| Author | Ray, Niyati |
| Call Number | AIT RSPR no.SM-14-01 |
| Subject(s) | Foreign exchange market--India
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| Note | A research study submitted in partial fulfillment of the requirements for the degree of Master of Business Administration |
| Publisher | Asian Institute of Technology |
| Series Statement | Research studies project report ; no. SM-14-01 |
| Abstract | There have been changes in the structural reforms of India in the foreign exchange market, since the 1990’s. India ’s regime changed from a fixed exchange rate regime to the liberalized exchan ge rate management system in 1992 (partial floating rate) to fully floating rate regime in 1993. With the increasing volatility in the exchange rate day by day, to pace with international standards of the foreign exchange market and mitigate the risks aris ing from the excess volatility, currency future market was introduced in India in 2008 in the National Stock Exchange (NSE) , which is considered to be another important structural change. This study aims to first review types, depth and liquidity of Indian currency derivatives, and then analyse the relationship between spot and futur e markets, with an emphasis on the role of currency volatility and liquidity . The research uses GARCH(1,1) ;E - GRACH(1,1) and Granger causality tests to analyse volatility and obt ain the relationship between the volatility in spot prices and future prices and also the liquidity parameters. From the analysis done in this paper, it can be concluded that the introduction of currency futures has reduced the volatility in the spot marke t . Through the granger causality tests, it can be concluded that spot price volatility can be reflected through the change in one of the key determinant s of liquidity i.e. open interest. Variation in open interest reflects change in the market depth and he nce the greater the market depth the lower the spot rate volatility. Another result obtained from the Granger causality test is that futures affect s pot, but not the reverse. So, price discovery takes place in the futures market, which dominates the spot m arket, as happens in case of many assets . Hence we can conclude the fact that future market provides a medium for determining the spot price and hence can help improve the overall market efficiency. T he fact that futures leads spot market is as expected, s ince futures market, with low transaction cost, encourages entry and active participation by a larger number of players than the spot market does. But, it has a potentially negative side. If futures market behaves in a bizarre manner and is highly volatil e, this can also get transmitted to the spot market. A 'good' futures market should facilitate faster price - discovery and also reduce price volatility, besides playing its fundamental role of providing a he dge to reduce risk. If futures act as a good, un biased forecast for "future spot rates", that hedging role becomes easy to satisfy. |
| Year | 2014 |
| Corresponding Series Added Entry | Asian Institute of Technology. Research studies project report ; no. SM-14-01 |
| Type | Research Study Project Report (RSPR) |
| School | School of Management |
| Department | Other Field of Studies (No Department) |
| Academic Program/FoS | Master of Business Administration (MBA) (Publication code=SM) |
| Chairperson(s) | Juthatip Jongwanich; |
| Examination Committee(s) | Supasith Chonglerttham;Badir, Yuosre; |
| Scholarship Donor(s) | AIT Fellowship; |
| Degree | Research report (M.BA.) - Asian Institute of Technology, 2014 |