Contract Specification of Exchange Traded Currency Futures Contracts
This sub‑topic covers the contract specification of exchange‑traded currency futures. You will learn the exact parameters that define a futures contract, such as contract size, tick size, contract months, settlement mechanism and margin requirements. Knowing these details is essential because NISM questions often test your ability to calculate contract value, margin and profit‑loss. Mastery of specifications also helps you avoid common exam traps related to tick value and settlement price.
Learning Objectives
- 1Identify and describe each element of a currency futures contract specification.
- 2Calculate the notional value of a contract using the contract size and futures price.
- 3Determine tick value and its impact on profit‑loss calculations.
- 4Explain margin, settlement and position limit rules as per SEBI/NISM.
Key Elements of a Currency Futures Contract
A currency futures contract is a standardized agreement to buy or sell a specified amount of a foreign currency against the Indian rupee at a predetermined price on a future date. The standardisation is achieved through a set of contract specifications defined by the exchange, which ensures liquidity and ease of trading.
Each specification – contract size, tick size, tick value, contract months, last trading day, settlement type and margin – is fixed for a given currency pair. Traders cannot modify these parameters; they must trade exactly as defined. This uniformity is what allows the contract to be listed on the NSE or BSE and cleared through the clearing corporation.
In the NISM exam, you will often be asked to pick the correct specification from a list, compute the contract value, or determine the profit‑loss per tick. Understanding the purpose of each element prevents mis‑interpretation of questions and saves valuable time.
- Contract specifications are published on the exchange website and in the NISM study material.
- Any deviation from the listed specifications results in an invalid trade.
Students often confuse the minimum price movement (tick size) with the monetary impact of that movement (tick value). Remember: Tick size is expressed in INR per unit of foreign currency, while tick value = Tick size × Contract size.
Contract Size and Notional Value
The contract size denotes the amount of foreign currency underlying one futures contract. For major pairs traded on Indian exchanges, the standard contract size is 1,000,000 units of the foreign currency (e.g., 1 million USD for USD/INR). This figure is fixed and appears in the contract specification sheet.
Notional (or contract) value is the rupee amount that the contract represents at a given futures price. It is calculated by multiplying the contract size by the quoted futures price. This value is crucial for margin calculations and for assessing the exposure of a position.
Exam questions frequently present a futures price and ask you to compute the notional value, or they give the notional value and ask for the implied futures price. Apply the simple multiplication formula accurately and watch the units.
- Contract Size = 1,000,000 foreign currency units.
- Futures Price = quoted in INR per unit of foreign currency.
Where:
Contract Size= Number of foreign currency units per contract (e.g., 1,000,000 USD)Futures Price= Quoted price in INR per unit of foreign currencyContract Value= Total rupee exposure of one contractWorked Example
Given Contract Size = 1,000,000 USD and Futures Price = 82.50 INR/USD: Step 1: Contract Value = 1,000,000 \times 82.50 Step 2: Contract Value = 82,500,000 INR Verification: 1,000,000 \times 82.50 = 82,500,000 INR.
Tick Size and Tick Value
Tick size is the smallest permissible change in the futures price for a given currency pair. It is expressed in INR per unit of foreign currency and varies across pairs. For example, USD/INR moves in steps of 0.0025 INR, while EUR/INR moves in steps of 0.0050 INR.
Tick value translates that price movement into a rupee amount that reflects the profit or loss for one contract. It is obtained by multiplying the tick size by the contract size. Because the contract size is the same for all pairs (1 million units), the tick value is directly proportional to the tick size.
In the exam, you may be asked to compute profit/loss per tick or to compare tick values across pairs. Use the tick‑value formula and keep the unit consistency (INR). Remember that a larger tick size leads to a larger tick value, which magnifies both gains and losses.
Typical Tick Size and Tick Value for Major Currency Pairs on Indian Exchanges
| Currency Pair | Tick Size (INR per unit) | Tick Value (INR per contract) |
|---|---|---|
| USD/INR | 0.0025 | 2,500 |
| EUR/INR | 0.0050 | 5,000 |
| GBP/INR | 0.0050 | 5,000 |
Do not assume that all currency futures have a tick size of 0.01 INR. The tick size differs by pair, and using the wrong value will lead to incorrect profit‑loss calculations.
Contract Months and Expiry
Exchange‑traded currency futures are listed for specific contract months, usually the nearest three months and then quarterly months (March, June, September, December). The contract month is identified by a standard code (e.g., USDINR Mar23).
The last trading day for a currency future is the second last business day of the contract month. After this date, the contract is settled, and no further trading is allowed. This rule ensures orderly settlement and aligns with the clearing corporation's processes.
Understanding the expiry schedule is vital for NISM questions that ask which contract month a trader should select for a given horizon, or when a position will be automatically settled.
Margin Requirements
Margins are collateral that participants must deposit to cover potential losses. SEBI mandates an Initial Margin (IM) and a Variation Margin (VM). The IM is a percentage of the contract value, typically ranging from 8% to 12% for major currency pairs, and is set by the exchange based on volatility.
Variation Margin is settled daily through a mark‑to‑market process. If the contract moves against a trader's position, the trader must pay the shortfall to the clearing corporation; if it moves in favor, the trader receives a credit.
Exam items often present a contract value and ask you to compute the required IM, or they give an IM percentage and ask for the cash amount. Apply the simple percentage formula and remember that the IM is calculated on the notional value of the contract, not on the tick value.
Position Limits per Person
SEBI imposes position limits to curb market manipulation and excessive concentration. For currency futures, the limit is expressed in the number of contracts a single participant can hold in a particular pair. The exact limit varies by pair and is published by the exchange; for example, the limit for USD/INR may be 1,000 contracts per participant.
When a trader reaches the limit, any additional order will be rejected. In the exam, you may be asked to identify whether a proposed trade breaches the limit, or to calculate the remaining allowable contracts.
Always cross‑check the latest limit tables in the NISM material; the numbers can change with market conditions.
Cash Settlement vs Physical Settlement
Indian currency futures are cash‑settled. On the expiry date, the final settlement price is the weighted average of the spot rates of the underlying currency during a pre‑defined window (usually the last 30 minutes of trading). The profit or loss is credited or debited in INR to the trader's account.
Physical delivery is not permitted for currency futures on Indian exchanges, which simplifies settlement and eliminates the need for foreign exchange delivery logistics. This distinction is a frequent exam point, as some international markets do allow physical settlement.
Knowing the settlement methodology helps you answer questions on how profit/loss is realized and why margin calls are settled in cash.
Average Daily Price Volatility (INR) for Selected Currency Futures
Scenario
Rohit, an Indian investor, decides to go long 2 contracts of USD/INR futures. Each contract has a size of 1,000,000 USD. The futures price at entry is 82.80 INR/USD. SEBI’s initial margin requirement for USD/INR is 10% of the contract value. By the end of the trading day, the futures price falls to 82.60 INR/USD.
Solution
Step 1: Compute the notional value of one contract: 1,000,000 × 82.80 = 82,800,000 INR. Step 2: For 2 contracts, total contract value = 2 × 82,800,000 = 165,600,000 INR. Step 3: Initial margin = 10% × 165,600,000 = 16,560,000 INR. Step 4: New contract value after price change = 1,000,000 × 82.60 = 82,600,000 INR per contract; for 2 contracts = 165,200,000 INR. Step 5: Loss = 165,600,000 – 165,200,000 = 400,000 INR. Step 6: Variation margin payable = 400,000 INR, which Rohit must fund to the clearing corporation. The remaining margin after the VM is 16,560,000 – 400,000 = 16,160,000 INR.
Conclusion
Rohit's position illustrates how a small price movement (0.20 INR) translates into a sizable rupee loss because of the large contract size. Remember to multiply the price change by the contract size to obtain the profit/loss per contract.
When the futures price has more than four decimal places, round the contract value to the nearest rupee before applying margin percentages. The NISM exam expects rounding at the final step, not intermediate.
Regulatory and Reporting Requirements
All participants must complete KYC and be registered as a client of a SEBI‑registered broker. Trades in currency futures are reported daily to the exchange, and the clearing corporation maintains a record of positions and margin balances.
Large traders (holding positions above a certain threshold) must submit a Position Statement to the exchange, as per SEBI circulars. Failure to report or to maintain required margins can lead to penalties, suspension of trading rights, or legal action.
Exam questions may ask which regulatory body oversees currency futures, the reporting frequency, or the consequences of non‑compliance. The answer is always SEBI, with daily reporting to the exchange and clearing corporation.
⭐Exam Takeaways
- Contract size for major pairs is 1,000,000 foreign currency units; contract value = size × futures price.
- Tick size varies by pair; tick value = tick size × contract size and determines profit/loss per price movement.
- Last trading day is the second last business day of the contract month; settlement is cash‑based using the final settlement price.
- Initial margin is typically 8‑12% of contract value; variation margin is settled daily via mark‑to‑market.
- Position limits restrict the number of contracts per participant; exceedance leads to order rejection.
- All currency futures are cash‑settled; no physical delivery occurs on Indian exchanges.
- SEBI mandates daily trade reporting, KYC compliance, and adherence to margin and position limits.
Practice Questions
8 questions on Contract Specification of Exchange Traded Currency Futures Contracts
What is the standard contract size for major currency pairs traded on Indian exchanges?
Which statement correctly describes the relationship between tick size and tick value?
If the futures price of USD/INR is 83.20 INR per USD, what is the notional value of one contract?
For EUR/INR futures, the tick size is 0.0050 INR. What is the tick value per contract?
Rohit goes long 3 USD/INR contracts at an entry price of 82.90 INR/USD. SEBI requires an initial margin of 10% of contract value. What is the total initial margin required?
A trader currently holds 950 contracts of USD/INR. The exchange’s position limit for this pair is 1,000 contracts per participant. If the trader attempts to buy 100 more contracts, what will happen?
On which day does trading cease for a currency futures contract?
Which regulatory authority oversees currency futures trading in India?