Index

A

Accessibility

currency futures market, advantages, 44

Activity-related variables

GDP, 229–30

ICSC—UBS store sales, 240–41

industrial production, 230–32

NAPM, 236–37

New York Empire State Index, 237

personal income and expenditure outlays, 237–38

Philadelphia Federal Reserve’s Business Outlook Survey, 234–36

retail sales, 239–40

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

strategy, 154–55

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

option pricing model, 85–86

BOT. see Balance of trade (BOT)

C

Calculation of rates cases, 30

Call money market, 185–86

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

technical aspects, 40–43

Currency option market mechanics in real world

exotic option pricing calculator, 83

market participants, 81–83

vanilla option pricing calculator, 82

volatility, 78–81

Currency regimes

fully convertible, 23

partially convertible, 23

pegged, 23–24

Curve flatteners

FRAs, 176

graph, 176–77

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

beige book, 259–60

CCI, 261–62

consumer credit report, 263–64

money supply, 257–59

mutual fund flows, 264–65

productivity and costs, 260–61

US treasury budget, 256–57

Delta, 87–88

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

types of, 16–17

Digitals

daily range accrual (RAC), 136

double must touch (DMT), 134

double no touch (DNT), 135–36

double one touch (DOT), 133–34

no touch (NT), 135

one touch (OT), 133

vanilla digital, 132–33

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

ECI, 224–25

help wanted index, 224

jobless claims, 220–21

non-farm payroll, 222–24

unemployment rate, 222

European knock-out cap

calculator, 166

graph, 168

payoff, 167

risks involved, 168

strategy, 165–67

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

application of, 94–98

for hedger, 98

for investor/trader, 96–97

Forecasted volatility, 81

Foreign exchange (FX)

barrier options, 125–32

basics of option, 59–60

currency market and money market, interlinkage between, 183–84

digitals, 132–36

fly in real market scenario, application of, 94–98

money market instruments, 184–90

option, defined, 59

option greeks, application of, 94–98

option payoff, 60–61

option premium components, 84

payoff diagrams, 61–62

pricing and greeks, option, 84–90

real world, currency option market mechanics, 78–83

risk reversal, application of, 94–98

scenario analysis, 58

vanilla option, 113–25

volatility, 91–94

Foreign institutional investment (FII), 218–19

Foreign investments

FII, 218–19

kinds, 218

Forex rates determination

Bretton Woods, background, 28

cash rate, 25

forward rate, 25–26

important related notes, 26–28

spot rate, 25

tom rate, 25 (see also Rate for Tomorrow)

Forward Rate Agreement (FRA)

cash flows for, 195–96

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

strategy, 156–57

Fully convertible, currency regimes, 23

Fundamental analysis and data releases

activity-related variables, 229–41

beige book, 259–60

consumer credit report, 263–64

employment data, 220–25

external sector, 253–56

inflation data, 225–29

international indicators, 265–69

leading indicators, 241–52

money supply, 258–59

mutual fund flows, 264–65

productivity and costs, 260–62

US treasury budget, 256–57

G

Gamma

for hedger, 95

for investor/trader, 95

Global foreign exchange turnover

banking industry, concentration in, 2–3

by currency, 4

by currency pair, 5–6

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

LIBOR and OIS rates, 200–202

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)

Implied volatility, 81, 91–92

Indian Benchmark Rate (INBMK), 192–93

Indian data releases

BOT, 214

CPI, 209–10

industrial production growth rate, 207–209

trade deficit, 216–18

trade surplus, 215–16

WPI, 210–13

Indianomics

fiscal policy, 206–207

Indian data releases, 207–13

monetary policy, 204–205

Indirect quotes, 23

Inflation data

CPI, 225–26

import and export prices, 229

PCE deflator, 228–29

PPI, 226–28

Initial margin, 43

Inter corporate deposits (ICD)

fixed and floating rate, 188

Interest rate cap

graph, 160

payoff, 160

risks involved, 161

strategy, 159–60

Interest rate options, 158

collar, 161–64

European knock-out cap, 165–68

interest rate cap, 159–61

knock-ins and knock-outs, 168

seagull, 164–65

Interest rate parity theory, 28

important notes, 29

Interest rate swap, 150, 153, 197–99

arrear swaps, 154–55

calculator, 151

coupon only swap, 158

fixing, 150

FRA, 153–54

full currency swap, 156–57

graph, 152

of major currencies, 151

payoff, 152

risks, 153

strategy, 150

International indicators

Bank of Japan, tankan survey, 265–66

IFO survey, 266–67

PMI, 268

RPI, 268–69

ZEW survey, 267–68

Investors, 40

ISDA master agreement, 291

advantages of, 296

architecture of, 292–93

historical background, 292

legal issues, 295–96

related documents, 294–95

K

Knock-in and knock-out (KIKO), 168

with vanilla option, 130–32

Knock-in (KI)

with vanilla Option, 125–26

Knock-out (KO)

with vanilla option, 128–29

L

Leading indicators

business inventories, 249–50

composite index, 251–52

construction spending, 247–48

consumer sentiment index (see Michigan survey)

durable goods orders, 246–47

factory orders, 244–45

home sales report, 241–42

housing starts, 242–43

motor vehicle sales, 252

new home sales, 244

wholesale trade, 248–49

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

OIS spread, 200–202

M

Maintenance margin, 43–44

Margin in ETC markets, concept

initial margin, 43

maintenance margin, 43–44

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)

Michigan survey, 250–51

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

call money market, 185–86

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

basics of, 59–60

definitions, 59

payoff, 60–62

Option greeks

application of, 94–98

delta, 87–88

gamma, 88

rho, 90

theta, 88–89

vega, 89

Option payoff, 60

diagrams, 61–62

Option premium components and intrinsic value, 84

Option pricing

binomial model, 84–85

Black–Scholes option pricing model, 85–86

factors affecting, 86–87

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

amount outstanding, 12–13

base currency and home currency, concept, 22

currency regimes, 23–24

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

markets in India, size, 13–15

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

fiscal policy, 206–207

monetary policy, 204–205

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

continuation pattern, 281–84

reversal patterns, 278–81

Realized volatility, 81

Related documents to ISDA master agreement

confirmations, 295

credit support annex (CSA), 295

definitions and user’s guide, 295

schedule, 294–95

Repo/reverse repo rate

chart, 186–87

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

application of, 94–98

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

Stock futures, 47–48

Supply management manufacturing index, 232–33

Supply management non-manufacturing index, 233–34

T

Target redemption notes (TARN), 123–25

Technical analysis

candlestick, 277–78

charts, kinds, 271–73

versus fundamental analysis, 273

indicator, 284–89

reading chart patterns, 278–84

steps in, 289–90

support and resistance, 273–74

trend, 274–77

Technical aspects of currency futures, 40–41

contract specifications, 42–43

Technical indicator

lagging indicators, 288–89

leading indicators, 285–87

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

Trade deficit, 216–18

Trade surplus, 215–16

Transparency

currency futures market, advantages, 44

Treasury bills/T-bills

benchmarks, 191

India information, 190

Trend

downward trend, 277–76

sideways trend, 276

upward trend, 274

V

Vanilla option

accumulator ratio forward, 122–23

and application, 113–14

call spread, 114–15

fader, 121–22

participatory forward, 119–20

range forward/risk reversal, 116–17

ratio forward, 120–21

seagull, 117–18

spread, 114–16

TARN, 123–25

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

implied volatility, 91–94

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

smile and skew, 92–93

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

constant maturity swap, 172–73

curve flatteners, 175–77

curve steepeners, 173–75