have been more successful in equity and currency than in... following table shows.
Transcription
have been more successful in equity and currency than in... following table shows.
have been more successful in equity and currency than in interest rate markets, as the following table shows. Average daily turnover (Rs Cr) on NSE Equity 2006-07 2007-08 2008-09 2009-10 2010-11 29,000 52,000 44,000 70,000 116,000 640 7,000 13,600 Currency Interest rate 10 Negligible Source: NSE Fact Book 2011, National Stock Exchange Sample Questions 1. Which of the following is the role of derivatives? a. Financing b. Cash or liquidity management c. Risk management d. All of the above (Answer: please see Section 4.1) 2. Which of the following derivatives have the largest market size globally as at 2009? a. Equity derivatives b. Interest rate derivatives c. Currency derivatives d. Commodity derivatives (Answer: please see Section 4.2) 3. Which of the following derivatives have the largest market size in India? a. Equity derivatives b. Interest rate derivatives c. Currency derivatives d. Commodity derivatives (Answer: please see Section 4.5) 4. Bond futures usually are settled as follows a. Cash settlement b. Physical settlement c. Both (a) and (b) d. None of the above (Answer: please see Section 4.2) 5. Which of the following correctly describes “hedging”? a. Risk reduction b. Risk minimization c. Risk insurance d. Risk elimination (Answer: please see Section 4.1) 50 Chapter 5: Contract Specification for Interest Rate Derivatives Topics 5.1 Underlying 5.2 Contract Amount 5.3 Contract Months, Expiry Date and Last Trading Day 5.4 Price quotation and tick size 5.5 Daily Settlement Price 5.6 Final Settlement Price 5.7 Delivery The “interest rate derivatives” traded on Exchanges in India are not truly interest rate derivatives but bond derivatives (see Section 4.2). The underlying for interest rate derivatives is the interest rate on money, typically, the interbank money; and the underlying for bond derivatives is a specific debt security issued by a specific borrowers. Globally, interest rate derivatives dominate bond derivatives because the interest rate market is one large market while the market for debt securities is fragmented into specific instruments, which are not fungible with each other. However, the name “interest rate derivatives” has become stuck in India to what actually are bond derivatives. All interest rate derivatives are traded in the Currency Derivatives segment of Exchange. As of February 2013, the state of trading in interest rate derivatives on Indian Exchanges is as follows. x National Stock Exchange (NSE): offers trading in interest rate derivatives x Bombay Stock Exchange (BSE): transferred its currency derivatives and interest rate derivatives to United Stock Exchange (USE) x United Stock Exchange (USE): only currency derivatives are traded x MCX-SX: only currency and equity derivatives are traded Thus, NSE is the only Exchange which currently trades interest rate derivatives. Even on this Exchange, only two of the four permissible contracts are currently traded. 5.1 Underlying Under the current regulations of SEBI, four interest rate derivatives are allowed to be traded on the Exchanges. The underlying assets for the four contracts are: 1. 91-day Treasury Bill issued by Government of India (GOI) 2. 2Y 7% GOI Security with semi-annual coupon payment 3. 5Y 7% GOI Security with semi-annual coupon payment 4. 10Y 7% GOI Security with semi-annual coupon payment The 91-day Treasury Bill is a discount or zero-coupon instrument (see Section 1.3) issued weekly by GOI on every Wednesday for settlement on the following Friday. It is issued for a minimum and in multiples of Rs 25,000. 51 GOI also issues many “dated securities” with different maturity dates and different coupons. They are issued for a minimum and in multiples of Rs 10,000. However, none of the existing dated GOI securities correspond to the coupon and maturity Unlike the Treasury Bill (which really exists and deliverable), the other three Government Securities above are notional or imaginary securities. Though there are many government securities outstanding, none of them match the coupon and maturity of the last three underlyings. Accordingly, for the purpose delivery, any of the eligible securities (explained in Section 5.7) are allowed to be substituted for the notional underlying after adjusting the delivery quantity through a “Conversion Factor” (explained in Section 5.6). To sum up, the underlying for 91- Treasury Bill is actual security and can be delivered, but that for other three futures (which are GOI securities) are notional and can be delivered as substitute securities for equivalent amount. Though SEBI regulations permit three different bond futures with maturity of 2Y, 5Y and 10Y, NSE currently trades only the 10Y GOI security (in addition to the 91-day Treasury Bill). 5.2 Contract Amount (or Market Lot) Contract Amount (or Market Lot) is the minimum and multiple of trade size. It is Rs 200,000 of face value. Because the face value will always be an integral multiple of Rs 2 lakhs, we cannot buy or sell for amounts like Rs 3 lakh, Rs 5 lakh, etc. In contrast, the market lot in the cash market of wholesale debt market is Rs 5 Cr (which is equal to 250 futures contracts). The face value and market value are linked by the market price. In both cash and futures markets, the prices are quoted for Rs 100 face value so that the relation between face value and market value is: Market Value = Face Value × (Market Price / 100) Thus, if the price is 106.10, the face value of 200,000 will have a market value of: 200,000 × (106.10/100) = 212,200. 5.3 Contract Months, Expiry Dates and Last Trading Day Contract Month (also known as Expiry Month) is the month in which the contract expires or settles. On any trading day, there will be multiple contracts expiring in different months. Current SEBI regulations allow the following number of contract months. 91D Treasury futures Bill Three nearest “serial months” and three nearest “quarterly” months, for a total of six contract months 7% 10Y GSec futures Four nearest “quarterly” months 52 The “quarterly” months are March, June, September and December; and “serial” month is a month other than the four quarterly months. As against the above regulations, NSE lists only the following contract months: 91D Treasury futures Bill Three nearest “serial “quarterly” month 7% 10Y GSec futures months” and one nearest Two nearest “quarterly” months Expiry date is the date on which the contract is settled; and the last trading day (LTD) is the date on which trading in the contract ceases and it will be (naturally) before the expiry date. The following are the expiry date and LTD for the two futures contracts. 91D Treasury futures Bill Expiry date: last business day of Contract Month LTD: last Wednesday (or previous business day, if it is holiday) of Contract Month. Trading halts at 1pm on LTD 7% 10Y GSec futures Expiry date: last business day of Contract Month LTD: Two business days prior to Expiry Date 5.4 Price Quotation and Tick Size Price quotation refers to the style of quoting the contract price; and tick size is the minimum change in price. The tick size for both contracts is Rs 0.0025. The price quotation for T-bill is 100 minus the discount rate (which is different from investment yield, see Section 2.5) and that for GOI security is price per 100 face value. For example, if the discount yield is 5%, then the price of T-bill futures will be: 100 – 5 = 95.0000. Given that the face value of one contract is equal to Rs 200,000 and given that tick size is 0.0025, the minimum change per contract will be: 200,000 u 0.0025 / 100 = 5. 5.5 Daily Settlement Price (DSP) Daily settlement price (DSP) is the price at which margining and mark-to-market (see Unit 6) is implemented. Because of daily mark-to-market, the carry price of the contract changes every day. The following is the procedure for determining the DSP. For 91-day T-bill futures DSP is determined in one of the following ways in that order of preference: (a) If there are at least five trades in the last 30 minutes of trading: DSP = 100 – 0.25 u Y where Y is the weighted average yield price of trades, the weights being the number of contracts in the trade. (b) If there are at least five trades in the last 60 minutes of trading: DSP = 100 – 0.25 u Y (c) If there are at least five trades in the last 120 minutes of trading: 53 DSP = 100 – 0.25 u Y (d) Theoretical price will be determined by the Clearing Corp in accordance with the disclosed procedure from the rates published by Fixed Income and Money Market Derivatives Association (FIMMDA). For 10Y GSec futures DSP is determined in one of the following ways in that order of preference. (a) If there are at least five trades for a minimum total amount of Rs 10 Cr in the last 30 minutes of trading: DSP = volume-weighted average price of such trades (b) If there are at least five trades for a minimum total amount of Rs 10 Cr in the last 60 minutes of trading: DSP = volume-weighted average price of such trades (c) If there are at least five trades for a minimum total amount of Rs 10 Cr in the last 120 minutes of trading: DSP = volume-weighted average price of such trades (d) Theoretical price will be determined by the Clearing Corp in accordance with the disclosed procedure. 5.6 Final Settlement Price (FSP) Final settlement price (DSP) is the price at which the contract is settled on the expiry date. For 91D T-bill, FSP is the weighted average discount yield (Y) in the auction of 91day T-bill conducted by Reserve Bank of India (RBI) on the expiry date. The FSP is (100 – 0.25 u Y) Note that 91 days is considered exactly one-fourth of the year (i.e. 0.25) in the formula above. For example, if the weighted average discount yield (Y) in the RBI auction is 5%, then the FSP will be (100 – 0.25 u 5%) = 99.9875 The value of one contract, given its face value of 200,000 and given that the price is for 100 face value, will be (200,000 / 100) u 99.9875 = 199,975 For 10Y GSec futures, FSP is the last DSP at which the contract is held. 5.7 Delivery The settlement method for the 91-day T-bill futures is compulsory cash settlement and that for 10Y GSec futures is physical settlement. The T-bill futures are settled in cash for the difference between the contract price and the final settlement price. The 10Y GSec futures are settled by physical delivery of the 54