As we all know that traders in India have not been able to do forex trading in cross currency pairs legitimately due to RBI regulations. So far, all currency pairs are bench-marked against the Indian Rupee (INR). This has an inherent disadvantage if you want to trade international pairs. The US Dollar is on one side of 87% of global forex trading around the world. More than 50% of global forex volumes consist of the 3 big global currency pairs which will soon be launched in India.
Recently, NSE has announced that it will launch cross currency pairs. They will be launching 3 global currency pairs:
1. (EUR/USD) Euro-US Dollar
2. (GBP/USD) British Pound – US Dollar
3. (USD/JPY) US Dollar – Japanese Yen
Points to note about the new forex pairs:
• They will be listing both futures and options contracts.
• The contract size will continue to be 1000 for all the new forex contracts.
• The tick size will be as follows:
- EUR/USD = 0.0001
- GBP/USD = 0.0001
- USD/JPY = 0.01
So for example, if the last traded price (LTP) of EUR/USD is 1.0914, the next minimum price change can be: 1.0915 or 1.0913.
Contract Cycle:
Futures contracts will have 12 months contracts available in addition to monthly contracts. Whereas options contracts will have:
- 3 monthly expiry
- 3 quarterly expiry
The new contracts will be introduced after the expiry of near month contract.
This is an illustration so you can understand better.
Options Strike Price:
The Strike price intervals will differ for USD/JPY but the number of strikes will be the same for all these new forex pairs.
Market Time:
The market hours can actually be a disadvantage as these pairs are traded 24/7 around the world. It starts in the land of the rising sun and during their day hours is when USD/JPY is most active. The second major activity happens during the evening when the American markets open. EUR/USD and GBP/USD are mainly active during European and American hours. Overnight positions can pose a risk management threat during times of great volatility and strong trends.
• These forex contracts shall trade from 9:00 AM to 7:30 PM, Monday to Friday.
• They shall expire 2 days prior to last working day at 12:30 PM.
The existing forex contracts which are benchmarked with the INR (USDINR, GBPINR etc.) will close at 5:00 PM every day. The time extension for the new forex trading pairs are to accommodate for the actively traded hours of the day. However, in spite of this time extension till 7:30 PM, it will not include the American trading hours.
Settlement:
• These forex contracts will be quoted and traded in foreign currency.
• Settlement will be done in Indian Rupees (INR).
• Profit/Loss in foreign currency will be converted using applicable RBI rate for the day.
• RBI rate will be available after 12:30 PM
• Daily Settlement: t+1 day, Final Settlement: T+2 days.
Take a look at the table below for more clarity.
Example 1 - Futures MTM Settlement:
• On April 20 2016 a participant buys & sells 1 contract
• Daily MTM shall be converted to INR
- For EUR/USD & GBP/USD, using USD/INR RBI reference rate.
- For USD/JPY using JPY/INR RBI exchange rate.
Checkout examples of how futures trades will be settled in all 3 forex pairs.
Example 2 - Futures MTM Settlement:
• On April 20, 2016 a trader buys and sells 1 contract and holds till expiry.
• Daily MTM shall be computed in US dollar but settlement shall be in INR.
• Conversion to INR shall be using daily USD-INR RBI Reference rate of 12:30 PM.
#4.9 = (1.0950 – 1.0901) * 1 (No. of contracts) * 1000 (Contract size)
Since the profits are settled in INR, it will be important to track USD/INR pair especially during times when the currency trend is strong in one direction.
Example 3 – Options Premium Settlement:
• Let’s say you trade 2 call option contracts of different strikes in GBP/USD.
• Net premium shall be payable/receivable on T+1 day.
Example 4- Options Final Settlement:
• Let’s say you have 1 call option contract in USD/JPY, which is in the money (ITM).
• Conversion to INR shall be using JPY/INR RBI exchange rate of 12:30 PM.
#830 = (112.83 – 112.0) * 1 (No. of contracts) * 1000 (Contract size).
Daily Settlement Price:
• Open futures positions are marked-to-market (MTM) at daily settlement price.
• Daily Settlement Price = Last Half Hour Weighted Average Price.
• In the absence of the last half hour trading, the theoretical price shall be considered.
Final Settlement Price:
• EUR/USD, GBP/USD and USD/YEN are cross currency rates for India.
• Cross rate is calculated by dividing one of the pairs by the other.
• Final settlement price shall be computed using RBI rate at 12:30 PM on last trading day.
Here is an example of computation of final settlement price:
Value of a Tick:
Value of 1 tick = Tick Size * Contract Size * INR conversion rate
We are very positive about this new initiative and will provide the necessary facilities to our clients to trade in this these new global pairs when NSE officially launches. Hope this post has answered all your potential queries.