As of now, Interest rate futures only banks have been permitted for in India, but there are lots of indications that the coverage of participants will be enhanced in due course. The credit crisis in the year 2008 has substantially increased the risk in global interest markets. In India, interest rates have been highly volatile in the last 12-18 months. There is a growing need for mitigating interest rate risk using an effective and efficient mechanism.
In this perspective, the book, ‘A guide to interest rate futures' published by MCX stock exchange, part of listed entity Financial Technologies (India) is aimed at developing awareness and understanding of the concepts and contemporary market practice of using Exchange traded interest rate futures for mitigating interest rate risk.
During the crisis, banks and financial institutions have failed but not exchange. It shows the reliability of regulator.
Inflation, government borrowing, company expansion activities are major factors having impact on interest rate movement.
In case of India, government borrowing is major factor among others. To funding higher fiscal deficit, RBI issue bonds in market to raise the money.
However bond price and bond yield have inverse relationship. Due to the huge supply bond prices are declining and yield is going up.
In this scenario, analysis of interest rate becomes essential to understand the market dynamics. Banks, primary dealers, FIIs will have great advantage by way of interest rate future trading.
A futures contract is an agreement between a buyer (seller) and an exchange or its clearinghouse in which the buyer (seller) agrees to take (make) delivery of a standard quantity of a specific asset/financial instrument at a specified price at the end of a designated period of time.
Future trading is essential as it is the best way of hedging against risk, perfect way for financial leverage and also effective management of funds. It would be the perfect way for proper price discovery.
Market regulators are planning to launch interest rate future in India very soon however proper schedule is yet to announce.
Apex bank of the country dose not have control on long term interest rate as it is determine by market force.
However instruments like interest rate future will bring more transparency in the movement of interest rate.
Role of RBI in interest rate future According to RBI's regulation, Banks/PDs/FIs, allowed to undertake FRAs/IRS for their balance sheet management or for market making, Overall swaps undertaken for market making PVBP should be within 0.25% of the net worth, Banks have been allowed to take trading positions in interest rate futures.
Banks need to disclose as a part of the notes on accounts to balance sheets the following details:
1) Notional principal amounts of exchange traded interest rate derivatives undertaken during the year.
2) Notional principal amounts of exchange traded interest rate derivatives outstanding as on year-end.
Contract Specifications:
- Underlying – 10Y coupon bearing GOI security
- Notional coupon – 7.00% s.a. (day count 30/360)
- Contract Size – Rs. 2.00 lacs
- Available Contracts – quarterly contracts expiring in the months of March, June, September and December.
- Deliverable Month – from 1st of the contract month to last day of contract month, i.e. 1 month
- Tenor – The maximum maturity of the contract is 12 months
- Last Trading day – Seventh business day preceding the last business day of the delivery month
- Last Delivery Day – Last business day of the month
- Trading Hours – 9:00 a.m. to 5:00 p.m.
Margin requirement:
Cash/Collateral deposited on fresh positions. Represents a deposit against short-term price movement.
The amount of initial margin is set by the Exchanges, in accordance with the guidelines laid down by the RBI-SEBI Technical Committee Report.
Based on a 99% VaR calculations, as per the methodology suggested by the RBI-SEBI Report. Subject to a minimum of 2.33% of the value of the futures contract on the first day of trading and L1.6% of the value of the futures contract thereafter
The Daily Settlement Price would be calculated based on the closing price of the futures contract on the trading day, which would be declared by the exchange soon after closing hours.
The closing price is calculated as the Weighted Average price of the futures contract in the last half an hour of trade.
Recently RBI has launched currency futures, which is working successfully. Interest rate is always the subject of interest of every individual.
It does have vital importance in the life of individual who is paying EMI for home loan and the banks, which approve that loan amount. Both the parties are worried for the risk, which is underlying in the trade.
To cover the risk, there is a need of perfect judgment of interest rate trend. In short, interest rate future trading will be the perfect platform for both the parties concerned in the trade.
It would be the best place where one can precisely judge the movement of upcoming interest rate. As of now, Interest rate futures only banks have been permitted for in India, but there are lots of indications that the coverage of participants will be enhanced in due course.
In this perspective, the book, ‘A guide to interest rate futures' published by MCX stock exchange, part of listed entity Financial Technologies (India) is aimed at developing awareness and understanding of the concepts and contemporary market practice of using Exchange traded interest rate futures for mitigating interest rate risk.
During the crisis, banks and financial institutions have failed but not exchange. It shows the reliability of regulator.
Inflation, government borrowing, company expansion activities are major factors having impact on interest rate movement.
In case of India, government borrowing is major factor among others. To funding higher fiscal deficit, RBI issue bonds in market to raise the money.
However bond price and bond yield have inverse relationship. Due to the huge supply bond prices are declining and yield is going up.
In this scenario, analysis of interest rate becomes essential to understand the market dynamics. Banks, primary dealers, FIIs will have great advantage by way of interest rate future trading.
A futures contract is an agreement between a buyer (seller) and an exchange or its clearinghouse in which the buyer (seller) agrees to take (make) delivery of a standard quantity of a specific asset/financial instrument at a specified price at the end of a designated period of time.
Future trading is essential as it is the best way of hedging against risk, perfect way for financial leverage and also effective management of funds. It would be the perfect way for proper price discovery.
Market regulators are planning to launch interest rate future in India very soon however proper schedule is yet to announce.
Apex bank of the country dose not have control on long term interest rate as it is determine by market force.
However instruments like interest rate future will bring more transparency in the movement of interest rate.
Role of RBI in interest rate future According to RBI's regulation, Banks/PDs/FIs, allowed to undertake FRAs/IRS for their balance sheet management or for market making, Overall swaps undertaken for market making PVBP should be within 0.25% of the net worth, Banks have been allowed to take trading positions in interest rate futures.
Banks need to disclose as a part of the notes on accounts to balance sheets the following details:
1) Notional principal amounts of exchange traded interest rate derivatives undertaken during the year.
2) Notional principal amounts of exchange traded interest rate derivatives outstanding as on year-end.
Contract Specifications:
- Underlying – 10Y coupon bearing GOI security
- Notional coupon – 7.00% s.a. (day count 30/360)
- Contract Size – Rs. 2.00 lacs
- Available Contracts – quarterly contracts expiring in the months of March, June, September and December.
- Deliverable Month – from 1st of the contract month to last day of contract month, i.e. 1 month
- Tenor – The maximum maturity of the contract is 12 months
- Last Trading day – Seventh business day preceding the last business day of the delivery month
- Last Delivery Day – Last business day of the month
- Trading Hours – 9:00 a.m. to 5:00 p.m.
Margin requirement:
Cash/Collateral deposited on fresh positions. Represents a deposit against short-term price movement.
The amount of initial margin is set by the Exchanges, in accordance with the guidelines laid down by the RBI-SEBI Technical Committee Report.
Based on a 99% VaR calculations, as per the methodology suggested by the RBI-SEBI Report. Subject to a minimum of 2.33% of the value of the futures contract on the first day of trading and L1.6% of the value of the futures contract thereafter
The Daily Settlement Price would be calculated based on the closing price of the futures contract on the trading day, which would be declared by the exchange soon after closing hours.
The closing price is calculated as the Weighted Average price of the futures contract in the last half an hour of trade.
Recently RBI has launched currency futures, which is working successfully. Interest rate is always the subject of interest of every individual.
It does have vital importance in the life of individual who is paying EMI for home loan and the banks, which approve that loan amount. Both the parties are worried for the risk, which is underlying in the trade.
To cover the risk, there is a need of perfect judgment of interest rate trend. In short, interest rate future trading will be the perfect platform for both the parties concerned in the trade.
It would be the best place where one can precisely judge the movement of upcoming interest rate. As of now, Interest rate futures only banks have been permitted for in India, but there are lots of indications that the coverage of participants will be enhanced in due course.
1 comment:
I would appreciate if we could make contact regards collaboration on commodity articles with you.
We are in prelaunch of a platforms dedicated to Global / BRIC & Emerging Market topics in business, finance & economy. We are partnering with a number of sources for content contribution, in various sectors that fit this theme, obviously your content is a key target area for us.
Our aim is to become a central hub for information in this area.
As part of our strategy, we provide our contributors with a bio on the platform, listing all articles published, each article carries a hotlink back to the original piece. We are also entering into co-marketing agreements with some of our partners, as we run a fairly high end database of potential subscribers to paid for research.
I look forward to receiving your response.
Many thanks & kind regards
Paul
Paul Harper
Founder & Chief Editor
MyStockVoice.com
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