USD INR Futures: Contract Specifications and Margin Requirements

The USD INR Pair (Part 1)

 The contract specification of the USD INR futures gives us insights on trade logistics.

Here are the salient features of the USD INR pair –

To give you a sense of how this works, let’s take an example –

This USD INR pair’s 15-minute chart displays a bearish Marubuzo indicated by the encircled candle. Initiating a short trade based on this is reasonable, with the Marubuzo’s high as your stoploss.

I want to demonstrate the way in which USD INR contracts operate rather than attempting to legitimize a trade.

The trade details are as below –

Date: 1st July 2016

Position – Short

Entry – 67.6900

SL – 67.7500

Number of lots to short – 10

1 lot of USD INR = $ 1000

The contract value of 1 lot of USD INR = Lot size * price

=1000 * 67.7000

=67,700

 The margin to open a USD INR position amounts to Rs.1,524/-. This equates to 67700 in contract size.

1525/67700

= 2.251%

I’d estimate 1.5% of this would be the SAPN margin requirement – that is, the least amount of margin demanded by the exchange – and the remainder in exposure margin.

Further, the idea is to short 10 lots, hence total margin required is –

10 * 1525

= 15,250/-

When trading equity futures, margin requirements can range from 15% to 65% of the contract value and vary depending on the stock. In comparison, currency trading offers significantly lower margins, which facilitates leverage.

In contrast, currency generally maintains a narrow trading range in comparison to stocks—rendering high leveraging attainable.

– The contract logistics

Take note of how currency futures are quoted – up to four decimal places. This is intentional, as even seemingly minuscule amounts such as 0.0025 can be significant for these instruments.

The Reserve Bank of India (RBI) state the reference rate to four decimal places. Even a slight change at this level can cause a significant shift in the foreign reserves. This practice is common globally when considering US Dollar to Indian Rupee (USD INR), where the tick size or pip is 0.0025. This is known as the minimum number denoting alteration in points by which a currency may move.

When the US Dollar to Indian Rupee rate changed from 67.9000 to 67.9025, it’s said that the currency has risen by a pip.

Calculating how much you would earn per pip in the USD INR pair should be simple. All you need to do is take the size of your trade and multiply it by the pip value.

Lot Size * pip (tick size)

= 1000 * 0.0025

= 2.5

This means to say, for every pip or every tick movement you make Rs.2.5/-.

Going back to the short trade, here is how the Marubuzo panned out –

When I first opened the trade, the currency pair went down to 67.6000. If I were to end this position now, here is my potential profit.

Entry = 67.6900

CMP = 67.6000

Total number of points = 67.6900 – 67.6000 = 0.0900

Position – Short

This could be a bit tricky, so please focus. As you know, a pip is the least amount of points a currency can move. To find out how many pips were moved when it shifted by 0.09 paise, we divide the entire number of points shifted by the pip size.

Number of pips = 0.0900/0.0025

= 36

We can now determine the amount of money that was gained from this trade, which was 36 pips.

Lot size * number of lots * number of pips * tick size

The number of pips multiplied by the tick size equates to the total points earned with the trade. Therefore, this can be rephrased as:

Lot Size * Number of lots * total number of points

= 1000 * 10 * 0.0900

= 900

For intraday trading, remember to meet the margin requirements. We can hold the July contract in the series up until two days prior to the last working day of the month.

Here is the calendar –

So 29th July happens to be the last working day of the month. Hence 27th July will be the expiry of this series. In fact, you can hold the contract only till 12:30 PM on 27th July.

You can check the contract to see exactly when it is set to expire.

What is the cost of resolving this issue?

The settlement will take place according to RBI’s reference rate on the 27th of July, and it is noteworthy that the P&L will be settled in Indian Rupees.

So for example, if I hold this position till 12:30 PM on 27th July and let it expiry, assume the price is 67.4000, then I’d stand to make –

= 1000 * 0.29 * 10

=2900/-

The cash will hit my trading account on the 28th of July. As long as you maintain the agreement, price fluctuations will be monitored (M2M). The same holds true for equity futures.

This example should offer an understanding of the mechanics behind currency futures.

Let us quickly run through the USDINR options contract.

 – USD INR options contract

Let us take a look at the USDINR option contract structure. This particular contract is only available for the USD INR pair, however, with any luck, more currency pairs may be added for options contracts in the future. Apart from characteristics that are similar to that of futures contracts, there are certain specifications exclusive to option contracts.

Option expiry style – European

Premium – Quoted in INR

Contract cycle – The future contracts for up to 12 months can be traded, while options contracts are available for a period of 3 months. This is similar to what applies in equity derivatives and as we are currently in July, the contracts which can be acted upon are those for July, August, and September.

Strikes available – Around 25 different strikes are available for you to select from, ranging from In the Money to Out of the Money to Near the Money and 0.25 paisa intervals. The number can vary depending on market conditions.

Settlement – The amount to be paid out is based on the Indian Rupee benchmark rate set by the Reserve Bank of India on the day of expiration.

Let us examine the USD INR option contract and comprehend its specifications. Here is an image to refer to – 

From the option quote, we know the following –

Option type – Call option

Strike – 67.0000

Spot price (see RBI reference rate) – 67.1848

Expiry Date – 27th July 2016

Position – Long

Premium – 0.7400 (quoted in INR)

The lot size is $1000, though this information has not been included in the quote for equity derivatives. Keep in mind that if it’s your first time seeing this, the lot size is $1000.

In terms of the premium you would pay, it is simple to work out if you decide to purchase this option.

Premium to be paid = lot size * premium

= 1000 * 0.7400

= 740

This illustration is similar to that of equity derivatives. Here is a picture I took instead –

It’s evident that the premium has increased substantially – if I terminate my transaction right away, here is my potential payoff.

= 1000 * 0.7750

=775

This translated to a profit of 775 – 740 = 35 per lot.