
Model_1

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Graph 3 Source: SPSS 23

currency_cp and Nifty_50_cp that gives the
Interpretation: The relationship between
coefficient of correlation at 0.983 which is a high degree of correlation. The
significant value is 0.00 which is not more than the critical value of 0.05 which
shows that currency_cp have a significant impact on Nifty_50_cp.

 Contract_cp&nifty_50_cp:

Model Description: Table 7

Model Type
Model ID V2 Model_1 ARIMA(1,0,1)

Model Statistics: Table 8

Model Fit
statistics Ljung-Box Q(18)
Number of Stationary Statistic Number of
Model Predictors R-squared s DF Sig. Outliers
V2-
1 .983 68.953 16 .000 0
Model_1

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Graph 4 Source: SPSS 23

Interpretation:The relationship between contract_cp and Nifty_50_cp that gives the coefficient of
correlation at 0.983 which is a high degree of correlation. The significant value is 0.00 which is
not more than the critical value of 0.05 which shows that contract_cp have a significant impact
on Nifty_50_cp.

 GBPINR:
 Currency_cp& Nifty_50_cp

Model Description: Table 9

Model Type
Model ID V2 Model_1 ARIMA(1,0,1)

Model Statistics: Table10

Model Fit
statistics Ljung-Box Q(18)
Number of Stationary Statistic Number of
Model Predictors R-squared s DF Sig. Outliers
V2-
1 .988 47.781 16 .000 0
Model_1

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Graph 5 Source: SPSS 23

Interpretation:The relationship between currency_cp and Nifty_50_cp that gives the coefficient
of correlation at 0.988 which is a high degree of correlation. The significant value is 0.00 which
is not more than the critical value of 0.05 which shows that currency_cp have a significant
impact on Nifty_50_cp.

 Contract_cp& nifty_50_cp:

Model Description: Table 11

Model Type
Model ID V4 Model_1 ARIMA(1,0,1)

Model Statistics: Table 12

Model Fit
statistics Ljung-Box Q(18)
Number of Stationary Statistic Number of
Model Predictors R-squared s DF Sig. Outliers
V4-
1 .989 35.267 16 .004 0
Model_1

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Vol. 3, No. 7, pp. 59-69.

Graph 6 Source: SPSS 23

Interpretation:The relationship between contract_cp and Nifty_50_cp that gives the coefficient of
correlation at 0.989 which is a high degree of correlation. The significant value is 0.004 which is
not more than the critical value of 0.05 which shows that contract_cp have a significant impact
on Nifty_50_cp.

Findings:
As per result of ARIMA:
There is impact on USDINR of currency_cp& Nifty_50_cp and contract_cp& Nifty_50_cp.
There is impact on EUROINR of currency_cp& Nifty_50_cp and contract_cp& Nifty_50_cp.
There is impact on GBPINR of currency_cp& Nifty_50_cp &contract_cp& Nifty_50_cp.
The impact of currency depends on the Indian stock market which can be seen in the research using
various statistical tools.

Suggestion:
The investor make an investment in Currency futures they take all information related to the currency and
make sure that they follow all rules and obligation of it.

Conclusion
Indian markets are predictable because of its liveliness and it attains a leading position in the global
financial system. In the current scenario of the financial condition, the inconsistencies in the
currencies, the rate of interest, the stocks and bonds is something very new.
The study on impact of currency derivative trading is important because increased spot market
instability resulting from futures trading may suggest a need for regulations.

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The results of this study are crucial to investors, stock exchange officials and regulators. An
important role played by the currency derivatives in the discovery of price and completing the
market. In risk management, its role for institutional investors and mutual fund managers hardly
need any attention.

References:
Adrangi B., Chatrath A., (1998), Futures commitments and exchange rate volatility, Journal of Business
Finance and Accounting, Vol. 25(3) & (4): pp. 501-520.
Brooks, C.; Rew, A.G; and Ritson, S. (2001), “A Trading strategy Based on lead-Lag Relationship
between the spot Index and futures contract for the FTSE 100”, International Journal of
Forecasting, Vol. 17, pp. 31-44
Chris, B., Alistar, G.W., and Stuart, T. (2001), “A trading strategy based on the leadlag relationship
between the spot index and futures contract for the FTSE 100”, International Journal of
Forecasting, Vol. 17, pp. 31- 44.
Kavussano, M.G. and Nomikos, N.K. (2003). “Price discovery, causality and forecasting in the freight
futures market”. Review of Derivative Research, Vol. 6, pp. 203-230.
Pradhan, H.C. and Bhat, K.S. (2009). “An empirical analysis of price discovery, causality and forecasting
in the nifty futures markets”, International Research Journal of Finance and Economics, Vol. 26,
pp. 83-92.

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