Currency Derivatives book by National Institute of Securities Markets

Currency Derivatives is an authoritative workbook to establish the mandated common minimum knowledge benchmark for individuals working in India's exchange-traded currency derivatives segment. The workbook is designed to support capacity building across the securities markets by simplifying complex concepts in foreign exchange markets, derivative instruments, trading mechanisms, pricing models, clearing and settlement systems, and the regulatory architecture governing currency derivatives in India. The text offers a unique blend of conceptual clarity, practical illustrations, regulatory guidance, and exam-oriented structure, ensuring that learners acquire theoretical understanding and practical competence in market operations, trading behaviour, hedging applications, risk controls, and compliance frameworks. With ten comprehensive chapters, the workbook presents a structured, progressive curriculum covering everything from currency market fundamentals to advanced derivative strategies, risk management systems, and investor protection mechanisms, making it an essential reference for anyone operating or aspiring to operate within India's currency derivatives ecosystem.

This book is intended for the following audience:

• Associated Persons of Market Intermediaries, including dealers, traders, authorised persons, and operations staff handling currency derivatives
• Treasury and Forex Desk Professionals in banks, NBFCs, and corporates engaged in hedging or trading currency exposures
• Risk Managers, Compliance Officers & Internal Auditors overseeing operational controls, risk mitigation systems, and regulatory compliance
• Students, Job Aspirants & Academicians pursuing careers in financial markets, derivatives analytics, treasury operations, or capital market regulation
• Trainers & Educational Institutions delivering courses on derivatives, trading strategies, and financial market operations

The Present Publication is the September 2025 Workbook Version, developed in collaboration with the Certification Team of NISM in coordination with Mr Amit Singhal of Cube Edugains Pvt. Ltd., and reviewed by Ms Aparna Bhat, NISM Empanelled Subject Matter Expert (SME). It is published exclusively by Taxmann, with the following noteworthy features:

• [Aligned to Currency Derivatives Examination] Covers prescribed learning outcomes and objectives, including currency market basics, derivatives pricing, trading processes, and regulatory norms
• [Comprehensive Multi-chapter Structure] Ten detailed chapters spanning foundational concepts to advanced regulatory and operational frameworks
• [Practical Illustrations & Payoff Charts] Futures and options payoffs, hedging strategies, arbitrage techniques, and spread-trading examples provide applied understanding
• [Full Coverage of India-specific Market Structure] Unique features of Indian FX markets, exchange systems, clearing corporations, interoperability, margins, position limits, and risk controls
• [In-depth Regulatory Guidance] Extensive content on SEBI, RBI, FEMA, SC(R)A, participation guidelines, member eligibility norms, and investor protection measures
• [Operational & Accounting Focus] Dedicated chapters on order management, trading costs, settlement obligations, accounting disclosures, and taxation of ETCDs
• [Investor Protection & Code of Conduct] Emphasises ethical conduct, grievance handling, PoA execution norms, risk disclosures, and investor safety standards

The workbook provides a structured deep dive into:

• Introduction to Currency Markets – This chapter builds the foundation by exploring:
• The evolution of global FX markets, the transition from fixed to floating exchange regimes, and key historical milestones
• Major global currencies and currency pairs, conventions for quoting exchange rates, and market participants across geographies
• Peculiarities of the Indian currency market, including regulatory restrictions, market segmentation, permitted instruments, and trading windows
• Exchange rate arithmetic, including cross-rate computations—an essential skill for pricing, arbitrage, and valuation
• Macroeconomic determinants of currency movements, such as interest rates, inflation, GDP trends, trade balances, and geopolitical factors
• Key economic indicators and how they influence currency prices—critical for traders and analysts
• Foreign Exchange Derivatives – This chapter deepens the conceptual understanding of derivatives in the currency space. It covers:
• Definitions, types, and economic functions of derivatives, including risk transfer, price discovery, and market efficiency
• Derivative products such as forwards, futures, options, and swaps, with differences in structure, settlement, and use cases
• Categories of Market Participants – hedgers, speculators, arbitrageurs, trading members, and institutional players
• Comparison between OTC vs exchange-traded derivatives, highlighting counterparty risks, standardisation, transparency, and settlement flows
• The policy rationale behind introducing exchange-traded currency derivatives in India
• Exchange-Traded Currency Futures – A comprehensive technical chapter covering:
• Definitions and mechanics of currency futures contracts
• Payoff charts for long and short futures positions, enabling graphical understanding of profit/loss under varying price scenarios
• Detailed contract specifications for INR pairs and other permitted currency futures
• Computing contract value and understanding tick sizes, quote conventions, and margin requirements
• Advantages and limitations of futures vs forwards in terms of liquidity, marking-to-market, and counterparty risks
• Interest Rate Parity (IRP) and the pricing model for currency futures—core to valuation and arbitrage opportunities
• Exchange-Traded Currency Options – This chapter transitions to options and covers:
• Key terminology, including premium, strike, expiration, intrinsic and time value
• Differences between European and American styles, and their relevance to Indian exchanges
• Understanding moneyness—ITM, OTM, ATM classifications
• Basics of option pricing, including factors that influence premium valuation
• Introduction to options Greeks—delta, gamma, theta, and vega—to understand sensitivity-based risk measures
• Comparison between ETCD options and OTC options, with emphasis on standardisation and risk mitigation mechanisms
• Strategies Using Exchange-Traded Currency Derivatives – A standalone strategy chapter that delves into:
• Roles and motives of various market participants—hedgers, traders, arbitrageurs, and corporate treasuries
• Hedging strategies using futures and options, such as long hedge, short hedge, protective puts, and covered calls
• Option trading strategies, including straddles, strangles, spreads, and synthetic positions—explained through detailed payoff diagrams
• Speculative uses of currency derivatives, explaining how traders build directional positions
• Arbitrage strategies, including cash-and-carry and reverse cash-and-carry opportunities
• Spread trading techniques, including calendar, inter-currency, and inter-exchange spreads
• Limitations of ETCDs for hedgers, such as basis risk and rollover costs
• Trading Mechanism in Exchange-Traded Currency Derivatives – This operational chapter describes:
• The ecosystem of entities involved in trading—exchanges, clearing corporations, trading members, custodians, and depositories
• Detailed functioning of exchange trading systems, order matching algorithms, and execution rules
• Order management processes, including order types, validity instructions, and execution control parameters
• Risk management tools such as order-level risk checks, price bands, and circuit filters
• Understanding trading costs, including exchange fees, brokerage, statutory charges, and margins
• Clearing, Settlement & Risk Management – A deeply technical and system-driven chapter covering:
• Full clearing and settlement mechanism for ETCD transactions
• Roles and responsibilities of clearing members, custodial participants, and clearing corporations
• Interoperability of clearing corporations, enabling cross-CC risk sharing and efficiency
• Daily and final settlement obligations, MTM (mark-to-market) process, and settlement cycles
• Position limits, both client-level and member-level, and their regulatory purpose
• Risk management frameworks—SPAN margins, exposure margins, extreme loss margins, and peak margin collection
• Core topics like the Settlement Guarantee Fund, cyber security guidelines, and resilience frameworks
• Regulatory Framework for ETCD – A regulatory deep dive covering:
• The Securities Contracts (Regulation) Act 1956, governing derivatives as securities
• The RBI–SEBI Standing Technical Committee and its role in harmonising derivative markets
• Provisions of FEMA 1999 relevant to currency risk management
• Comprehensive SEBI regulations and guidelines, including risk disclosures, participation norms, and capital adequacy
• RBI regulations governing currency market participation by banks, exporters, importers, and other entities
• Eligibility criteria and compliance obligations for derivative members and clearing members
• Accounting & Taxation – An essential chapter for finance professionals, explaining:
• Accounting entries for mark-to-market gains and losses
• Disclosure requirements for derivative exposures under accounting standards
• Taxation of ETCDs, including treatment under business income, speculative income, and applicable tax rules
• Code of Conduct & Investor Protection Measures – A governance and ethics-focused chapter covering:
• SEBI's Code of Conduct for Brokers emphasising integrity, fairness, and diligence
• Processes for investor grievance redressal, including escalation mechanisms
• Handling investor claims in the event of default by a trading/clearing member
• Overview of the Investor Protection Fund and its scope
• Guidance on Power of Attorney execution, KYC norms, and mandatory risk disclosures

The workbook is crafted in a pedagogically sound sequence—starting with fundamental concepts, then advancing through instruments, strategies, trading mechanisms, risk frameworks, regulatory environments, and ethical considerations. Each chapter includes:

• Topic-wise subdivisions for granular learning
• Numerical examples and payoff charts
• Tables, diagrams, and conceptual frameworks
• Exam-oriented material aligned with NISM's assessment structure
• A Syllabus Outline with weightages is also provided for targeted preparation