Currency Chapter Notes

Chapter 3: Exchange Traded Currency Futures

NISM Series I — Currency Derivatives | ~16% weightage | ~101 questions

What this chapter is about

This is the most tested chapter in the entire exam at 16%. Master this one chapter and you've secured more marks than any other. Currency futures work on the same logic as equity futures but with one crucial difference — pricing is driven by Interest Rate Parity (IRP) instead of cost of carry. The exam hammers IRP calculations, MTM calculations, open position tracking, and FIFO P&L relentlessly. Every exam set has 6-8 numericals from this chapter alone.

Contract specifications — must know cold

Note: JPYINR lot size is 1,00,000 JPY but P&L is calculated per 100 JPY (quoted as INR per 100 JPY). So for P&L: multiply lots × 1,000 (not 1,00,000).

Expiry: Two working days PRIOR to the last business day of the expiry month, at 12:30 PM. If that day is a holiday, move to the previous trading day.

Maximum maturity: 12 months (12 contract series always available)

Settlement: Always cash-settled in INR at the FBIL/RBI reference rate

Final settlement price: FBIL reference rate published at ~1:30 PM on expiry day

Operating ranges: ±3% of base price for contracts up to 6 months; ±5% for contracts above 6 months

Base price on Day 1: Theoretical futures price (derived from IRP formula)

Base price on subsequent days: Previous day's daily settlement price

Closing price: Weighted average price of last 30 minutes of trading

Interest Rate Parity — the pricing engine

This is the most important formula in the entire exam. Currency futures price = spot rate adjusted for interest rate differential between the two countries.

Formula:

Futures Price = Spot Price × (1 + r_quotation) / (1 + r_base)

For USDINR: Quotation currency = INR, Base currency = USD

USDINR Futures = USDINR Spot × (1 + r_INR) / (1 + r_USD)

Why? If India rates are higher than US rates, holding INR is more attractive. To prevent arbitrage, the rupee must trade at a forward DISCOUNT to USD (USDINR futures must be higher than spot). This is Interest Rate Parity in action.

Example — 1 year forward: Spot USDINR = 83, India rate = 7%, US rate = 2%

Futures = 83 × (1.07 / 1.02) = 83 × 1.049 = 87.07

Example — 6 month forward: Spot USDINR = 64, India rate = 10%, US rate = 2% One-year cost = 64 × (1.10/1.02) = 69.02 Interest cost for year = 69.02 − 64 = 5.02 Six-month cost = 5.02 / 2 = 2.51 Six-month futures = 64 + 2.51 = 66.51

Reverse IRP — find spot from futures:

Spot = Futures / (1 + r_INR/12) × (1 + r_USD/12)

Key rule: Higher interest rate country's currency trades at a DISCOUNT in futures market (its futures price is higher than its spot when measured as INR per USD).

P&L calculations — 8 numericals every exam

Long futures (bought):

Profit/Loss = (Exit Price − Entry Price) × Lot Size × Number of Lots

Short futures (sold):

Profit/Loss = (Entry Price − Exit Price) × Lot Size × Number of Lots

With bid-ask spread:

• When buying: you buy at ASK price (higher)
• When selling: you sell at BID price (lower)
• Always buy high, sell low from your perspective as price-taker

Example: Sell 10 lots USDINR at 74.50/74.70, square off 5 lots at 73.55/73.75

Sell at BID = 74.50 Buy back at ASK = 73.75 Profit per USD = 74.50 − 73.75 = 0.75 Total profit = 0.75 × 5 lots × 1,000 = Rs 3,750

MTM — Mark to Market calculations

Daily settlement of P&L. Three scenarios:

1. Squared off positions (same day): P&L = (Buy price − Sell price) × lots × lot size

2. Open positions not squared off: P&L = (Settlement price − Trade price) × lots × lot size

3. Brought forward positions (carry forward): P&L = (Today's settlement − Yesterday's settlement) × lots × lot size

Example — Day 2 MTM on carry forward: TM bought 100 lots, sold 60 lots on Day 1. Net long 40 lots. Day 1 settlement = 66.30, Day 2 settlement = 66.80 MTM = (66.80 − 66.30) × 40 × 1,000 = Rs 20,000 profit

Open position calculation

Trading Member open position = Proprietary position + ALL client positions

Not netted across clients. Each client's buy-sell is netted separately, then ADDED together.

Example: TM proprietary: bought 20, sold 5 → net long 15 lots = 15,000 USD Client A: bought 12, sold 2 → net long 10 lots = 10,000 USD Client B: bought 12, sold 2 → net long 10 lots = 10,000 USD

TM total open position = 15,000 + 10,000 + 10,000 = 35,000 USD

Client A and Client B positions are reported separately: 10,000 USD each.

FIFO method for P&L

When multiple contracts are outstanding and some are squared off, the FIRST contracts bought are treated as FIRST squared off.

Example: Buy 20 lots at 74.70 at 10:30 AM (Day 1) Buy 10 lots at 74.50 at 2:00 PM (Day 1) Buy 20 lots at 74.30 at 11:30 AM (Day 2) Sell 20 lots at 74.70 on Day 3

FIFO = first 20 lots bought were at 74.70. Sale at 74.70. P&L = (74.70 − 74.70) × 20 × 1,000 = Rs 0 (zero profit/loss)

Tick calculations

USDINR tick = Rs 0.0025 per USD 100 ticks = 100 × 0.0025 = Rs 0.25 per USD For 10 lots: 0.25 × 10 × 1,000 = Rs 2,500

For JPYINR (per 100 JPY): 400 ticks × 0.0025 = Rs 1.00 per 100 JPY For 1 lot (1,00,000 JPY = 1,000 units of 100 JPY): 1.00 × 1,000 = Rs 1,000

Calendar spread

Simultaneous long in one expiry and short in another expiry of the SAME underlying.

• Also called horizontal spread or time spread or intra-currency pair spread
• Lower margin than two outright positions (only basis risk, no market risk)
• ELM charged on 1/3 of far month MTM value

Calendar spread P&L: Current: 3M at 60.20, 6M at 61.10 (spread = 0.90) Expected: 3M at 59.90, 6M at 60.50 (spread = 0.60)

Spread narrows from 0.90 to 0.60 — profit for "sell near, buy far" spread Profit = (0.90 − 0.60) × 1,000 = Rs 300 per lot

Real market example — IRP in action

RBI keeps repo rate at 6.5%. US Fed funds rate at 2%. Spot USDINR = 83.

One-year USDINR futures should trade at: 83 × (1.065 / 1.02) = 83 × 1.0441 = 86.66

If you see one-month futures at 83.70 (premium of 0.70), that's approximately: Annual rate premium = 0.70 / 83 × 12 = ~10.1% — close to India's rate premium over US.

Trap Alert

Trap 1: "Calendar spread is same underlying, same expiry, different strikes" — FALSE That's a vertical spread (options). Calendar spread = same underlying, DIFFERENT expiry months.

Trap 2: "JPYINR lot size P&L multiplier is 1,00,000" — WRONG Use 1,000 for P&L calculations (since price is quoted per 100 JPY, and lot = 1,00,000/100 = 1,000 units).

Trap 3: "Settlement price on expiry = closing price of futures" — FALSE Final settlement = FBIL/RBI reference rate, NOT the futures closing price. Daily MTM uses futures closing price, but final settlement uses the RBI reference rate.

Trap 4: "Operating range = circuit filter for equities" — NOT the same name For currency futures, it's called "operating range" (not price band or circuit filter). Same concept, different name.

Trap 5: "Currency with higher interest rate trades at premium in futures" — WRONG Higher interest rate country's currency trades at DISCOUNT in the forward/futures market. USDINR futures > USDINR spot because INR has higher rates → INR expected to depreciate.

Numericals formula sheet

IRP:     F = S × (1 + r_INR) / (1 + r_USD)
P&L:     (Exit − Entry) × Lot size × Lots [for long]
         (Entry − Exit) × Lot size × Lots [for short]
MTM:     (Today settlement − Yesterday settlement) × Lots × Lot size
Ticks:   N ticks × 0.0025 × Lot size × Lots
Cross:   N ticks × 0.0025 × 1000 (for USDINR/EURINR/GBPINR)
         N ticks × 0.0025 × 1000 (for JPYINR, not 1,00,000)
Spread:  N ticks × Rs 2.50 per lot (for any INR pair)
Contract value: Futures price × Lot size × Number of lots

Must-remember rules

• USDINR/EURINR/GBPINR lot = 1,000 units | JPYINR lot = 1,00,000 JPY (but use 1,000 for P&L)
• Tick = Rs 0.0025 | Tick value = Rs 2.50 per lot
• Expiry = 2 working days before last business day at 12:30 PM
• Max maturity = 12 months
• Settlement = cash in INR at FBIL/RBI reference rate
• Higher India rates → USDINR futures > spot (INR at discount)
• IRP: F = S × (1 + r_INR) / (1 + r_USD)
• TM open position = proprietary + all client positions (no client netting across clients)
• FIFO = first contracts bought, first squared off
• Closing price = weighted average last 30 minutes
• Calendar spread = same underlying, different expiry, lower margin

Weightage note

~16% = ~101 questions — the most tested chapter. Expect 6-8 pure numericals per exam. IRP appears in 2-3 questions, MTM in 2-3, FIFO in 1-2, open position in 1-2, tick calculations in 1-2. Every exam also has 4-5 conceptual questions on lot sizes, expiry, settlement, and operating ranges. This chapter alone can make or break your exam result.

Quick revision — 60 second scan

• Lot: USDINR/EURINR/GBPINR = 1,000 | JPYINR = 1,00,000 (P&L use 1,000)
• Tick = 0.0025 = Rs 2.50 per lot
• IRP: F = S × (1+r_INR)/(1+r_USD)
• Higher India rates → futures > spot (INR depreciates forward)
• Expiry = 2 working days before last business day, 12:30 PM
• Final settlement = FBIL/RBI reference rate (not futures price)
• FIFO: first bought = first squared off
• TM position = own + all clients combined
• Calendar spread = same underlying, different expiry
• Operating range = ±3% (≤6M), ±5% (>6M)