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NISM-Series-I: Currency Derivatives Certification Examination

(NISM-Series-I: CD Examination)

 

Test Objectives [new syllabus effective 21st February 2012]

 

Unit 1: Introduction to Currency Markets

1.1 Brief history of foreign exchange markets

1.2 Major currency pairs

1.3 Overview of international currency markets

1.4 Basics of currency markets and peculiarities in India

1.4.1 Currency pair

1.4.2 Base Currency / Quotation Currency

1.4.3 Interbank market and merchant market

1.4.4 Two way quotes

1.4.5 Appreciation/ Depreciation

1.4.6 Market timing

1.4.7 Price benchmarks

1.4.8 Price discovery

1.4.9 RBI reference rate

1.5 Settlement or value date

1.6 OTC forward market

1.7 Exchange rate arithmetic- cross rate,

1.7.1 EURINR

1.7.2 GBPINR

1.7.3 JPYINR

1.8 Impact of market economics on currency prices

1.9 Economic indicators

1.9.1 Gross Domestic Product (GDP)

1.9.2 Retail Sales

1.9.3 Industrial Production

1.9.3 Consumer Price Index (CPI)

1.9.5 Nonfarm payrolls (NFP)

1.9.6 Central bank meetings and key decisions

 

Unit 2: Foreign Exchange Derivatives

2.1 Derivatives – Definition

      Describe the evolution of derivatives

      Define a derivative as per SC(R)A and RBI Act

2.2 Derivative Products

      Briefly describe the various derivative products

      Forwards

      Futures

      Options

2.3 Growth Drivers of Derivatives

      Describe the factors that have driven the growth in derivatives market

2.4 Market Players

      List the various players in the Foreign Exchange market

      Describe how the Foreign Exchange market presents different opportunities for all the Players

2.5 Key Economic Functions of Derivatives

      Describe how Derivatives help in price discovery

      Derivatives market helps in transfer of risk

      Derivatives market is linked to underlying cash market

      Speculative trade impacts the Forex market

      Understand advantages and disadvantages of speculative trading in Foreign Exchange market

2.6 Exchange-Traded Vs. Over-the-Counter Derivatives

      Understand Differences between Exchange Traded and OTC Derivatives

      Features of OTC Derivatives that may give rise to instability in the financial system

 

Unit 3: Exchange Traded Currency Futures

3.1 Currency Futures - Definition

      Futures Contract

      Currency Futures Contract

      Tick size

3.2 Futures Terminology

      Define:

      Spot price

      Futures price

      Contract cycle

      Value Date/Final Settlement Date

      Expiry date

      Contract size

      Initial margin

      Marking-to-market

3.3 Rationale behind Currency Futures

      Define the Standardized items in a futures contract

      Understand the rationale behind introducing currency futures in the Indian context

3.4 Distinction between Futures and Forward Contracts

      Understand Advantages of Futures Contracts

      Limitations of Futures Contracts

3.5 Interest Rate Parity and Pricing of Currency Futures

      Understand the relationship between spot price, future price and term to maturity

      Calculate one given the rest:

      Future price

      Spot price

      Term to maturity

      Calculate Forward or Spot rates given either one of them, interest rates and basis

 

Unit 4: Strategies Using Currency Futures

4.1 Speculation in Futures Markets

      Understand the role of speculation in currency futures markets

4.2 Long Position in Futures

      Understand speculative transactions and payoffs using long position in futures

4.3 Short Position in Futures

      Understand speculative transactions and payoffs using short position in futures

4.4 Hedging Using Currency Futures

      Understand Concept of hedging

      Types of hedgers

      Proper size of the hedging position

      Possible hedging strategies that can be used by Corporate Bodies and Retail Customers and their impact in various possible market situations

4.5 Trading Spreads Using Currency Futures

      Understand the concept of spread and the factors that influence its movement

4.6 Arbitrage

      Understand Concept of arbitrage

      Use of arbitrage in currency futures markets

      Calculate arbitrage opportunities under various conditions



Unit 5 Trading in Currency Futures

5.1 Currency Futures Contract Specification

      Define the contract specifications for currency futures market segment

5.2 Trading Parameters

      Define and understand the trading parameters

      Base Price

      Closing Price

5.3 Tenors of Futures Contract

      Define and understand the tenor of a futures contract:

      Expiry Date

      Settlement Price

5.4 Entities in the Trading System

      Define and understand the role of various entities in the trading system for currency futures:

      Trading Members

      Clearing Members

      Trading-cum-Clearing Members

      Professional Clearing Members

      Participants

5.5 Types of Orders

      Define and understand the types of orders that can be entered in the trading system

      Understand the conditions that can be attached to orders that are entered including time /price and other conditions

      Understand applicability of price limit circuit filters

5.6 Mark-to-Market

      Understand Concept of mark- to- market

      Applicability of the concept in trading in currency futures

5.7 Position Limits

      Define maximum allowable open position limits for members trading in currency futures

      Understand the rules related to monitoring and enforcement of position limits in the currency futures market

      Understand the objectives and broad functioning of the surveillance systems and procedures of exchanges

 

Unit 6 Clearing, Settlement and Risk Management in Currency Futures

6.1 Clearing Entities

      Define and understand role of various entities involved in clearing system for currency futures

6.2 Clearing Mechanism

      Understand the clearing mechanism

      Calculate the open positions and obligations of clearing members under various situations

6.3 Settlement Mechanism

      Understand the concept of MTM settlement

      Calculate end of day MTM under various situations

      Understand the final settlement for currency futures contract

6.4 Risk Management Measures

      Understand the salient features of the exchange risk management measures

6.5 Margin Requirements

      Understand the concept and applicability of Initial margin

      Portfolio based margin

      Calendar spread margin

      Extreme loss margin

      Liquid net worth

      Liquid assets

      Real time computation 

      MTM settlement

      Understand Margin collection processes by Clearing Corporations Enforcement mechanisms employed by Clearing Corporations


Unit 7 Exchange Traded Currency Options

7.1 Options – Definition, basic terms

      Option definition

      Call vs. Put option

      Bought vs. sold option

      Option premium

7.2 Difference between futures and options

      Rights vs. obligations

7.3 Options in financial market

7.4 Style of options

      European vs. American option

7.5 Moneyness of an option

      In the money

      At the money

      Out of the money

7.6 Basics of option pricing and option Greeks:

      Parameters impacting option pricing

      Definition of option greeks

7.7 Option pricing methodology 

      Very brief mention of Black and Scholes and binomial pricing model

7.8 Option pay offs

      Pay off diagram of futures, put option, call option

7.9 Option strategies

      Vanilla option

      Combination options

7.10 Uses of currency options

        Practical application of options to real life business needs

7.11 Clearing, Settlement and Risk Management for currency options

       Contract design

       Clearing, Settlement, position limits

       Initial margin, Extreme loss margin, Net option value, Calendar margin

 

Unit 8 Accounting And Taxation

8.1 Accounting

      Understand Accounting treatment for derivative contracts at:

      Inception of contract

      Daily Settlement

      Final Settlement

      In case of Default

8.2 Taxation of Derivative Transaction In Securities

      Understand tax treatment of profit/loss on derivative transaction in securities

 

Unit 9 Regulatory Framework for Currency Derivatives

9.1 Securities Contracts (Regulation) Act, 1956 [SC(R)A]

      Know basic features of SC(R)A

      Define

      Securities

      Derivative

      Know the provisions of Section 18 A

9.2 Securities and Exchange Board of India Act, 1992

      Know Basic features of the SEBI Act, 1992 Powers of SEBI

9.3 RBI-SEBI Standing Technical Committee on Exchange Traded Currency and Interest Rate Derivatives

      Know Objectives of the Committee

      Major recommendations of the Committee

9.4 Foreign Exchange Management Act, 1999 – Provisions

      Know Basic features

      Amendments that impacted introduction of currency futures trading

      Salient features of RBI notification ‘Currency Futures (Reserve Bank) Directions, 2008 ‘

      Salient features of RBI Circular, ‘Guidelines on trading of Currency Futures in Recognised Stock / New Exchanges’, etc.

9.5 Regulatory Framework for Exchanges

      Know salient features of SEBI Regulations for Currency Derivatives Exchanges

9.6 Regulatory Framework for Clearing Corporations

      Know salient features of SEBI Regulations for Clearing Corporations

9.7 Governing Council of the Exchange and Clearing Corporation

      Know Requirement for separate Governing councils for Currency Derivatives exchanges/segments

      Representation of Trading/ Clearing members on Governing Council

9.8 Eligibility Criteria for Members

      Know Entities eligible for membership of currency derivatives exchanges

      Eligibility criteria for various types of entities

 

Unit 10 Codes of Conduct and Investor Protection Measures

10.1 Adherence to SEBI Codes of Conduct for Brokers/ Sub-Brokers

       Understand basic features of SEBI Code of Conduct for Brokers

       Understand basic features of SEBI Code of Conduct for Sub-brokers

10.2 Adherence to Codes of Conduct Specific to Exchange Traded Currency Derivatives Segment

       Understand basic features of Codes of Conduct for Trading Members

10.3 Grievance Redressal Mechanism for Investors

       Understand Investor Grievance Redressal Process

       Nature of complaints considered by exchanges

       Arbitration Mechanism at exchanges

 

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