Chapter 6: Trading Mechanism in Exchange Traded Currency Derivatives
NISM Series I — Currency Derivatives | ~11% weightage | ~73 questions
What this chapter is about
Same structure as Series VIII CH6 but with currency-specific details. Order types, operating ranges, position limits, pro account rules, and FIFO — all tested here. The unique currency additions: operating ranges are ±3%/±5% (not circuit filters), expiry is at 12:30 PM (not 3:30 PM), and market timings are 9 AM to 5 PM. Know the differences from equity and you'll score full marks.
Order types
Limit order: Execute at specified price or BETTER. Buy limit = specified price or LOWER. Sell limit = specified price or HIGHER. May not execute if market doesn't reach the price.
Market order: Execute immediately at best available price. Trading system determines the price — not the trader.
Stop Loss Buy: Protects a short position. Trigger price < Limit price. When market rises to trigger, releases a limit buy order at or below limit price.
Stop Loss Sell: Protects a long position. Trigger price > Limit price. When market falls to trigger, releases a limit sell order.
IOC (Immediate or Cancel): Execute available quantity immediately, cancel the rest. Partial fills allowed. Nothing stays in the order book.
Day order: Valid for the trading day only. Auto-cancelled at end of day.
GTC (Good Till Cancelled): Stays active until cancelled (up to 365 days).
Active vs Passive orders: All orders enter as ACTIVE. If matched immediately → executed. If unmatched → becomes PASSIVE (sits in order book by price and time priority).
Operating ranges (price limits)
To prevent erroneous order entry:
- Contracts up to 6 months: ±3% of base price
- Contracts above 6 months: ±5% of base price
Example: Base price GBPINR = Rs 100, contract = 1 month (≤6M) Operating range = 100 ± 3% = 97 to 103
For options: operating range based on DELTA (not fixed %).
Trading hours and expiry
Market timing: 9:00 AM to 5:00 PM (currency options excluding cross-currency) Cross-currency pairs (EURUSD, GBPUSD, USDJPY): can trade up to 7:30 PM
Expiry day: Trading ceases at 12:30 PM (not 5:00 PM as on normal days)
Expiry date: Two working days PRIOR to last business day of expiry month
Example: Last business day of April 2025 = 30th (Friday). Two working days before: 30th = Friday (last business day) 29th = Thursday (1 working day prior) 28th = Wednesday (2 working days prior) → expiry = 28th April
If Monday 29th is a holiday: 30th = Friday, 29th = holiday, 28th = Sunday, 27th = Saturday, 26th = Friday → expiry = 25th Thursday
Maximum maturity: 12 months for all INR pairs (USDINR, EURINR, GBPINR, JPYINR)
Position monitoring
Positions monitored during day based on: Total open interest at END OF PREVIOUS DAY — not real-time, not the current day.
Pro account (proprietary trading): TM can place pro-account orders from ONE approved location. For multiple locations: must request exchange permission case-by-case. Exchange (not SEBI, not Clearing Corporation) approves.
Algorithmic trading: Any order generated using automated execution logic. Requires exchange approval. Day order can be placed via algo.
Contract notes and brokerage
Contract notes: Broker must issue WITHOUT DELAY to clients in the FORMAT SPECIFIED BY THE EXCHANGE.
Maximum brokerage:
- Futures: 2.5% of contract value
- Options: 2.5% of premium OR Rs 100 per lot, whichever is HIGHER
Base minimum capital:
- Only proprietary trading, no algo: Rs 10 lakhs
- Client trading only, no algo: Rs 15 lakhs
- Proprietary + client, no algo: Rs 25 lakhs
- Any broker with algo: Rs 50 lakhs
FIFO for P&L
When multiple contracts of the same series are outstanding and some are squared off, P&L is calculated using FIRST IN FIRST OUT. The price of the EARLIEST contract purchased is used first.
Real market example
A trader sells USDINR futures at 86.50/86.70. The current market price is 86.80. They enter a limit sell order at 86.50. Since the best available buy order is at 86.60 (higher than their limit), the order will execute at 86.60 — at or above their limit price.
A stop-loss order: Trader is long USDINR at 84. Places stop loss sell order with trigger = 83.50, limit = 83.25. When USDINR falls to 83.50, the stop triggers and a limit sell order at 83.25 is released. Trigger > Limit for stop loss sell.
Trap Alert
Trap 1: "Currency futures trading hours are 9 AM to 7:30 PM" — PARTIAL INR pairs (USDINR, EURINR, GBPINR, JPYINR) trade 9 AM to 5 PM. Cross-currency pairs (EURUSD, GBPUSD, USDJPY) trade 9 AM to 7:30 PM.
Trap 2: "Operating range = circuit filter" — Different terminology For equities it's called circuit filter/price band. For currency futures it's called "operating range." Same concept, different name.
Trap 3: "Day order carried forward to next day if unexecuted" — FALSE Day order is cancelled at end of day automatically. Only GTC stays active till cancelled.
Trap 4: "Pro account orders can be from multiple terminals freely" — FALSE One approved location by default. Need exchange permission for multiple locations.
Trap 5: "Stop loss buy: trigger > limit" — FALSE for buy Stop loss BUY: trigger < limit (trigger price is lower, you want to buy once it gets there). Stop loss SELL: trigger > limit.
Trap 6: "Position limits monitored on real-time open interest" — FALSE Monitoring uses previous day's end-of-day open interest.
Must-remember rules
- Limit order: buy at or below / sell at or above specified price
- Market order: system determines price
- Stop loss BUY: trigger < limit | Stop loss SELL: trigger > limit
- IOC: execute now or cancel (partial fills OK)
- Day order: cancelled EOD | GTC: valid up to 365 days
- Operating range: ±3% (≤6 months) | ±5% (>6 months) | Options: Delta-based
- Market timing: 9 AM–5 PM (INR pairs) | 9 AM–7:30 PM (cross currency)
- Expiry: 12:30 PM, 2 working days before last business day of month
- Max maturity: 12 months
- Brokerage: max 2.5% contract value (futures) | 2.5% premium or Rs100/lot (options)
- Pro account: one location default; exchange permission for multiple
- Position monitoring: based on PREVIOUS day's end-of-day open interest
- FIFO: first contracts bought = first squared off
Weightage note
~11% = ~73 questions. Heavy on order types, operating ranges, expiry mechanics, and pro account rules. 2-3 expiry date calculation numericals per exam. 3-4 questions on stop loss order trigger vs limit logic. Know trading hours and expiry time precisely.
Quick revision — 60 second scan
- Limit: at your price or better | Market: system decides
- Stop buy: trigger < limit | Stop sell: trigger > limit
- IOC: immediate execute or cancel | Day: EOD cancel | GTC: 365 days
- Operating: ±3% ≤6M | ±5% >6M | Options: Delta-based
- INR pairs: 9AM–5PM | Cross currency: 9AM–7:30PM
- Expiry: 12:30 PM, 2 working days before last business day
- Max maturity: 12 months
- Pro account: 1 location; need exchange permission for more
- Position monitor: previous day EOD OI