A
Accessibility
currency futures market, advantages, 44
Activity-related variables
New York Empire State Index, 237
personal income and expenditure outlays, 237–38
Philadelphia Federal Reserve’s Business Outlook Survey, 234–36
supply management manufacturing index, 232–33
supply management nonmanufacturing index, 233–34
Additions and Amendments to Securities Contract (Regulation) Act, 1956, 18
Advantages of ISDA master agreement, 296
Amendments and Additions to Reserve Bank of India Act, 1934, 19–20
Amount of foreign exchange contracts outstanding as on end-june 2010
global foreign exchange positions, growth, 9–10
positions by counterparty, 10
positions by currency, 12
positions by maturity, 11
positions value by instrument, 11
Arbitrageurs, 40
Architecture of ISDA master agreement
close out netting, 294
default and termination events, events, 293
local version and multicurrency version, 292
single agreement, 293
taxation and multi-branch issues, 294
Arrear swaps
payoff, 155
risks, 155
B
Balance of trade (BOT), 214
Barrier options
double knock-in (DKI) with vanilla option, 126–27
double knock-out (DKO) with vanilla option, 129–30
knock-in and knock-out (KIKO) with vanilla option, 130–32
knock-in (KI) with vanilla Option, 125–26
knock-out (KO) with vanilla option, 128–29
Base currency and home currency, concept, 22
Basis swap currency market impact, 202
Binomial model
call option, calculation method for, 84–85
price tree generation, 84
Black–Scholes
assumptions of, 86
currency options, 86
graph of, 90
BOT. see Balance of trade (BOT)
C
Calculation of rates cases, 30
rate chart, 186
rates quoted by various banks, 185
Candlestick charting technique, 277
types of candles, 278
CCI. see Consumer confidence index (CCI)
Certificates of deposit (CDs)
benchmark, 189
yields of various banks, 189
Charts, 271
candlestick chart, 273
line and bar, 272
Collar
calculator, 162
graph, 163
hedges against, 161
payoff, 161
risks involved, 164
strategy, 161
Commercial papers (CP)
rates for various tenor, 188
Constant maturity swap
payoff, 172
risks involved, 173
strategy, 172
Consumer confidence index (CCI), 261–62
Consumer credit report, 263–64
Consumer price index (CPI), 209, 225–26
currency market, effect, 210
types of, 210
Cost
currency futures market, advantages, 44
Coupon only swap
risks involved, 158
strategy, 158
CPI. see Consumer price index (CPI)
Credit risk
currency futures market, advantages, 44
Currency futures contract
advantages of, 44
market participants in, 40
and options on exchanges of derivatives in India, 20–21
Currency option market mechanics in real world
exotic option pricing calculator, 83
vanilla option pricing calculator, 82
Currency regimes
fully convertible, 23
partially convertible, 23
Curve flatteners
FRAs, 176
and libor curve, 176
payoff, 175
risks involved, 176
strategy, 175
swaps, 176
Curve steepeners
graph, 174
payoff, 173
risks involved, 175
strategy, 173
D
Daily range accrual (RAC) digitals, 136
Data releases
consumer credit report, 263–64
productivity and costs, 260–61
for hedger, 95
for investor/trader, 94
Derivatives
currency futures and options on exchanges in India, 20–21
exchange traded derivatives, amount outstanding, 13
in India, history and legalization, 17–20
legal definition, 16
market, participants in, 17
OTC, amount outstanding, 12–13
Digitals
daily range accrual (RAC), 136
double must touch (DMT), 134
double one touch (DOT), 133–34
no touch (NT), 135
one touch (OT), 133
Direct quotes, 23
Double knock-in (DKI) with vanilla option, 126–27
Double knock-out (DKO) with vanilla option, 129–30
Double must touch (DMT) digitals, 134
Double no touch (DNT) digitals, 135–36
Double one touch (DOT) digitals, 133–34
E
ECI. see Employee cost index (ECI)
Efficient price discovery currency futures market, advantages, 44
Employee cost index (ECI), 224–25
Employment data
help wanted index, 224
unemployment rate, 222
European knock-out cap
calculator, 166
graph, 168
payoff, 167
risks involved, 168
Exchange traded contracts (ETC) difference between, 47
External sector
current account balance, 254–55
international trade balance, 253–54
treasury international capital data, 255–56
F
FII. see Foreign institutional investment (FII)
Fiscal policy
currency market, effect, 206
deficit conditions, 206
process of, 206
surplus conditions, 207
Fixed to fixed range accrual, 170–72
graph, 171
payoff, 170
risks involved, 171
strategy, 170
variation, 172
Floating to fixed range accrual
payoff, 169
strategy, 169
variations, 169
Fly in real market scenario
for hedger, 98
Forecasted volatility, 81
Foreign exchange (FX)
currency market and money market, interlinkage between, 183–84
fly in real market scenario, application of, 94–98
money market instruments, 184–90
option, defined, 59
option greeks, application of, 94–98
option premium components, 84
pricing and greeks, option, 84–90
real world, currency option market mechanics, 78–83
risk reversal, application of, 94–98
scenario analysis, 58
Foreign institutional investment (FII), 218–19
Foreign investments
kinds, 218
Forex rates determination
Bretton Woods, background, 28
cash rate, 25
important related notes, 26–28
spot rate, 25
tom rate, 25 (see also Rate for Tomorrow)
Forward Rate Agreement (FRA)
deal, terms of, 195
graph, 154
levels for major currencies, 153
payoff, 153
quoting, 195
risk, 154
strategy, 153
terminology, 195
uses, 196
FRA. see Forward Rate Agreement (FRA)
Full currency swap
risks involved, 157
Fully convertible, currency regimes, 23
Fundamental analysis and data releases
activity-related variables, 229–41
consumer credit report, 263–64
international indicators, 265–69
productivity and costs, 260–62
G
Gamma
for hedger, 95
for investor/trader, 95
Global foreign exchange turnover
banking industry, concentration in, 2–3
by currency, 4
by execution method, 6
geographical distribution of, 7–9
growth, 1
by instrument, 3
instrument and currency distribution of, 4–5
market turnover, 2
by maturity, 3
Global money market risk indicators and exchange rate, impact
basis swap, 202
TED spread, 200
Gross domestic product (GDP), 229–30
H
Hedgers, 40
Hedging in over-the-counter markets, concept
important understanding, 24
importer and exporter, exposure, 24
Help wanted index
define, 224
History and legalization of derivatives in India, 17
Additions and Amendments to Securities Contract (Regulation) Act, 1956, 18
Amendments and Additions to Reserve Bank of India Act, 1934, 19–20
I
ICD. see Inter corporate deposits (ICD)
Indian Benchmark Rate (INBMK), 192–93
Indian data releases
BOT, 214
industrial production growth rate, 207–209
Indianomics
Indirect quotes, 23
Inflation data
import and export prices, 229
Initial margin, 43
Inter corporate deposits (ICD)
fixed and floating rate, 188
Interest rate cap
graph, 160
payoff, 160
risks involved, 161
Interest rate options, 158
European knock-out cap, 165–68
knock-ins and knock-outs, 168
Interest rate parity theory, 28
important notes, 29
Interest rate swap, 150, 153, 197–99
calculator, 151
coupon only swap, 158
fixing, 150
graph, 152
of major currencies, 151
payoff, 152
risks, 153
strategy, 150
International indicators
Bank of Japan, tankan survey, 265–66
PMI, 268
Investors, 40
ISDA master agreement, 291
advantages of, 296
historical background, 292
K
Knock-in and knock-out (KIKO), 168
Knock-in (KI)
Knock-out (KO)
L
Leading indicators
consumer sentiment index (see Michigan survey)
motor vehicle sales, 252
new home sales, 244
Legal issues of ISDA master agreement
authority and capacity, 295
netting and set-off, 295
reliance and suitability, 296
termination, 296
London Interbank Offer Rate (Libor), 197–99
M
Margin in ETC markets, concept
initial margin, 43
mark-to-market margin, 43
Market participants in currency futures segment
arbitrageurs, 40
hedgers and investors, 40
Market rate
scenario analysis, 17
Mark-to-market margin, 43
MFBD. see Modified following business day (MFBD)
MIBID. see Mumbai Interbank Bid Rate (MIBID)
MIBOR. see Mumbai Interbank Offer Rate (MIBOR)
MIFOR. see Mumbai Interbank Forward Offered Rate (MIFOR)
Modified following business day (MFBD), 177
Monetary policy
currency market, effect, 205
effects, 204
inflationary trend, 205
monetary control by RBI, process, 205
Money market
asset liability management desk, 184
corporates and foreign institutional investors, 184
and currency market, interlinkage between money market, 183–84
define, 183
liquidity projections and INR rate view, 184
Money market instruments
certificates of deposit (CDs), 189
commercial papers, 188
ICD, 188
overnight call money/repo, 184–85
repo/reverse repo rate, 186–87
treasury bills/T-bills, 190–91
Mumbai Interbank Bid Rate (MIBID), 196
Mumbai Interbank Forward Offered Rate (MIFOR)
fixing, 194
swap rates with, 194
Mumbai Interbank Offer Rate (MIBOR), 191
fixing chart, 192
N
NAPM. see National Association of Purchasing Management (NAPM)
National Association of Purchasing Management (NAPM), 236–37
New York Empire State Index, 237
NSE and Thomson Reuters screenshots, 44–46
O
OIS. see Overnight Indexed Swap (OIS)
Option
definitions, 59
Option greeks
gamma, 88
rho, 90
vega, 89
Option payoff, 60
Option premium components and intrinsic value, 84
Option pricing
Black–Scholes option pricing model, 85–86
risk-free interest rate, 87
risk neutralization model, 85
time to expiration, 87
underlying price and strike price, 87
volatility, 87
OTC. see Over-the-Counter (OTC)
difference between, 47
Outstanding derivatives of banks in
India, 14
Overnight call money/repo
Indian money market, 184
instruments form, 185
Overnight Indexed Swap (OIS), 196–97
Over-the-Counter (OTC) derivatives
base currency and home currency, concept, 22
difference between, 47
direct and indirect quotes, 23
forex rates determination, 25–28
hedging in over-the-counter markets, concept, 24
interest rate parity theory, 28–29
outstanding derivatives of banks in India, 14
quoting convention, 22
rates, calculation, 30
P
Partially convertible, currency regimes, 23
PCE deflator. see Personal consumption expenditure (PCE) deflator
Pegged, currency regimes, 23–24
Personal consumption expenditure (PCE) deflator, 228–29
Philadelphia Federal Reserve’s Business Outlook Survey, 234–36
PMI. see Purchasing managers index (PMI)
Policies
PPI. see Producer price index (PPI)
Producer price index (PPI), 226–28
Purchasing managers index (PMI), 268
R
Range accruals, 168
fixed to fixed range accrual, 170–72
floating to fixed range accrual, 169–70
variations, 169
Rate for tomorrow, 25
Rates market, key concepts
business day convention, 177
MFBD, 177
preceding business day, 177
Reading chart patterns
Realized volatility, 81
Related documents to ISDA master agreement
confirmations, 295
credit support annex (CSA), 295
definitions and user’s guide, 295
Repo/reverse repo rate
of RBI, 187
Retail price index (RPI), 268–69
Rho
for hedger, 96
for investor/trader, 96
Risk-free interest rate
for option pricing, 87
Risk neutralization model
alternatives, 85
Risk reversal
for hedger, 96
for investor/trader, 96
RPI. see Retail price index (RPI)
S
Seagull
graph, 165
payoff, 164
risks involved, 165
strategy, 164
Standardized contracts
currency futures market, advantages, 44
Statement and ledger formats, 45–46
Supply management manufacturing index, 232–33
Supply management non-manufacturing index, 233–34
T
Target redemption notes (TARN), 123–25
Technical analysis
versus fundamental analysis, 273
reading chart patterns, 278–84
support and resistance, 273–74
Technical aspects of currency futures, 40–41
contract specifications, 42–43
Technical indicator
TED spread
currency market impact, 200
with EUR/USD, 200
Theta
for hedger, 95
for investor/trader, 95
Thomson Reuters and NSE screenshots, 44–46
Transparency
currency futures market, advantages, 44
Treasury bills/T-bills
benchmarks, 191
India information, 190
Trend
sideways trend, 276
upward trend, 274
V
Vanilla option
accumulator ratio forward, 122–23
range forward/risk reversal, 116–17
Vega
for hedger, 96
for investor/trader, 95
Volatility, 87
ATM volatility in major currency pairs, 80
ATM volatility in USD/INR currency pair, 79
defined, 78
fly for six months tenor in USD/INR currency pair, 79
from historical data, estimation, 91
historical/realized volatility calculation, 91
kinds of, 81
kurtosis effect, 93
long call and protective put, graph, 94
put call parity, 94
risk reversal for six months tenor in USD/INR currency pair, 79
skew effect, 93
surface for currency pair USD/INR, 80
W
Wholesale price index (WPI), 210
and CPI difference between, 212
and rates of inflation, 212–13
terms of currency, effect, 211
terms of interest rates, effect, 211–12
WPI. see Wholesale price index (WPI)
Y
Yield curve structures
3.143.255.36