Hedge Benefits in Currency Derivatives: An Illustration
- 4m0•
- 27 Apr 2023
Margins have an important role to play when it comes to derivatives trading, be it equity F&O or currency trading. Lower the margin, higher the leverage and vice versa. Many of us might be aware that currencies have the least margin requirement (2.5%* to 5%*) of all the products (equity, commodity and currencies) that gets traded on Indian exchanges, but many of us would not be aware that currency segment also offers similar margin benefit on hedge portfolio, as in equity derivatives.
While a lot has been written and talked about how margins can get reduced on a hedged portfolio in equity derivatives, not much is there to show the same benefit in currency segment with an illustration. Margins given in the table below are indicative and can be different at the time of actual transaction, depending upon strikes and volatility.Also, the margin benefit can be better, if hedges are tighter. In the example below, have taken all the hedges at 0.50p spread.
Trade Details
Strategy
Expiry
Total Margin
Buy futures at CMP
Buy Naked Futures
28-Jul-21
1887
Naked Call short - 74.50 CE Strike
Naked Short Call - ATM
28-Jul-21
2042
Naked Call short - 75.00 CE Strike
Naked Short Call - OTM
28-Jul-21
1608
Call Spread - 74.50 and 75.00
Buy Call Spread
28-Jul-21
733
Sell Straddle – Sell 74.50 call & Put
Sell Straddle
28-Jul-21
2699
Sell Strangle - 74 PE and 75 CE
Sell Strangle
28-Jul-21
2235
Buy futures at CMP and Buy an OTM 74 Put
Buy Futures + Buy OTM Put
28-Jul-21
1163
Buy futures at CMP and Sell OTM Call
Buy Futures + Sell OTM Call
28-Jul-21
2440
Sell straddle and Buy OTM Call & Put
Iron Fly
28-Jul-21
1694
Sell strangle and Buy OTM Call & Put
Iron Condor
28-Jul-21
1581
| Indicative Margin on USDINR 1 lot | |||||
|---|---|---|---|---|---|
Sr. No | Trade Details | Strategy | Expiry | Total Margin | |
1 | Buy futures at CMP | Buy Naked Futures | 28-Jul-21 | 1887 | |
2 | Naked Call short - 74.50 CE Strike | Naked Short Call - ATM | 28-Jul-21 | 2042 | |
3 | Naked Call short - 75.00 CE Strike | Naked Short Call - OTM | 28-Jul-21 | 1608 | |
4 | Call Spread - 74.50 and 75.00 | Buy Call Spread | 28-Jul-21 | 733 | |
5 | Sell Straddle – Sell 74.50 call & Put | Sell Straddle | 28-Jul-21 | 2699 | |
6 | Sell Strangle - 74 PE and 75 CE | Sell Strangle | 28-Jul-21 | 2235 | |
7 | Buy futures at CMP and Buy an OTM 74 Put | Buy Futures + Buy OTM Put | 28-Jul-21 | 1163 | |
8 | Buy futures at CMP and Sell OTM Call | Buy Futures + Sell OTM Call | 28-Jul-21 | 2440 | |
9 | Sell straddle and Buy OTM Call & Put | Iron Fly | 28-Jul-21 | 1694 | |
10 | Sell strangle and Buy OTM Call & Put | Iron Condor | 28-Jul-21 | 1581 |
Source: PC SPAN
As can be seen from the table above, highest margin is in case of straddle and the lowest in case of call spread. It is to be noticed that total margin is inclusive of both SPAN + Exposure margin. Given that USDINR also has liquid weekly options contract along with monthly, it gives more flexibility to a trader to use the instrument.
Not only this, if one compares the statutory cost, currency has the lowest charges. Most of us would be aware that there is no STT/CTT applicable in currency but at the same time might not be aware that stamp duty is also the lowest in currency – just Rs. 10 per crore and that too only on buy side, making currency a perfect product for trader and hedger.
Currency Futures
Currency Options
| Statutory Cost | Futures (per crore) | Options (per crore) | ||
|---|---|---|---|---|
Equity Futures | Currency Futures | Equity Options | Currency Options | |
Exchange Turnover* | 190 | 90 | 5000 | 3350 |
STT^ | 1000 | NA | 5000 | NA |
Stamp Duty# | 200 | 10 | 300 | 10 |
IPF** | 10 | 5 | 100 | 200 |
Total | 1400 | 105 | 10400 | 3710 |
*-in case of options, applicable only on premium amount ^-STT applicable only on sell leg in futures and on sell side on option premium #-Stamp duty applicable only on buy leg in futures and on option premium **-In case of options applicable only on premium amount
Happy Trading with Kotak Securities !!!
