A Project report On Currency futures market in India Undertaken At Anagram capital In Partial Fulfillment of the Project Study in Masters of Business Administration Programme of Gujarat Technological University Submitted by: Submitted to: Milan Adodariya  Dr. Sneha Shukla Khima Goraniya  Batch: 09-11 N. R. Institute of business management, Ahmedabad PREFACE As a part of M. B. A. curriculum we have to do summer training in the corporate world for 7 weeks as partial fulfillment of degree and based on that we have to prepare project report on it.
So there is great importance for us of this valuable training as we have to get real world learning experience. Fortunately, we got opportunities to have our training at Anagram Securities ltd. And we came into touch with corporate world and learnt basic concepts of currency futures market. Whatever we learnt we have also tried to apply it in our project report and for that we selected topic “currency futures market in India” and we have tried to understand it properly with practical examples. With this we have also included topics about organization and its activities, products, market analysis etc. here we have done our training so our objectives of this report and training are as followings. ACKNOWLEDGEMENT An acknowledgement is something which is overlooked by many, but it forms integral part of our project and is only means through which we could communicate our thanks to all those who have extended their help with selflessness in an untiring manner. We are thankful to our Institute (NRIBM-GLS) for giving us an opportunity of doing our summer project at Anagram. We heartly thankful to our Director Dr. Hitesh Ruparel and Prof. Dr. Sneha Shukla for providing us guidance in this project.
We would like to express our gratitude to our company guide Miss. Namrata Agarwal and HR Manager to giving us opportunity to have our summer project in this well-known company. We are also very thankful to Mr. Kashyap Darji, without his guidance this project would have not been possible. It was nice learning experience to have with him. Last but not least we are thankful to all of those who have directly or indirectly helped us to make this project a great journey in the ocean of knowledge. We are again very much thankful to all these persons. Thank you, Milan Adodariya
Khima Goraniya M. B. A-NRIBM (BATCH 2009-11) EXECUTIVE SUMMARY The project aims to get an overview about currency futures market and to achieve this we have decided to go step by step under the guidance of our internal guide as well as external guide at Anagram Capital which is as under. Research methodology gives a proper direction to go through out the project. It includes our objective to get basic understanding about the currency market as well as to know about the awareness level of people who are active in the stock market towards currency futures.
A brief introduction has been given about history of various means of exchange and need of determining a particular currency for a country and major currencies of the world. India has a strong presence in the world’s economic activities so a strong need felt by RBI and SEBI to do something in this area. Hence a working committee has been formed and according to their suggestions trading in currency futures started in India. Indian broking industry is always an attractive destination for FII’s and FDI’s to invest and trade but major portion of that constitutes from equity shares.
After the permission of SEBI and RBI this industry has also focused on trading in currency futures and today industry has gained a lot from this area also. Anagram capital is a big player in retail broking and having its root in western India particularly in Gujarat. The company has a strong research base and providing sound tips to its varied client base. Anagram also has a special team managing its currency futures clients. Primary data has been collected from the survey and Data analysis has been done with the help of various statistical tools.
The market of currency future is still not penetrated and future of currency futures is very good as the size of Indian economy is increasing day by day. Table of Contents Chapter No. | Topic | Page No. | | Preface| | | Acknowledgement| | | Executive Summary| | 1| Research Methodology| | | 1. 1| Introduction | | | 1. 2| Research Objectives| | | 1. 3| Research Design| | | 1. 4| Literature reviewed| | | 1. 5| Data collection| | | 1. 6| Sample size| | | 1. 7 | Data analysis| | | 1. 8| Limitations| | 2| Introduction to the Foreign Exchange market| | | 2. 1| Foreign Exchange| | | 2. | Overview of the international currency markets| | | 2. 3| Major currency of the world| | | 2. 4| Exchange rate mechanism| | | 2. 5| Economic variables impacting exchange rate movement | | 3| Currency futures in Indian Context| | | 3. 1| Introduction of currency futures on indian exchange| | | 3. 2| Need for Exchange Traded Currency Futures| | | 3. 3| Over-the-counter v/s Exchange traded| | | 3. 4| Formation of committee| | | 3. 5| Contract Specification of currency futures| | | 3. 6| Strategies used in currency futures| | | 3. 7 | Hedging used in currency futures | | 4| Industry profile| | 4. 1| Broking Insights| | | 4. 2| Terminals| | | 4. 3| Branches and sub-Brokers| | | 4. 4| Financial markets| | | 4. 5| Products | | | 4. 6| Future plans| | 5| Company profile| | | 5. 1| Introduction| | | 5. 2| Investment Philosophy| | | 5. 3| Beyond Broking| | | 5. 4| Research and Risk Management| | | 5. 5| Infrastructure| | | 5. 6| Distribution Business| | | 5. 7| Business Segments| | | 5. 8| Products of Anagram| | | 5. 9| SWOT analysis of anagram| | 6| Data Analysis & Interpretation| | 7| Key Findings| | 8| Conclusion| | 9| Bibliography| | | Annexure [Questionnaire]| | Chapter-1
Research Methodology: 1. 1 Introduction This study aims to delineate the methodology, employed to undertaken this study. Research is a common parlance, which refers to a search for knowledge. one can define research as scientific and systematic search for pertinent. Research is of a great importance to find out the nature, extent and cause of the research issue under study. Research methodology is the processes in which various steps are generally adopted by a research are outlined. 1. 2 Objective: 1. To know about the currency market in India with the understanding of currency futures. 2.
To know the awareness & penetration level of respondent about currency futures. 3. To know about the various usage of currency futures. 4. To determine the purpose of trading in currency futures. 5. To know the awareness level about hedging in currency futures. 6. To identify the most preferred currency pair for trading in currency futures. 1. 3 Research design: A research design is the arrangement of condition for collection and analysis of data. Actually it is the blue print of research project. The research design as follow: 1. Descriptive research 1. 4 Literature reviewed: 1.
Various articles published in Indian journals of finance. e. g. currency futures trading in India by Dr. K. S. Jaiswal and Dipti Saha 2. Projects prepared by our college students in the past. 1. 5 Data collection: 1. Primary data sources: Questionnaire survey of various respondents in Ahmadabad. 2. Secondary data sources: Data collected from various past surveys, internet, and magazines. 1. 6 Sample size: 120 respondents have been selected across Ahmedabad city. 1. 7 Data analysis: Data analysis will be done with the help of statistical tools…. like pie chart, bar chart, etc. 1. limitations: * Area of survey was limited to the city of Ahmadabad only. * Respondent may have given biased answers for the required data. * Some of respondent did not like to respond. Chapter-2 Introduction to the Foreign Exchange market 2. 1 Foreign Exchange: The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is by far the largest market in the world, in terms of cash value traded, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions.
The trade happening in the forex markets across the globe exceeds $3. 2 trillion/day (on an average) presently. Retail traders (small speculators) are a small part of this market. A foreign exchange transaction is still a shift of funds or short-term financial claims from one country and currency to another. 2. 1. 1 History: The history and evolution of the Foreign Exchange may be traced back to the early stages of human history. In the early days the goods were exchanged between individuals and the value of one good was expressed in terms of other goods.
The limitations of this barter system encouraged traders to use other mediums such as stones, teeth etc. to determine the value of goods. These mediums soon to be replaced by precious metals in particular silver and gold thus providing an accepted way of payment in exchange of goods. It also had the many advantages such as storage and durability. The introduction of Roman gold coin followed by the silver one played a key role in the development of the trade and foreign exchange during the biblical times. Both coins gained a wide acceptance in Middle East and other parts of the world forming an elementary international monetary system.
By the middle Ages, increased usage of bills encouraged the foreign exchange to become a function of international banking. However with the attempts of governments to create a more stable economic environment for global trading and exchange, the last century witnessed some measures and events that shaped the current foreign exchange markets. * The Gold Standard, 1816-1933 :- The ‘gold standard’ used the physical weight of gold as the standard value for the money and making it directly exchangeable in the form of the precious metal. In 1816 for instance, the pound sterling was defined as 123. 7 grains of gold on its way to becoming the foremost reserve currency and was the principal component of the international capital market. This led to the expression ‘as good as gold’ when applied to the Sterling, as the Bank of England at the time gained stability and prestige as the premier monetary authority. Before the First World War, most Central banks supported their currencies with convertibility to gold. Paper money could always be exchanged for gold. For this type of gold exchange, a central bank coverage backing up the government’s currency reserves was not necessarily needed.
When a group mindset fostered a disastrous notion of converting back to gold in mass, panic resulted in so-called “Run on banks”. The US dollar adopted the gold standard late in 1879 and became the standard-bearer replacing the British Pound when Britain and the other European countries came off the system with the outbreak of World War I in 1914. Eventually, though, the worsening international depression lead even the dollar off the gold standard by 1933 marking the period of collapse in international trade and financial flows prior to World War II. * The Bretton Woods System, 1944-73:-
The Gold Standard partly, fixing the USD at $35. 00 per ounce of Gold and fixing the other main currencies to the dollar, initially intended to be on a permanent basis. The Bretton Woods system formalized the role of the US dollar as the new ‘global’ reserve currency with its value fixed into gold and the US assuming the responsibility of ensuring convertibility while other currencies were pegged to the dollar. In Asia, the lack of sustainability of fixed foreign exchange rates has gained new relevance with the events in the latter part of 1997, where currencies were forced to float.
Currency after currency was devalued against the US dollar. The devaluation of currencies continued to plague the currency trading markets, and confidence in the open market of forex trading was not sustained. Leaving other fixed exchange rates in particular in South America also looking very vulnerable. While commercial companies have had to face a much more volatile currency environment in recent years, investors and financial institutions have discovered a new playground. The size of the FOREX market now dwarfs any other investment market. The last few decades have seen oreign exchange trading develop into the world’s largest global market. Restrictions on capital flows have been removed in most countries, leaving the market forces free to adjust foreign exchange rates according to their perceived values. In the 1980s, cross-border capital movements accelerated with the advent of computers and technology, extending market continuum through Asian, European and American time zones. Transactions in foreign exchange rocketed from about $70 billion a day in the 1980s, to more than $1. 5 trillion a day two decades later. 2. 2 OVERVIEW OF INTERNATIONAL CURRENCY MARKETS
During the past quarter century, the concept of a 24-hour market has become a reality. Somewhere on the planet, financial centers are open for business; banks and other institutions are trading the US Dollar and other currencies every hour of the day and night, except on weekends. In financial centers around the world, business hours overlap; as some centers close, others open and begin to trade. The foreign exchange market follows the sun around the earth. Business is heavy when both the US markets and the major European markets are open -that is, when it is morning in New York and afternoon in London.
In the New York market, nearly two-thirds of the day’s activity typically takes place in the morning hours. Activity normally becomes very slow in New York in the mid-to late afternoon, after European markets have closed and before the Tokyo, Hong Kong, and Singapore markets have opened. Given this uneven flow of business around the clock, market participants often will respond less aggressively to an exchange rate development that occurs at a relatively inactive time of day, and will wait to see whether the development is confirmed when the major markets open.
Some institutions pay little attention to developments in less active markets. Nonetheless, the 24-hour market does provide a continuous “real-time” market assessment of the ebb and flow of influences and attitudes with respect to the traded currencies, and an opportunity for a quick judgment of unexpected events. With many traders carrying pocket monitors, it has become relatively easy to stay in touch with market developments at all times. The market consists of a limited number of major dealer institutions that are particularly active in foreign exchange, trading with customers and (more often) with each other.
Most of these institutions, but not all, are commercial banks and investment banks. These institutions are geographically dispersed, located in numerous financial centers around the world. Wherever they are located, these institutions are in close communication with each other; linked to each other through telephones, computers, and other electronic means. Each nation’s market has its own infrastructure. For foreign exchange market operations as well as for other connected matters, each country enforces its own laws, banking regulations, accounting rules, taxation and operates its own payment and settlement systems.
Thus, even in a global foreign exchange market with currencies traded on essentially the same terms simultaneously in many financial centers, there are different national financial systems and infrastructures through which transactions are executed, and within which currencies are held. With access to all of the foreign exchange markets generally open to participants from all countries, and with vast amounts of market information transmitted simultaneously and almost instantly to dealers throughout the world, there is an enormous amount of cross-border foreign exchange trading among dealers as well as between dealers and their customers.
At any moment, the exchange rates of major currencies tend to be virtually identical in all the financial centers where there is active trading. Rarely are there such substantial price differences among major centers as to provide major opportunities for arbitrage. In pricing, the various financial centers that are open for business and active at any one time are effectively integrated into a single market. 2. 3 MAJOR CURRENCIES OF THE WORLD * US Dollar Us dollar is by far the most widely traded currency.
In part, the widespread use of the US Dollar reflects its substantial international role as “investment” currency in many capital markets, “reserve” currency held by many central banks, “transaction” currency in many international commodity markets, “invoice” currency in many contracts, and “intervention” currency employed by monetary authorities in market operations to influence their own exchange rates. In addition, the widespread trading of the US Dollar reflects its use as a “vehicle” currency in foreign exchange transactions, a use that reinforces its international role in trade and finance.
For most pairs of currencies, the market practice is to trade each of the two currencies against a common third currency as a vehicle, rather than to trade the two currencies directly against each other. The vehicle currency used most often is the US Dollar, although very recently euro also has become an important vehicle currency. Thus, a trader who wants to shift funds from one currency to another, say from Indian Rupees to Philippine Pesos, will probably sell INR for US Dollars and then sell the US Dollars for Pesos.
Although this approach results in two transactions rather than one, it may be the preferred way, since the US Dollar/INR market and the US Dollar/Philippines Peso market are much more active and liquid and have much better information than a bilateral market for the two currencies directly against each other. By using the US Dollar or some other currency as a vehicle, banks and other foreign exchange market participants can limit more of their working Balances to the vehicle currency, rather than holding and managing many currencies, and can concentrate their research and information sources on the vehicle currency.
Use of a vehicle currency greatly reduces the number of exchange rates that must be dealt with in a multilateral system. In a system of 10 currencies, if one currency is selected as the vehicle currency and used for all transactions, there would be a total of nine currency pairs or exchange rates to be dealt with (i. e. one exchange rate for the vehicle currency against each of the others), whereas if no vehicle currency were used, there would be 45 exchange rates to be dealt with.
In a system of 100 currencies with no vehicle currencies, potentially there would be 4,950 currency pairs or exchange rates [the formula is: n(n-1)/2]. Thus, using a vehicle currency can yield the advantages of fewer, larger, and more liquid markets with fewer currencies Balances reduced informational needs, and simpler operations. The US Dollar took on a major vehicle currency role with the introduction of the Breton Woods par value system, in which most nations met their IMF exchange rate obligations by buying and selling US Dollars to maintain a par value relationship for their own currency against the US Dollar.
The US Dollar was a convenient vehicle because of its central role in the exchange rate system and its widespread use as a reserve currency. The US Dollar’s vehicle currency role was also due to the presence of large and liquid US Dollar money and other financial markets, and, in time, the Euro-US Dollar markets, where the US Dollars needed for (or resulting from) foreign exchange transactions could conveniently be borrowed (or placed). * The Euro Like the US Dollar, the Euro has a strong international presence and over the years has emerged as a premier currency, second only to the US Dollar. The Japanese Yen The Japanese Yen is the third most traded currency in the world. It has a much smaller international presence than the US Dollar or the Euro. The Yen is very liquid around the world, practically around the clock * The British Pound Until the end of World War II, the Pound was the currency of reference. The nickname Cable is derived from the telegrams used to update the GBP/USD rates across the Atlantic. The currency is heavily traded against the Euro and the US Dollar, but it has a spotty presence against other currencies.
The two-year bout with the Exchange Rate Mechanism, between 1990 and 1992, had a soothing effect on the British Pound, as it generally had to follow the Deutsche Mark’s fluctuations, but the crisis conditions that precipitated the pound’s withdrawal from the Exchange Rate Mechanism had a psychological effect on the currency. . 2. 4 EXCHANGE RATE MECHANISM “Foreign Exchange” refers to money denominated in the currency of another nation or a group of nations. Any person who exchanges money denominated in his own nation’s currency for money denominated in another nation’s currency acquires foreign exchange.
This holds true whether the amount of the transaction is equal to a few rupees or to billions of rupees; whether the person involved is a tourist cashing a travellers’ cheque or an investor exchanging hundreds of millions of rupees for the acquisition of a foreign company; and whether the form of money being acquired is foreign currency notes, foreign currency-denominated bank deposits, or other short-term claims denominated in foreign currency. A foreign exchange transaction is still a shift of funds or short-term financial claims from one country and currency to another.
Thus, within India, any money denominated in any currency other than the Indian Rupees (INR) is, broadly speaking, “foreign exchange. ” Foreign Exchange can be cash, funds available on credit cards and debit cards, travellers’ cheques, bank deposits, or other short-term claims. It is still “foreign exchange” if it is a short-term negotiable financial claim denominated in a currency other than INR. Almost every nation has its own national currency or monetary unit – Rupee, US Dollar, Peso etc. – used for making and receiving payments within its own borders.
But foreign currencies are usually needed for payments across national borders. Thus, in any nation whose residents conduct business abroad or engage in financial transactions with persons in other countries, there must be a mechanism for providing access to foreign currencies, so that payments can be made in a form acceptable to foreigners. In other words, there is need for “foreign exchange” transactions—exchange of one currency for another. The exchange rate is a price – the number of units of one nation’s currency that must be surrendered in order to acquire one unit of another nation’s currency.
There are scores of “exchange rates” for INR and other currencies, say US Dollar. In the spot market, there is an exchange rate for every other national currency traded in that market, as well as for various composite currencies or constructed monetary units such as the Euro or the International Monetary Fund’s “SDR”. There are also various “trade-weighted” or “effective” rates designed to show a currency’s movements against an average of various other currencies (for eg US Dollar index, which is a weighted index against world major currencies like Euro, Pound Sterling, Yen, and Canadian Dollar).
Apart from the spot rates, there are additional exchange rates for other delivery dates in the forward markets. The market price is determined by the interaction of buyers and sellers in that market, and a market exchange rate between two currencies is determined by the interaction of the official and private participants in the foreign exchange rate market. For a currency with an exchange rate that is fixed, or set by the monetary authorities, the central bank or another official body is a participant in the market, standing ready to buy or sell the currency as necessary to maintain the authorized pegged rate or range.
But in countries like the United States, which follows a complete free floating regime, the authorities are not known to intervene in the foreign exchange market on a continuous basis to influence the exchange rate. The market participation is made up of individuals, non-financial firms, banks, official bodies, and other private institutions from all over the world that are buying and selling US Dollars at that particular time. The participants in the foreign exchange market are thus a heterogeneous group.
The various investors, hedgers, and speculators may be focused on any time period, from a few minutes to several years. But, whatever is the constitution of participants, and whether their motive is investing, hedging, speculating, arbitraging, paying for imports, or seeking to influence the rate, they are all part of the aggregate demand for and supply of the currencies involved, and they all play a role in determining the market price at that instant. Given the diverse views, interests, and time frames of the participants, predicting the future course of exchange rates is a particularly complex and uncertain exercise.
At the same time, since the exchange rate influences such a vast array of participants and business decisions, it is a pervasive and singularly important price in an open economy, influencing consumer prices, investment decisions, interest rates, economic growth, the location of industry, and much more. The role of the foreign exchange market in the determination of that price is critically important. 2. 5 ECONOMIC VARIABLES IMPACTING EXCHANGE RATE MOVEMENTS Various economic variables impact the movement in exchange rates.
Interest rates, inflation figures, GDP are the main variables; however other economic indicators that provide direction regarding the state of the economy also have a significant impact on the movement of a currency. These would include employment reports, balance of payment figures, manufacturing indices, consumer prices and retail sales amongst others. Indicators which suggest that the economy is strengthening are positively correlated with a strong currency and would result in the currency strengthening and vice versa.
Currency trader should be aware of government policies and the central bank stance as indicated by them from time to time, either by policy action or market intervention. Government structures its policies in a manner such that its long term objectives on employment and growth are met. In trying to achieve these objectives, it sometimes has to work around the economic variables and hence policy directives and the economic variables are entwined and have an impact on exchange rate movements. Chapter-3
Currency futures in Indian Context 3. 1 Introduction Of currency Futures on Indian exchange The foreign exchange market in India started in earnest less than three decades ago when in 1978 the government allowed banks to trade foreign exchange with one another. Today over 70% of the trading in foreign exchange continues to take place in the inter-bank market. The market consists of over 90 Authorized Dealers (mostly banks) who transact currency among themselves and come out “square” or without exposure at the end of the trading day.
Trading is regulated by the Foreign Exchange Dealers Association of India (FEDAI), a self-regulatory association of dealers. Since 2001, clearing and settlement functions in the foreign exchange market are largely carried out by the Clearing Corporation of India Limited (CCIL) that handles transactions of approximately 3. 5 billion US dollars a day, about 80% of the total transactions. The liberalization process has significantly boosted the foreign exchange market in the country by allowing both banks and corporations greater flexibility in holding and trading foreign currencies.
The Sodhani Committee set up in 1994 recommended greater freedom to participating banks, allowing them to fix their own trading limits, interest rates on FCNR deposits and the use of derivative products. The growth of the foreign exchange market in the last few years has been nothing less than momentous. In the last 5 years, from 2000-01 to 2005-06, trading volume in the foreign exchange market (including swaps, forwards and forward cancellations) has more than tripled, growing at a compounded annual rate exceeding 25%. Figure 1 shows the growth of foreign exchange trading in India between 1999 and 2006.
The inter-bank forex trading volume has continued to account for the dominant share (over 77%) of total trading over this period, though there is an unmistakable downward trend in that proportion. This is in keeping with global patterns. In March 2006, about half (48%) of the transactions were spot trades, while swap transactions (essentially repurchase agreements with a one-way transaction – spot or forward – combined with a longer- horizon forward transaction in the reverse direction) accounted for 34% and forwards and forward cancellations made up 11% and 7% respectively.
About two-thirds of all transactions had the rupee on one side. In 2004, according to the triennial central bank survey of foreign exchange and derivative markets conducted by the Bank for International Settlements (BIS (2005a)) the Indian Rupee featured in the 20th position among all currencies in terms of being on one side of all foreign transactions around the globe and its share had tripled since 1998. As a host of foreign exchange trading activity, India ranked 23rd among all countries covered by the BIS survey in 2004 accounting for 0. 3% of the world turnover.
Trading is relatively moderately concentrated in India with 11 banks accounting for over 75% of the trades covered by the BIS 2004 survey. The foreign exchange market has acquired a distinct vibrancy as evident from the range of products, participation, liquidity and turnover. The average daily turnover in the foreign exchange market increased from US $ 23. 7 billion in March 2006 to US $ 33. 0 billion in March 2007 in consonance with the increase in foreign exchange transactions. Although liberalization helped Indian forex market in various ways, extensive fluctuations of exchange rate also took place in Indian forex market.
These issues have attracted a great deal of interest from policy-makers and investors. While some flexibility in foreign exchange markets and exchange rate determination is desirable, excessive volatility can have adverse impact on price discovery, export performance, sustainability of current account balance, and balance sheets. In the context of upgrading Indian foreign exchange market to international standards, a well- developed foreign exchange derivative market (both OTC as well as Exchange traded) is required. 3. 2 Need for Exchange Traded Currency Futures
With a view to enable entities to manage volatility in the currency market, RBI on April 20, 2007 issued comprehensive guidelines on the usage of foreign currency forwards, swaps and options in the OTC market. At the same time, RBI also set up an Internal Working Group to explore the advantages of introducing currency futures. The Report of the Internal Working Group of RBI submitted in April 2008, recommended the introduction of exchange traded currency futures. Exchange traded futures as compared to OTC forwards serve the same economic purpose, yet differ in fundamental ways.
An individual entering into a forward contract agrees to transact at a forward price on a future date. On the maturity date, the obligation of the individual equals the forward price at which the contract was executed. Except on the maturity date, no money changes hands. On the other hand, in the case of an exchange traded futures contract, marks to market obligations are settled on a daily basis. Since the profits or losses in the futures market are collected / paid on a daily basis, the scope for building up of mark to market losses in the books of various participants gets limited.
The counterparty risk in a futures contract is further eliminated by the presence of a clearing corporation, which by assuming counterparty guarantee eliminates credit risk. Further, in an Exchange traded scenario where the market lot is fixed at a much lesser size than the OTC market, equitable opportunity is provided to all classes of investors whether large or small to participate in the futures market. The transactions on an Exchange are executed on a price time priority ensuring that the best price is available to all categories of market participants irrespective of their size.
Other advantages of an Exchange traded market would be greater transparency, efficiency and accessibility. 3. 3 Over-the-counter v/s Exchange traded A. Over-the-counter trading: 1. Over-The-Counter: Over-the-counter (OTC) or off-exchange trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. It is contrasted with exchange trading, which occurs via facilities constructed for the purpose of trading (i. e. , exchanges), such as futures exchanges or stock exchanges. 2. OTC Contract:
An over-the-counter contract is a bilateral contract in which two parties agree on how a particular trade or agreement is to be settled in the future. It is usually from an investment bank to its clients directly. Forwards and swaps are prime examples of such contracts. It is mostly done via the computer or the telephone. For derivatives, these agreements are usually governed by an International Swaps and Derivatives Association agreement 3. The OTC markets have the following features: a) The management of counter-party (credit) risk is decentralized and located within individual institutions, b) There are no formal centralized limits n individual positions, leverage, or margining; limits are determined as credit lines by each of the counterparties entering into these contracts c) There are no formal rules for risk and burden-sharing, d) There are no formal rules or mechanisms for ensuring market stability and integrity, and for safeguarding the collective interests of market participants, and e) Although OTC contracts are affected indirectly by national legal systems, banking supervision and market surveillance, they are generally not regulated by a regulatory authority.
B. Exchange trading: 1. Exchange A futures exchange or derivatives exchange is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. 2. Nature of contracts a) Exchange-traded contracts are standardized by the exchanges where they trade. b) The contract details what asset is to be bought or sold, and how, when, where and in what quantity it is to be delivered. ) The terms also specify the currency in which the contract will trade, minimum tick value, and the last trading day and expiry or delivery month. d) The contracts ultimately are not between the original buyer and the original seller, but between the holders at expiry and the exchange. e) The contracts traded on futures exchanges are always standardized. To make sure liquidity is high, there is only a limited number of standardized contracts. 3. 4 Formation of committee
With the expected benefits of exchange traded currency futures, it was decided in a joint meeting of RBI and SEBI on February 28, 2008, that an RBI-SEBI Standing Technical Committee on Exchange Traded Currency and Interest Rate Derivatives would be constituted. To begin with, the Committee would evolve norms and oversee the implementation of Exchange traded currency futures. The Committee is constituted with the officials from RBI and SEBI. * The Committee was given the following terms of reference: i. To coordinate the regulatory roles of RBI and SEBI in regard to trading of Currency and Interest Rate Futures on the Exchanges. i. To suggest the eligibility norms for existing and new Exchanges for Currency and Interest Rate Futures trading. iii. To suggest eligibility criteria for the members of such exchanges. Iv. To review product design, margin requirements and other risk mitigation measures on an ongoing basis v. To suggest surveillance mechanism and dissemination of market information vi. To consider microstructure issues, in the overall interest of financial stability. 3. 5 Contract Specification of currency futures A. USD/INR Contract 1. Underlying Initially, currency futures contracts on US Dollar – Indian Rupee (US$-INR) would be permitted. . Trading Hours The trading on currency futures would be available from 9 a. m. to 5 p. m. 3. Size of the contract The minimum contract size of the currency futures contract at the time of introduction would be US$ 1000. The contract size would be periodically aligned to ensure that the size of the contract remains close to the minimum size. 4. Quotation The currency futures contract would be quoted in rupee terms. However, the outstanding positions would be in dollar terms. 5. Tenor of the contract The currency futures contract shall have a maximum maturity of 12 months. 6. Available contracts
All monthly maturities from 1 to 12 months would be made available. 7. Settlement mechanism The currency futures contract shall be settled in cash in Indian Rupee. 8. Settlement price The settlement price would be the Reserve Bank Reference Rate on the date of expiry. The methodology of computation and dissemination of the Reference Rate may be publicly disclosed by RBI. 9. Final settlement day The currency futures contract would expire on the last working day (excluding Saturdays) of the month. The last working day would be taken to be the same as that for Interbank Settlements in Mumbai.
The rules for Interbank Settlements, including those for ‘known holidays’ and ‘subsequently declared holiday’ would be those as laid down by FEDAI. B. EURO-INR CONTRACT (EUR-INR) 1. Underlying Euro-Indian Rupee (EUR-INR) 2. Trading Hours 9 a. m. to 5 p. m. 3. Size of the contract The contract size would be Euro 1000. 4. Quotation The contract would be quoted in rupee terms. However, the outstanding positions would be in Euro terms. 5. Tenor of the contract The maximum maturity of the contract would be 12 months. 6. Available contracts All monthly maturities from 1 to 12 months would be made available. . Settlement mechanism The contract would be settled in cash in Indian Rupee. 8. Settlement price The settlement price would be the Reserve Bank Reference Rate on the date of expiry. 9. Final settlement day The contract would expire on the last working day (excluding Saturdays) of the month. The last working day would be taken to be the same as that for Interbank Settlements in Mumbai. The rules for Interbank Settlements, including those for ‘known holidays’ and ‘subsequently declare holiday’ would be those as laid down by FEDAI 10. Initial Margin
The Initial Margin requirement would be based on a worst case loss of a portfolio of an individual client across various scenarios of price changes. The various scenarios of price changes would be so computed so as to cover a 99% VaR over a one day horizon. In order to achieve this, the price scan range shall be fixed at 3. 5 standard deviation. The initial margin so computed would be subject to a minimum of 2. 80% on the first day of trading and 2% thereafter. The initial margin shall be deducted from the liquid net worth of the clearing member on an online, real time basis. 11. Calendar spread margin
A currency futures position at one maturity which is hedged by an offsetting position at a different maturity would be treated as a calendar spread. The calendar spread margin shall be at a value of Rs. 700 for a spread of 1 month; Rs 1000 for a spread of 2 months and Rs 1500 for a spread of 3 months or more. The benefit for a calendar spread would continue till expiry of the near month contract. 12. Extreme Loss margin Extreme loss margin of 0. 3% on the mark to market value of the gross open positions shall be deducted from the liquid assets of the clearing member on an on line, real time basis. 3. Position Limits a) Client Level: The gross open positions of the client across all contracts shall not exceed 6% of the total open interest or EUR 5 million whichever is higher. The Exchange will disseminate alerts whenever the gross open position of the client exceeds 3% of the total open interest at the end of the previous day’s trade. b) Trading Member Level: The gross open positions of the trading member across all contracts shall not exceed 15% of the total open interest or EUR 25 million whichever is higher. c) Bank:
The gross open positions of the bank across all contracts shall not exceed 15% of the total open interest or EUR 50 million whichever is higher d) Clearing Member Level: No separate position limit is prescribed at the level of clearing member. However, the clearing member shall ensure that his own trading position and the positions of each trading member clearing through him is within the limits specified above. C. POUND STERLINGINR CONTRACT (GBP-INR) 1. Underlying Pound Sterling Indian Rupee (GBP-INR) 2. Trading Hours 9 a. m. to 5 p. m. 3. Size of the contract
The contract size would be Pound Sterling 1000. 4. Quotation The contract would be quoted in rupee terms. However, the outstanding positions would be in Pound Sterling terms. 5. Tenor of the contract The maximum maturity of the contract would be 12 months. 6. Available contracts All monthly maturities from 1 to 12 months would be made available. 7. Settlement mechanism The contract would be settled in cash in Indian Rupee. 8. Settlement price Exchange rate published by the Reserve Bank in its Press Release captioned RBI Reference Rate for US$ and Euro. 9. Final settlement day
The contract would expire on the last working day (excluding Saturdays) of the month. The last working day would be taken to be the same as that for Interbank Settlements in Mumbai. The rules for Interbank Settlements, including those for ‘known holidays’ and ‘subsequently declared holiday’ would be those as laid down by FEDAI. 10. Initial Margin The Initial Margin requirement would be based on a worst case loss of a portfolio of an individual client across various scenarios of price changes. The various scenarios of price changes would be so computed so as to cover a 99% VaR over a one day horizon.
In order to achieve this, the price scan range shall be fixed at 3. 5 standard deviation. The initial margin so computed would be subject to a minimum of 3. 20% on the first day of trading and 2% thereafter. The initial margin shall be deducted from the liquid net worth of the clearing member on an online, real time basis. 11. Calendar spread margin A currency futures position at one maturity which is hedged by an offsetting position at a different maturity would be treated as a calendar spread. The calendar spread margin shall be at a value of Rs. 500 for a spread of 1 month; Rs 1800 for a spread of 2 months and Rs 2000 for a spread of 3 months or more. The benefit for a calendar spread would continue till expiry of the near month contract. 12. Extreme Loss margin Extreme loss margin of 0. 5% on the mark to market value of the gross open positions shall be deducted from the liquid assets of the clearing member on an on line, real time basis. 13. Position Limits a) Client Level: The gross open positions of the client across all contracts shall not exceed 6% of the total open interest or GBP 5 million whichever is higher.
The Exchange will disseminate alerts whenever the gross open position of the client exceeds 3% of the total open interest at the end of the previous day’s trade. b) Trading Member Level: The gross open positions of the trading member across all contracts shall not exceed 15% of the total open interest or GBP 25 million whichever is higher. c) Bank: The gross open positions of the bank across all contracts shall not exceed 15% of the total open interest or GBP 50 million whichever is higher. d) Clearing Member Level:
No separate position limit is prescribed at the level of clearing member. However, the clearing member shall ensure that his own trading position and the positions of each trading member clearing through him is within the limits specified above. D. JAPANESE YEN-INR CONTRACT (JPY-INR) 1. Underlying Japanese Yen – Indian Rupee (JPY-INR) 2. Trading Hours 9 a. m. to 5 p. m 3. Size of the contract The contract size would be Japanese Yen 1,00,000 4. Quotation The contract would be quoted in rupee terms. However, the outstanding positions would be in Japanese Yen terms. 5.
Tenor of the contract The maximum maturity of the contract would be 12 months. 6. Available contracts All monthly maturities from 1 to 12 months would be made available. 7. Settlement mechanism The contract would be settled in cash in Indian Rupee. 8. Settlement price Exchange rate published by the Reserve Bank in its Press Release captioned RBI Reference Rate for US$ and Euro. 9. Final settlement day The contract would expire on the last working day (excluding Saturdays) of the month. The last working day would be taken to be the same as that for Interbank Settlements in Mumbai.
The rules for Interbank Settlements, including those for ‘known holidays’ and ‘subsequently declared holiday’ would be those as laid down by FEDAI. 10. Initial Margin The Initial Margin requirement would be based on a worst case loss of a portfolio of an individual client across various scenarios of price changes. The various scenarios of price changes would be so computed so as to cover a 99% VaR over a one day horizon. In order to achieve this, the price scan range shall be fixed at 3. 5 standard deviation. The initial margin so computed would be subject to a minimum of 4. 0% on the first day of trading and 2. 30% thereafter. The initial margin shall be deducted from the liquid net worth of the clearing member on an online, real time basis. 11. Calendar spread margin A currency futures position at one maturity which is hedged by an offsetting position at a different maturity would be treated as a calendar spread. The calendar spread margin shall be at a value of Rs. 600 for a spread of 1 month; Rs 1000 for a spread of 2 months and Rs 1500 for a spread of 3 months or more. The benefit for a calendar spread would continue till expiry of the near month contract. 2. Extreme Loss margin Extreme loss margin of 0. 7% on the mark to market value of the gross open positions shall be deducted from the liquid assets of the clearing member on an on line, real time basis. 13. Position Limits a) Client Level: The gross open positions of the client across all contracts shall not exceed 6% of the total open interest or JPY 200 million whichever is higher. The Exchange will disseminate alerts whenever the gross open position of the client exceeds 3% of the total open interest at the end of the previous day’s trade. b) Trading Member Level:
The gross open positions of the trading member across all contracts shall not exceed 15% of the total open interest or JPY 1000 million whichever is higher. c) Bank: The gross open positions of the trading member across all contracts shall not exceed 15% of the total open interest or JPY 2000 million whichever is higher. d) Clearing Member Level: No separate position limit is prescribed at the level of clearing member. However, the clearing member shall ensure that his own trading position and the positions of each trading member clearing through him is within the limits specified above. . 6 Strategies used in currency futures 1. SPECULATION IN FUTURES MARKETS Speculators play a vital role in the futures markets. Futures are designed primarily to assist hedgers in managing their exposure to price risk; however, this would not be possible without the participation of speculators. Speculators, or traders, assume the price risk that hedgers attempt to lay off in the markets. In other words, hedgers often depend on speculators to take the other side of their trades (i. e. act as counter party) and to add depth and liquidity to the markets that are vital for the unctioning of a futures market. The speculators therefore have a big hand in making the market. Speculation is not similar to manipulation. A manipulator tries to push prices in the reverse direction of the market equilibrium while the speculator forecasts the movement in prices and this effort eventually brings the prices closer to the market equilibrium. If the speculators do not adhere to the relevant fundamental factors of the spot market, they would not survive since their correlation with the underlying spot market would be nonexistent. 2. LONG POSITION IN FUTURES
Long position in a currency futures contract without any exposure in the cash market is called a speculative position. Long position in futures for speculative purpose means buying futures contract in anticipation of strengthening of the exchange rate (which actually means buy the base currency (USD) and sell the terms currency (INR) and you want the base currency to rise in value and then you would sell it back at a higher price). If the exchange rate strengthens before the expiry of the contract then the trader makes a profit on squaring off the position, and if the exchange rate weakens then the trader makes a loss.
The graph above depicts the pay-off of a long position in a future contract, which does demonstrate that the pay-off of a trader is a linear derivative, that is, he makes unlimited profit if the market moves as per his directional view, and if the market goes against, he has equal risk of making unlimited losses if he doesn’t choose to exit out his position. Hypothetical Example – Long positions in futures On May 1, 2008, an active trader in the currency futures market expects INR will depreciate against USD caused by India’s sharply rising import bill and poor FII equity flows.
On the basis of his view about the USD/INR movement, he buys 1 USD/INR August contract at the prevailing rate of Rs. 40. 5800. He decides to hold the contract till expiry and during the holding period USD/INR futures actually moves as per his anticipation and the RBI Reference rate increases to USD/INR 42. 46 on May 30, 2008. He squares off his position and books a profit of Rs. 1880 (42. 4600×1000 – 40. 5800×1000) on 1 contract of USD/INR futures contract. 3. SHORT POSITION IN FUTURES Short position in a currency futures contract without any exposure in the cash market is called a speculative transaction.
Short position in futures for speculative purposes means selling a futures contract in anticipation of decline in the exchange rate (which actually means sell the base currency (USD) and buy the terms currency (INR) and you want the base currency to fall in value and then you would buy it back at a lower price). If the exchange rate weakens before the expiry of the contract, then the trader makes a profit on squaring off the position, and if the exchange rate strengthens then the trader makes loss. Example – Short positions in futures
On August 1, 2008, an active trader in the currency futures market expects INR will appreciate against USD, caused by softening of crude oil prices in the international market and hence improving India’s trade balance. On the basis of his view about the USD/INR movement, he sells 1 USD/INR August contract at the prevailing rate of Rs. 42. 3600. On August 6, 2008, USD/INR August futures contract actually moves as per his anticipation and declines to 41. 9975. He decides to square off his position and earns a profit of Rs. 362. 50 (42. 3600×1000 – 41. 975×1000) on squaring off the short position of 1 USD/INR August futures contract. Observation: The trader has effectively analysed the market conditions and has taken a right call by going short on futures and thus has made a gain of Rs. 362. 50 per contract with small investment (a margin of 3%, which comes to Rs. 1270. 80) in a span of 6 days. 3. 7 HEDGING USED IN CURRENCY FUTURES Hedging: Hedging means taking a position in the future market that is opposite to a position in the physical market with a view to reduce or limit risk associated with unpredictable changes in exchange rate.
A hedger has an Overall Portfolio (OP) composed of (at least) 2 positions: 1. Underlying position 2. Hedging position with negative correlation with underlying position Value of OP = Underlying position + Hedging position; and in case of a Perfect hedge, the Value of the OP is insensitive to exchange rate (FX) changes. Types of FX Hedgers using Futures Long hedge: · Underlying position: short in the foreign currency · Hedging position: long in currency futures Short hedge: · Underlying position: long in the foreign currency · Hedging position: short in currency futures The proper size of the Hedging position Basic Approach: Equal hedge · Modern Approach: Optimal hedge Equal hedge: In an Equal Hedge, the total value of the futures contracts involved is the same as the value of the spot market position. As an example, a US importer who has an exposure of ? 1 million will go long on 16 contracts assuming a face value of ? 62,500 per contract. Therefore in an equal hedge: Size of Underlying position = Size of Hedging position. Optimal Hedge: An optimal hedge is one where the changes in the spot prices are negatively correlated with the changes in the futures prices and perfectly offset each other.
This can generally be described as an equal hedge, except when the spot-future basis relationship changes. An Optimal Hedge is a hedging strategy which yields the highest level of utility to the hedger. Corporate Hedging Before the introduction of currency futures, a corporate hedger had only Over-the-Counter (OTC) market as a platform to hedge his currency exposure; however now he has an additional platform where he can compare between the two platforms and accordingly decide whether he will hedge his exposure in the OTC market or on an exchange or he will like to hedge his exposures partially on both the platforms.
Example 1: Long Futures Hedge Exposed to the Risk of Strengthening USD Unhedged Exposure: Let’s say on January 1, 2008, an Indian importer enters into a contract to import 1,000 barrels of oil with payment to be made in US Dollar (USD) on July 1, 2008. The price of each barrel of oil has been fixed at USD 110/barrel at the prevailing exchange rate of 1 USD = INR 39. 41; the cost of one barrel of oil in INR works out to be Rs. 4335. 10 (110 x 39. 41). The importer has a risk that the USD may strengthen over the next six months causing the oil to cost more in INR; however, he decides not to hedge his position.
On July 1, 2008, the INR actually depreciates and now the exchange rate stands at 1 USD = INR 43. 23. In dollar terms he has fixed his price, that is USD 110/barrel, however, to make payment in USD he has to convert the INR into USD on the given date and now the exchange rate stands at 1USD = INR43. 23. Therefore, to make payment for one dollar, he has to shell out Rs. 43. 23. Hence the same barrel of oil which was costing Rs. 4335. 10 on January 1, 2008 will now cost him Rs. 4755. 0, which means 1 barrel of oil ended up costing Rs. 4755. 30 – Rs. 4335. 10 = Rs. 420. 20 more and hence the 1000 barrels of oil has become dearer by INR 4,20,200. When INR weakens, he makes a loss, and when INR strengthens, he makes a profit. As the importer cannot be sure of future exchange rate developments, he has an entirely speculative position in the cash market, which can affect the value of his operating cash flows, income statement, and competitive position, hence market share and stock price. Hedged:
Let’s presume the same Indian Importer pre-empted that there is good probability that INR will weaken against the USD given the current macro-economic fundamentals of increasing Current Account deficit and FII outflows and decides to hedge his exposure on an exchange platform using currency futures. Since he is concerned that the value of USD will rise he decides go long on currency futures, it means he purchases a USD/INR futures contract. This protects the importer because strengthening of USD would lead to profit in the long futures position, which would effectively ensure that his loss in the physical market would be mitigated.
The following figure and Exhibit explain the mechanics of hedging using currency futures. Observation: Following a 9. 7% rise in the spot price for USD, the US dollars are purchased at the new, higher spot price, but profits on the hedge foster an effective exchange rate equal to the original hedge price. Example 2: Short Futures Hedge Exposed to the Risk of Weakening USD Unhedged Exposure: Let’s say on March 1, 2008, an Indian refiner enters into a contract to export 1000 barrels of oil with payment to be received in US Dollar (USD) on June 1, 2008.
The price of each barrel of oil has been fixed at USD 80/barrel at the prevailing exchange rate of 1 USD = INR 44. 05; the price of one barrel of oil in INR works out to be is Rs. 3524 (80 x 44. 05). The refiner has a risk that the INR may strengthen over the next three months causing the oil to cost less in INR; however he decides not to hedge his position. On June 1, 2008, the INR actually appreciates against the USD and now the exchange rate stands at 1 USD = INR 40. 30.
In dollar terms he has fixed his price, that is USD 80/barrel; however, the dollar that he receives has to be converted in INR on the given date and the exchange rate stands at 1USD = INR40. 30. Therefore, every dollar that he receives is worth Rs. 40. 30 as against Rs. 44. 05. Hence the same barrel of oil that initially would have garnered him Rs. 3524 (80 x 44. 05) will now realize Rs. 3224, which means 1 barrel of oil ended up selling Rs. 3524 – Rs. 3224 = Rs. 300 less and hence the 1000 barrels of oil has become cheaper by INR 3,00,000. When INR strengthens, he makes a loss and when INR weakens, he makes a profit.
As the refiner cannot be sure of future exchange rate developments, he has an entirely speculative position in the cash market, which can affect the value of his operating cash flows, income statement, and competitive position, hence market share and stock price. Hedged: Let’s presume the same Indian refiner pre-empted that there is good probability that INR will strengthen against the USD given the current macroeconomic fundamentals of reducing fiscal deficit, stable current account deficit and strong FII inflows and decides to hedge his exposure on an exchange platform using currency futures.
Since he is concerned that the value of USD will fall he decides go short on currency futures, it means he sells a USD/INR future contract. This protects the importer because weakening of USD would lead to profit in the short futures position, which would effectively ensure that his loss in the physical market would be mitigated. The following figure and exhibit explain the mechanics of hedging using currency futures. Observation: Following an 8. 51% fall in the spot price for USD, the US dollars are sold at the new, lower spot price; but profits on the hedge foster an effective xchange rate equal to the original hedge price. Example 3 (Variation of Example 1): Long Futures Hedge Exposed to the Risk of Contract Expiry and Liquidation on the Same Day. Observation: The size of the exposure is USD 110000 and the desired value date is precisely the same as the futures delivery date (June 30). Following a 9. 5% rise in the spot price for USD against INR, the US dollars are purchased at the new, higher spot price; but profits on the hedge foster an effective exchange rate equal to the original futures price because on the date of expiry the spot price and the future price tend to converge.
Chapter-4 INDUSTRY PROFILE: 4. 1 Broking Insights The Indian broking industry is one of the oldest trading industries that have been around even before the establishment of the BSE in 1875. Despite passing through a number of changes in the post liberalization period, the industry has found its way towards sustainable growth. With the purpose of gaining a deeper understanding about the role of the Indian stock broking industry in the country’s economy, we present in this section some of the industry insights gleaned from analysis of data received through primary research.
For the broking industry, we started with an initial database of over 1,800 broking firms that were contacted, from which 464 responses were received. The list was further short listed based on the number of terminals and the top 210 were selected for profiling. 394 responses, that provided more than 85% of the information sought have been included for this analysis presented here as insights. All the data for the study was collected through responses received directly from the broking firms.
The insights have been arrived at through an analysis on various parameters, pertinent to the equity broking industry, such as region, terminal, market, branches, sub brokers, products and growth areas. Some key characteristics of the sample 394 firms are: * On the basis of geographical concentration, the West region has the maximum representation of 52%. Around 24% firms are located in the North, 13% in the South and 10% in the East * 3% firms started broking operations before 1950, 65% between 1950-1995 and 32% post 1995. On the basis of terminals, 40% are located at Mumbai, 12% in Delhi, 8% in Ahmedabad, 7% in Kolkata, 4% in Chennai and 29% are from other cities * From this study, we find that almost 36% firms trade in cash and derivatives and 27% are into cash markets alone. Around 20% trade in cash, derivatives and commodities * In the cash market, around 34% firms trade at NSE, 14% at BSE and 52% trade at both exchanges. In the derivative segment, 48% trade at NSE, 7% at BSE and 45% at both, whereas in the debt market, 31% trade at NSE, 26% at BSE and 43% at both exchanges * Majority of branches are located in the North, i. e. around 40%.
West has 31%, 24% are located in South and 5% in East * In terms of sub-brokers, around 55% are located in the South, 29% in West, 11% in North and 4% in East * Trading, IPOs and Mututal Funds are the top three products offered with 90% firms offering trading, 67% IPOs and 53% firms offering mutual fund transactions * In terms of various areas of growth, 84% firms have expressed interest in expanding their institutional clients, 66% firms intend to increase FII clients and 43% are interested in setting up JV in India and abroad * In terms of IT penetration, 62% firms have provided their website and around 94% firms have email facility 4. 2 Terminals Almost 52% of the terminals in the sample are based in the Western region of India, followed by 25% in the North, 13% in the South and 10% in the East. Mumbai has got the maximum representation from the West, Chennai from the South, New Delhi from the North and Kolkata from the East.
Mumbai also has got the maximum representation in having the highest number of terminals. 40% terminals are located in Mumbai while 12% are from Delhi, 8% from Ahmedabad, 7% from Kolkata, 4% from Chennai and 29% are from other cities in India. 4. 3 Branches & Sub-Brokers The maximum concentration of branches is in the North, with as many as 40% of all branches located there, followed by the Western region, with 31% branches. Around 24% branches are located in the South and East constitutes for 5% of the total branches of the total sample. In case of sub-brokers, almost 55% of them are based in the South. West and North follow, with 30% and 11% sub-brokers respectively, whereas East has around 4% of total sub-brokers. 4. Financial Markets The financial markets have been classified as cash market, derivatives market, debt market and commodities market. Cash market, also known as spot market, is the most sought after amongst investors. Majority of the sample broking firms are dealing in the cash market, followed by derivative and commodities. 27% firms are dealing only in the cash market, whereas 35% are into cash and derivatives. Almost 20% firms trade in cash, derivatives and commodities market. Firms that are into cash, derivatives and debt are 7%. On the other hand, firms into cash and commodities are 3%, cash & debt marke