What is a stock split?

A Stock split is a process where in the company decides to reduce the face value of the outstanding shares. This is usually done only when the stock is in a strong uptrend and the board of the company has a   comfortable anticipation that the stock will continue the same trend further. When a stock is quoting high in the market, there are worries that there will be fewer takers for the stock implying lower liquidity to the shares of the company. By this exercise, the company tries to provide more liquidity to the stock in the market. More often than not the when a company declares a stock split it means that particular firm is experiencing success.

Mechanics of stock split:

To do a stock split it is important to know the requirements before a stock split, as well as the general profile of the company which is announcing a split of their stock. Naturally the company must have enough unissued authorized shares to split the stock and then the board of directors must then meet and declare a stock split. If authorized shares need to be added, then the company must seek approval from shareholders, which requires a shareholder meeting for a vote to support additional shares being issued. At that point the company can announce the stock split and both the split and recording dates are set. When the split date does indeed arrive, additional shares are issued and the stock price per share is adjusted accordingly.

The average profile of a company that declares a stock split is one that is currently operating with increasing revenue and net earnings.  Typically the stock price is close to or higher than the price of the last split, is in a general uptrend and of course is expected to continue to move northwards.  In addition, business is forecasted to be very good going forward, shareholder confidence is high and basically no major legal issues are pending reconciliation. In addition, a stock split announcement is typically accompanied by other major events which could be anything such as a bonus, dividend being paid, a stock buyback program or even changes to management.

Stock splits usually attract the interest of the retail and institutional participants as they are certainly worth monitoring and when correctly identified, they provide low risk and high reward options strategies. In fact, if you can see a stock split coming when implied volatility is currently very low, then these particular situations have a tremendous chance of being highly profitable when coupled with the appropriate options strategy.

Investing in IPOa, The ASBA route...

Investment through the Initial Public offering (IPO) has been flair of the investors in India, for decades. This is also the primary step where in the investors learn investing in the stock market. Over the past decade it is observed that the participation of the retail investor for IPO has taken a large leap as they are proving to be an avenue to make quick money as the IPOs list at high premium to the issue price.
Retail investors are subscribing IPOs hand to hand and their increased participation is making the IPOs a success for the issuing company. Mostly the IPOs are oversubscribed i.e., more applications for the shares offered for sale by the company. It is almost certain that due to oversubscription, the investors will not get the number of shares they apply for in an IPO – most of the time two lots are alloted for four applied, one lot for five and sometimes nothing at all! Running in the race to apply for the shares in an IPO, investors run out of cheque leaves and also experience that the balance in the savings account has dip below the minimum balance required. Banks mostly charge penalties to the account holders who do not maintain a minimum balance. The securities market regulator and watch dog of the investor community in INDIA, the Securities and Exchange board of India (SEBI) has formulated a smarter way of investing in IPOs wherein you can make applications for IPOs with the amount residing in your account till the allotment is finalized. This way is called as “Application Supported by Blocked Amount” (ASBA). This facility can be an ‘Icing on the cake’ for the investors in the country.
ASBA- Application Supported by Blocked Amount is an application that authorizes the banker to block a specific sum of money in an individual's bank account for an IPO and debit the account only to the extent of the shares allotted to the individual. However, even as the blocked amount will not be available for use of the customer and he will continue to earn interest on it.
The benefits that an investor can derive from ASBA are
a) Cancelling and revising the bid is also possible.
b) The application amount is not debited from the savings account.
c) Keep earning interest on the amount parked in the Savings account.

Unlike the normal procedure where the debit happens immediately and the applicant needs to wait for refunds on a partial allotment, the ASBA route provides interest and saves time.
Now the question arises, how does one apply for ASBA?
Applying for ASBA
To bid in an IPO, the investor has to take either the e-route via on-line trading account or fill the physical form and submit it with his banker/broker. In the first scenario, taking an online investor into consideration, the process is very simple, he needs to just check the ASBA check-box in his screen (top brokerage houses provide ASBA facility for their online clients) and rest of the process is taken care of automatically. Whereas, if the investor takes the traditional way of applying to IPOs still, he needs to approach his banker (ASBA application forms can be downloaded from the NSE/BSE Web sites too) for an ‘ASBA Bid cum Application' form.
The applicant has to fill in basic details that include bank account number, PAN number, demat number, the bid quantity and bid price and submit the form with the banker (if the applicant is a Net banking client, he may be able to do this online itself). The banker then uploads details of the application in the bidding platform and simultaneously blocks the amount in the client's account. What is to be noted here is that not all banks have ASBA facility; only self certified syndicate banks (SCSBs) offer this.
List of SCSBs is given as a link below. To name a few, State Bank of India, HDFC Bank, AXIS Bank, ICICI Bank, Bank of India, Kotak Mahindra Bank, Standard Chartered Bank etc., are among those offering the facility. The best thing in this way of applying is that currently most brokers and bankers offer this service free of cost for their clients. They collect the selling commission or the processing fee from merchant bankers of the issue.

With ASBA applications just kicking off, there has been queries as to whether one can apply at the cut-off price and if the place bids can be revised. The answer is: Yes, one can do that. “The investor has the option of revising and even cancelling the bid till the cut-off time on the last day of the issue”. The process is simple and doesn't require much of a doing.
Process to be complied:
The investor need to have a current/savings account with one of the SCSBs to be able to apply via ASBA route in IPOs. While accessing this route the investor should ensure that he makes sufficient amount is available in his account while making the application. Once the process is complete, the banker sends in an acknowledgement which should be filed and kept for future reference.
Recently, brokerage houses have also been given the ‘green' signal by SEBI to distribute ASBA forms. So now you needn't even walk up to the bank for an ASBA application; you can send it through your broker (not all brokerages currently offer this service).

Important Links:

- List of SCSBs (including details Controlling Branch & Designated Branch)

- To register with the Exchange as Self certified syndicate banks, the bank has to submit an undertaking as per the prescribed format.

- Investors, wishing to apply the E-route or Online trading account click here

Why Most Futures Traders Lose Money..?

A review of 50 very basic, often violated rules for trading futures

It is often viewed that most of the traders have had a bitter experience of trading in the futures. It was during my academic internship I was assigned a task to find out the reasons of people incurring losses in futures trading. I would like to share the experience with you  and help you take an informed and wise investing/trading decision.

A survey of 50 brokers asked what, in their experience, caused most futures traders to lose money. The executives represent the trading experience of more than 10,000 futures traders. In addition, most of these Executives have also traded or are currently trading for themselves. Their answers are not summarized because different traders make (and lose) money for different reasons.

Perhaps you may recognize some of your strengths and weaknesses. Yet many of the reasons given are very similar from broker to broker. The repetitions stand to demonstrate that, many futures traders lose money for many of the same reasons.

Here is what they said:

1. Many futures traders trade without a plan. They do not define specific risk and profit objectives before trading. Even if they establish a plan, they “second guess” it and don’t stick to it, particularly if the trade is a loss. Usually, they liquidate the good trades and keep the bad ones.

2. They fail to pre-define risk, add to a losing position, and fail to use Stop Losses.

3. After several profitable trades, many speculators become wild and unconservative. They base their trades on hunches and long shots, rather than sound fundamental and technical reasoning, or put their money into one deal that “can’t fail.”

4. Many traders don’t realize the news they hear and read.

5.Traders often trade with less capital and try to carry too big a position with too little capital (margins). They trade too frequently for the size of the account.

6. Most of the traders try to “beat the market” by day trading, nervous scalping, and getting greedy.

7. They frequently have a directional bias; for example, always wanting to be long.

8. Lack of experience in the market causes many traders to become emotionally and/or financially committed to one trade, and unwilling or unable to take a loss. They may be unable to admit they have made a mistake, or they look at the market on too short a timeframe.

9. Most of the traders Overtrade. They are of the perception that more trades with less profit in a volatile market will increase their profitability. These traders often end up paying high on commissions then their gains.

10. Many traders can’t (or don’t) take the small losses. They often stick to a posotion until it really hurts, then take the loss. This is an undisciplined approach...a trader needs to develop and stick with a system.

11. Many traders get a fundamental case and hang onto it, even after the market technically turns. Only believe fundamentals as long as the technical signals follow. Both must agree.

12. Many traders break a cardinal rule: “Cut losses short. Let profits run.”

13. Many people trade with their hearts instead of their heads. For some traders, adversity (or success) distorts judgment. That’s why they should have a plan first, and stick to it.

14. Often traders have bad timing, and not enough capital to survive the shake out.

15. Too many traders perceive futures markets as an intuitive arena. The inability to distinguish between price fluctuations, which reflect a fundamental change, and those that represent an interim change often causes losses.

16. Not following a disciplined trading program leads to accepting large losses and small profits. Many traders do not define offensive and defensive plans when an initial position is taken.

17. Emotion makes many traders hold a loser too long. Many traders don’t discipline themselves to take small losses and big gains.

 18. Too many traders are under financed, and get washed out at the extremes.

19. Greed causes some traders to allow profits to dwindle into losses while hoping for larger profits. This is really a lack of discipline. Also, having too many trades on at one time and overtrading for the amount of capital involved can stem from greed.

20. Trying to trade inactive markets is dangerous.

21. Taking too big a risk with too little profit potential is a sure road to losses.

22. Many traders lose by not taking losses in proportion to the size of their accounts.

23. Often, traders do not recognize the difference between trading markets and trending markets. Lack of discipline is a major shortcoming.

24. Lack of discipline includes several lesser items; i.e., impatience, need for action, etc. Also, many traders are unable to take a loss and do it quickly.

25. Trading against the trend, especially without reasonable stops, and insufficient capital to trade with and/or improper money management are major causes of large tosses in the futures markets; however, a large capital base alone does not guarantee success.

26. Overtrading is dangerous, and often stems from lack of planning.

27. Trading very speculative commodities is a frequent mistake.

28. There is a striking inability to stay with winners. Most traders are too willing to take small profits and, therefore, miss out on big profits. Another problem is under capitalization; small accounts can’t diversify, and can’t use valid stops.

29. Some traders are on an ego trip and won’t take advice from another person; any trades must be their ideas.

30. Many traders have the habit of not cutting losses fast, and getting out of winners too soon. It sounds simple, but it takes discipline to trade correctly. This is hard whether you’re losing or winning. Many traders overtrade their accounts.

31. Futures traders tend to have no discipline, no plan, and no patience. They overtrade and can’t wait for the right opportunity. Instead, they seem compelled to trade every rumor.

32. Staying with a losing position because a trader’s information (or worse yet, intuition) indicates the deteriorating market is only a temporary situation can lead to large losses.

33. Lack of risk capital in the market means inadequate capital for diversification and staying power in the market.

34. Some speculators don’t have the temperament to accept small losses in a trade, or the patience to let winners ride.

35. Greed, as evidenced by trying to pick tops or bottoms, is a frequent error.

36. Not having a trading plan results in a lack of money management. Then, when too much ego gets involved, the result is emotional trading.

37. Frequently, traders judge markets on the local situation only, rather than taking the worldwide situation into account.

38. Speculators allow emotions to overcome intelligence when markets are going for them or against them. They do not have a plan and follow it. A good plan must include defense points (stops).

39. Some traders are not willing to believe price action, and thus trade contrary to the trend.

40. Many speculators trade only one commodity.

41. Getting out of a rallying commodity too quickly, or holding losers too long results in losses.

42. Trading against the trend is a common mistake. This may result from overtrading, too many day trades, and under capitalization, accentuated by failure to use a money management approach to trading futures.

43. Often, traders jump into a market based on a story in the morning paper; the market many times has already discounted the information.

44. Lack of self-discipline on the part of the trader and/ or broker creates losses.
Futures traders tend to do inadequate research.

45. Traders don’t clearly identify and then adhere to risk parameters; i.e., stops.

46. Most traders overtrade without doing enough research. They take too many positions with too little information. They do a lot of day trading for which they are under-margined; thus, they are unable to accept small losses.

47. Many speculators use “conventional wisdom” which is either local, or “old news” to the market. They take small profits, not riding gains as they should, and tend to stay with losing positions. Most traders do not spend enough time and effort analyzing the market, and/or analyzing their own emotional make-ups.

48. Too many traders do not apply money management techniques. They have no discipline, no plan. Many also overstay when the market goes against them, and won’t limit their losses.

49. Many traders are undercapitalized. They trade positions too large, relative to their available capital. They are not flexible enough to change their minds or opinions when the trend is clearly against their positions. They don’t have a good battle plan and the courage to stick to it.

50. Don’t make trading decisions based on inside information. It’s illegal for some markets, and besides, it’s usually wrong.

DERIVATIVES EXISTING IN INDIA…

FINANCIAL DERIVATIVES

The term derivatives refer to a large number of financial instruments whose value is derived from the underlying assets. Derivative instruments like the options and futures facilitate the trading in financial contracts. The most important underlying instruments in the market are in the form of Equity, treasury bills, and foreign exchange. The trading in the financial derivatives has attracted the prominent players of the equity markets.

The primary purpose of a derivative contract is to transfer risk from one party to another i.e. risk is transferred from a party that wants to get rid of it to another party i.e. willing to take it. The major players seen in the derivatives segment are the SPECULATORS whose sole objective is to buy and sell for a profit alone. The HEDGERS are the other breeds of players, who aim merely to have a hedge positions. They are risk free investors whose intention is to have a safety mechanism and wish to protect their portfolio. Nevertheless, they are pursued as a cheap and efficient way of moving risk within the economic system. But the world of derivatives is riddled with jargons making it more awesome.

The trading in equity through the derivatives in India was introduced in the year 2000 by the Securities And Exchange Board of India [SEBI] and this was described as the “India’s derivative explosion”. Although this took a definite form in 2000 but the idea was initiated in the year 1995. it was then in the year 2000 that SEBI permitted the trading the in the options on the platforms of  India’s premier exchange platforms i.e., the National Stock Exchange Of India limited [NSE] and The Bombay Stock Exchange [BSE] in the individual securities. But the futures contracts took 17 long months to get launched on November 09’ 2001.

The trading in options and futures in the individual stocks were permitted to trade on the stable stocks only. The small and highly volatile stocks were an exemption from the trade in derivatives. Futures and options are important tools that help the investors to derive profit. The futures facilitate the investor to enter into a contract to deliver the underlying security at a future date whereas, the options allow it to his discretion as to whether he wants to buy (call) or sell (put) the contract.

The current trading behavior in the derivatives segment reveals that single stock futures continues to account for a sizeable proportion. A recent report indicates that the trading in the individual stock futures in the Indian exchanges has reached global volumes. One possible reason for such a behavior of the trader could be that futures closely resemble the erstwhile ‘BADLA’ system.

Turnover in Financial Markets and Commodity Market
(Rs in Crore)
S No.	Market segments	2002-03		2003-04		2004-05 (E)
1	Government Securities Market	1,544,376	(63)	2,518,322	(91.2)	2,827,872	(91)
2	Forex Market	658,035	(27)	2,318,531	(84)	3,867,936	(124.4)
3	Total Stock Market Turnover (I+ II)	1,374,405	(56)	3,745,507	(136)	4,160,702	(133.8)
I	National Stock Exchange (a+b)	1,057,854	(43)	3,230,002	(117)	3,641,672	(117.1)
	a) Cash	617,989		1,099,534		1,147,027
	b) Derivatives	439,865		2,130,468		2,494,645
II	Bombay Stock Exchange (a+b)	316,551	(13)	515,505	(18.7)	519,030	(16.7)
	a) Cash	314,073		503,053		499,503
	b) Derivatives	2,478		12,452		19,527
4	Commodities Market	NA		130,215	(4.7)	500,000	(16.1)
Note: Fig. in bracket represents percentage to GDP at market prices                               Source: Sebi bulletin

Indian Derivatives Market …. Looking Ahead

Clearly, in the nascent stage, the derivatives market in India is heading in the right direction. In the terms of the number of contracts in a single commodity/stock it is probably the largest market globally. It is no longer a market that can be ignored by any of the serious participants. The Indian economy, now, is at the verge of greater expansion the any other economies in the globe today. This has attracted a large number of institutional investors, both – the Indian as well as foreign, to invest in to the Indian stocks and commodities, thereby bringing in a lot of forex reserves. As predicted by the popular investment Gurus’ and the great Economists world wide, India will be a major player in the global economy by the end of this decade. We can conclude that, with the institutional participation set to increase and a broader product rollout inevitable, the market can only widen and deepen further.

WHAT IS A DERIVATIVE MARKET?

INTORDUCTION

The derivative is a product whose value is derived form the value of one or more variables/underlying assets called bases in a contractual manner. They have no value of their own but derive it from the underlying asset that is being dealt with under the derivative contract. Thus derivate contracts acquire their value from the spot prices of the assets that are covered by the contract. The primary purpose of a derivative contract is to transfer “risk” from one party to another they have established themselves as irreplaceable tools to hedge against risks in the market. The underlying asset can be equity, forex, commodity or any other asset.

The emergence of the market for derivative product, most notably forwards, futures and options can be traced back to the willingness of the risk-averse economic agents to guard themselves against the uncertainties resulting out of the fluctuations in the underlying assets’ prices. It is because of this nature, that, the markets [financial/commodities] are marked with a higher degree of volatility through the uses of derivative products. The risk of the prices can be transferred fully or partially by, locking-in the asset prices in the form of futures or forwards.

As an instrument of risk management, these do not influence the fluctuations in the prices of the underlying assets. Infact, by locking-in the assets prices, derivative products minimize the impact of the fluctuations in the asset prices on the profitability and cash-flow of the investors.

The Indian derivatives market has a history of more than a century, but is still in a nascent stage vis-à-vis the global derivatives market. Today we have an active derivatives market in the segment of stocks and foreign currency, while the trading in the commodities is just standardized. The OTC derivatives in India are well established and the Indian capital markets have acquired the international flavor and the volumes in the derivatives market in at a pace to climb up. 

A contract bought by paying an upfront margin is calculated as value added risk (VAR) basis. Which traces the volatility in the underlying assets (stock or commodities) prices to arrive at margin that is reflected of this volatility. Stock futures are linear and are absolutely similar to simple stocks i.e., ideally if the stock goes up and payoff.

Trading instruments

Derivatives in the recent times have become very popular because of their wide application. Before getting into the hard talks about the commodities trade, let us know about the trading instruments in the derivatives, as they are similarly applicable to the commodities derivatives. There are 4 types of Derivatives instrument:

Ø   Forward contract

Ø   Future contract

Ø   Options contract

Ø   Swap

Futures and Options are actively used in many exchanges whereas; Forwards and Swaps are mostly trade Over The Counter (OTC).

FORWARDS CONTRACT

A spot or cash market is the most commonly used for trading. A majority of our day-to-day transactions are in the cash market. In addition to the cash purchase, another way trading is by entering into a Forward contract. A Forward contract is an agreement to buy or sell an asset on a specified date of a specified price. These contracts are usually entered between a financial institution and its corporate clients or two financial institutions themselves. In the context to the Commodity trading, prior to the standardization, the trade was carried out as a forwards contract between the Associations, Producers and Traders. Where the Association used to act as counter for the trade. 

A forward contract has been in existence in the organized commodities exchanges for quite sometimes. The first forward contract probably started in Japan in the early 18^th century, while the establishment of the CHICAGO BOARD OF TRADE (CBOT) in 1848 led to the start of a formal commodities exchange in the USA.

Forward contracts are very useful in HEDGING and SPECULATION. The essential idea of entering into the forward contract is to Hedge the price thereto avoid the price risk. By entering into a forward contract one is assured of the price at which the goods/assets are bought and sold. The classic Hedging example would be that of an exporter who expects to receive payment in foreign currency after three months. As he is exposed to greater amount of risk in the fluctuations in the exchange rates, he can, with the use of forwards, lock-in the rate today and reduce the uncertainty. Similarly, if a speculator has the information of an upswing in the prices of the asset, he can go long on the forward market instead of the cash market and book the profit when the target price is achieved. 

The forward contract is settled at the maturity date. The holder of the short position delivers the assets to the holder of the long position on the maturity against a cash payment that equals to the delivery price by the buyer. The price agreed in the forwards contract is the DILIVERY PRICE. Since the delivery price is chosen at the time of entering into the contract, the value of the contract becomes zero to both the parties and costs nothing to either the holder of the long position or to the holder of the short position.

The salient features of a forwards contract are:

q  It is a bilateral contract and hence is exposed to counter-party risk.

q  Every contract is unique and is custom designed in the terms of: expiration date and the asset type and quality.

q  The contract price is not available in the public domain.

q  On the expiration, the contract is to be settled by the delivery of the asset.

q  Of the party wishes to reverse the contract, he has to go to the same counter-party, which may result o attract some charges.

FUTURES CONTRACT

“Financial futures represent the most significant financial innovations of the last twenty years.”                             - As quoted by MERTON MILLER, a noble lauret’ 1999.

The father of financial derivatives is Leo Me lamed. The first exchange that traded in the financial derivatives was INTERNATIONAL MONETARY MARKET, wing of the Chicago Mercantile Exchange, Chicago, in the year 1972.

The futures market was designed to solve the problems, existing in the forwards market. A financial future is an agreement between two parties to buy or sell a standard quantity of a specified good/asset on a future date at an agreed price. Accordingly, future contracts are promises: the person who initially sells the contract promises to deliver a specified underlying asset to a designated delivery point during a certain month, called delivery month.  The underlying asset could, well be, a commodity, stock market index, individual stock, currency, interest rates etc.. The party to the contract who determines to pay a price for the goods is assumed to take a long position, while the other who agrees to sell is assumed to be taking a short position.

The futures contracts are standardized in the terms of:

·         Quantity of the underlying assets.

·         Quality of the underlying assets.

·         Date and month of the delivery.

·         Units of the price quotations and minimum price change, and

·         Location of the settlement.

It is due to the standardization that the futures contract have an edge with the forward contract, in the terms of: Liquidity, safety and the security to honoring the contract which is otherwise not secured in an OTC trading forwards contract.

In short, futures contract is an exchange-traded version of the usual forward contract. There are however, significant differences between the two and the same can be appreciated from the above discussion.

Benefits to Industry from Futures trading:

ü  Hedging the price risk associated with futures contractual commitments.

ü   Spaced out purchases possible rather than large cash purchases and its storage.

ü   Efficient price discovery prevents seasonal price volatility.

ü   Greater flexibility, certainty and transparency in procuring commodities would aid bank lending.

ü   Facilitate informed lending.

ü   Hedged positions of producers and processors would reduce the risk of default faced by banks.

ü   Lending for agricultural sector would go up with greater transparency in pricing and storage.

ü   Commodity Exchanges to act as distribution network to retail agri-finance from Banks to rural households.

ü   Provide trading limit finance to Traders in commodities Exchanges.

OPTIONS CONTRACT

Options have existed over a long period but were traded over the counter (OTC) only. These contracts are fundamentally different from that of futures and forwards. In the recent years options have become fundamental to the working of global capital markets. They are traded on a wide variety of underlying assets on both, the exchanges and OTC. Options like the futures are also available on many traditional products such as equities, stock indices, commodities and foreign exchange interest rates etc., options are used as a derivate instrument only in financial capital market in India and not in commodity derivatives. It is in the process in introduction.

Options, like futures, also speculative in nature. Options is a legal contract which, facilitate the holder of the contract, the right but not the obligations to buy or sell the underlying asset at the fixed rate on a future date. It should be highlighted that, unlike that the futures and forward contract the options gives the buyer of the contract, the right to enter into a contract and he doesn’t have to necessarily exercise the right to give, take the delivery.  When a contract is made the buyer has to pay some money as a ‘Premium’ to the seller to acquire such a right.

Options are basically of two types.

·         Call options

·         Put options

Call options:  A call options gives the buyer the right to buy the underlying asset at a strike price specified in the option. The profit/loss depends on the expiration date of the contract if the spot price exceeds the strike price the holder of the contract books a profit and vice-versa. Higher the spot price more is the profit.

Put options: A put option give the buyer the right to sell the underlying asset at the strike price specified in the option. The profit/loss that the buyer makes on the option depends on the spot price of the underlying asset. If the spot price is below the strike price he makes profit and vice-versa. If the spot price is higher than the strike price he will wait up to the expiry or else book the profit early.

SWAPS:

Swaps were developed as a long-term price risk management instrument available on the over-the-counter market. Swaps are private agreements between two parties to exchange cash flows in the future according to a pre-arranged formula. These agreements are used to manage risk in the financial markets and exploit the available opportunity for arbitrage in the capital market. 

A swap, generically, is an exchange. In the financial parlance it refers to an exchange of a series of cash flows against another series of cash flows. Swaps are also used in the asset/liability management to obtain cost-effective financing and to generate higher risk-adjusted returns. With swaps, producers can effectively fix, i.e. lock in, the prices they receive over the medium to long-term, and consumers can fix the prices they have to pay. No delivery of the asset is involved; the mechanism of swaps is purely financial.

The swaps market originated in the late 1970’s, when simultaneous loans were arrange between British and the US entities to bypass regulatory barriers on the movement of foreign currency .the land mark transaction between the World Bank and the IBM in august 1981, paved the way for the development of a market that has grown from a nominal volume in the early 1980’s to an outstanding turnover of US $ 46.380tn in 1999.

 The swaps market offers several advantages like:

Ø  These agreements are undertaken privately while transactions using exchange traded derivatives are public.

Ø  Since the swaps products are not standardized, counter parties can customize cash-flow streams to suit their requirements

 The swaps can be regarded as portfolios of forward contracts. The two commonly used swaps are:

• Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency.
• Currency swaps: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction.