ndf currencies This is a topic that many people are looking for. newyorkcityvoices.org is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, newyorkcityvoices.org would like to introduce to you Basics of Currency Trading (Part 2) – Currency Futures & NDF s (Non Deliverable Forwards). Following along are instructions in the video below:
“What our currency futures. We understood in currency for words that importers and exporters actually actually receive dollars and receive rupee payments. Whenever they made any deal with the bank here on the currency futures you actually don t exchange dollars or rupee. It s only a profit loss calculation that take this let us try and understand how suppose if i m an importer.
I am supposed to import cruel. Which let s say today is costing me 1. And i see 1. Today is 60 rupees.
As an importer. I have a thread a 1 60. Tomorrow. If becomes 1 65.
I might have to pay five rupees more called honor of my import so what do i do currency futures are same like forwards but only difference is that the futures are traded on the exchange in india destroyed it on nsc mcx. Okay so now if this is the given situation in my threat is that tomorrow rupee my depreciate and for one dollar. Sixty. One go to one dollar.
Sixty five. I would rather go ahead and on the exchange by dollars add 1. Sixty. Now what happens is let s assume like i was anticipating and the price actually goes up and one dollar becomes 65.
So because i had bought one dollar at sixty and now one dollar is sixty five. I make a profit of five rupees understand in futures you actually don t have to deliver dollars or don t have to pay through peas. And why savers are like we were doing in forwards. Where the bank was actually giving dollars and the importer and exporter were actually transacting and changing or exchanging.
The currency over here. It s a pure profit and loss settlement. What i mean when i say sup your profit and loss settlement and try to say if 1 60. Is what you want the dollar at and tomorrow.
The dollar becomes sixty five you make a five rupee profit. You actually don t have to buy it at sixty five and sell it at sixty and all that no you bought it at 60. It became sixty five you make a flat profit of five dollars. So what happens in this case.
Is now when one dollar is sixty five when i am doing 1. Worth of import how much will i have to pay i will have to pay sixty five rupees. But what is the net cost to me the net cost is sixty rupees is because i have made a profit of rupees five by trading in the futures so i paid 65 from the person i imported. But on the future contract.
I made five okay so what is the net for me the net for me per dollar..
Is sixty rupees. Similarly let s assume. If i am an exporter. If i am an exporter and i have a race that today when i m exporting something on which i am receiving 1.
I am actually getting 65 rupees. But tomorrow. It might be a sound possibility and when i will export the same thing. But one dollar is 60 rupees.
So when i export something worth one dollar. I get only 60 in hand so what should i go ahead and do so on the futures. I will actually go ahead and sell dollars or by rupee means the same so i sell a futures contract on nac or mcx for dollar at 65. So when one dollar becomes sixty.
I sold it at 65. I buy it back at sixty. I make a profit of five rupees. So when i actually am to export something worth one dollar how much will i receive i will receive only sixty.
But i have made five rupees profit on the exchange hence the net for me is 65. This is how people use the futures exchange to hedge their position. So the difference between forwards and futures is very simple in forwards acids. Actually change hands.
Which means if i am an importer and i would need dollars after a month. So i sign a forward contract with a bank where after a month bank actually gives me dollars at the rate. Which was predetermined so in forwards acids actually change hands. But in futures.
It is cash settled. What do i mean when i say cash circle. I am saying you bought dollars at one dollar equal to sixty rupees tomorrow one dollar becomes sixty five over here no one gives you dollars. But because you bought at sixty.
And i went to sixty five you are paid the remaining five rupees. That s the major difference between a forward and a future apart from the theoretical difference. Which in the current context of the subject that we are learning is not important. Whether forwards are non standard contracts and futures are standard contracts forward contracts typically have less of third party risk third party.
Guarantee futures have no default risk. So that is more on the theoretical aspect. Which withers which we don t need in the current context of what we re trying to study. So now that we ve understood spot now that we ve understood forwards now that we ve understood futures let s look at what our non deliverable forwards mom daily free will follower also called as nbx like the name suggests.
This is a forward contract..
Which is non deliverable now. I why there is some of your confusion about it. So what s our non deliverable forward contract it exactly works like a futures. Which is cash settled.
We just learned that if i buy one dollar at sixty rupees and tomorrow. One dollar becomes sixty five. I actually don t have to pay sixty rupees. And i receive 65.
It is cash settled i directly get five rupees profit that i make we learnt this is how the futures contract operate. This is exactly how the non deliverable forward contract operates abided 60. When it goes to 65. I make the five rupees.
Which is cash settled then why is it called non deliverable forwards contract. It s called a forward contract because unlike a futures contract. Which is exchange traded so futures is traded on x. On an exchange like we learned then a cmc x.
Over here in india. Non deliverable. Forward contracts or in dfs are traded over the counter over the counter like the forwards contract were traded with a bank. Okay.
That s the major difference. Which is why this is called a non deliverable for words because it is over the counter traded when you trade on the exchange people who know a little bit of derivatives. They ll understand that you have to pay margin. You have to pay margin to trade the futures contract over here you don t pay any margin to trade in the non deliverable forward contract it is cash satellite expiring okay then why is non deliverable forward contract becoming the buzzword for our currency problems.
What is happening is and fii who is investing in india. Normally would want to hedge the currency position in the hedge. It by signing up a forward contract with a man for which for which they keep all the stocks or debt that they ve purchased with the bank as collateral. Because fi is or nris.
Or anyone was not an indian resident is not allowed to trade in the futures market on our currency exchange. So if they want to hedge their position. They will have to hedge their position. Only using the forwards market and probably with the bank because they are the biggest so suppose if i m an fyi who s got n billion dollar worth of holding of debt or commodity debt or equity and we go to the bank.
I will sign a forward contract with a bank for ten billion dollars. Okay an alert i like to keep the equity and debt with the bank as mortgage for which the bank and fii. Which is me will sign a forward contract which means i will buy dollars from the bank. The bank will sell me dollars and we have to exchange our currency let s say after a year that s the forward contract between us okay.
So i have bought dollars from the bank..
The bank sole dollar should me to me and the contract is for or your what happens is as nfi. I i trade for myself my clients 4p note holders. Okay. What happens is i would want to hedge position for myself.
Which i do with the bank. But what i also do is that on behalf of my clients. And my p note holders also i go in hedge with a bank. Which means i keep their equity and debt with the bank as collateral and hedge on behalf of them also which the rbi thinks the clients and the p note holders are not aware of that the fii is hedging on behalf of them what will they fi.
I do that means for the client and for p note. In the forward contract. The fii has bought dollars from the bank like over here to hedge. Okay.
Now because they are not allowed to trade in the indian market. They use the non deliverable forward market. Which trades in dubai. Singapore and allah.
Which means ust. Rupee. Is also trading on the non deliverable. Forward market in dubai.
Singapore and hong kong. Now because rupee has been depreciating. So much rupees. Been depreciating.
So much you always had the non deliverable forward trading at a premium to our indian usd inr contract on our futures exchange. So what were the fi is doing the fis were actually buying dollars on behalf of the client and p. Not holders in india. Which rbi thought that the client simply note holders are unaware of they have bought dollars in the indian forward exchange and they were selling dollars in the ndf in singapore.
Dubai and hong kong. Because india force trading at a premium to the indian exchange because of huge rupee depreciation. This is how rbi and is is anticipating that fi is were making arbitrage gains in hence arby. I came up with a rule saying that if fi is one to a hedge on behalf of the client and p.
Not holders. They will have to have a written consent from the client. And the peanut holders that the client and the peanut holder wants to hedge only after which they ll be allowed to hedge. Now.
The question can be why in the india s market will we have the dollar trading at a premium..
The answer is very simple that indian markets that is nsc or mcx for currencies trade from nine to five. But if you look at a composite of hong kong singapore and dubai market. This will turn out to be a 24 hour market which means that if people are negative on our currency. Okay it will reflect in the indian market only between 9 00 to 5 00.
What happens after mine. After 5 00 and up to 9 00 in the morning. So people would actually go ahead and buy dollars or sell rupee in hong kong. Singapore.
And buy so. What happens is when i as a trader in india. Look at the non deliverable forward. Market where people have been buying dollars and selling rupee at 8 am.
I see that the dollar is trading at a premium is because till. 9. 00 to 5 00. These markets were reflecting.
What the indian markets are doing. But after 5 00. Because the indian market stopped the activity was on only in these markets. Where people knew that the rupee is going to depreciate and ball was going to go.
Up so people were buying dollars and selling rupee so at 8 am in the morning next day before our market starts. Me as a trader who definitely want to know what is the market. Expecting the dollar and the rupee to go see. And i know that in the offshore markets in india.
People have been buying dollar and selling rupee and hence dollar. Is trading at a premium and rupee is not hence. When at nine o clock. The market opens.
I also started buying dollars in india. And this cycle continues. Because of which you always had non deliverable forward market where dollars were trading at a premium to the indian markets. Enhance an arbitrage gain could be made i hope the ndf is absolutely clear to ” .
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