The Effects Of Introducing Onshore Foreign Exchange Derivatives To Rate Of Exchange

The exchange rate is a critical and basic financial element of one country, which has a great influence to its economy, and it is the most important task of the authority to maintain the steadily of one country’s currency. On September1.2010, the Bank for International Settlements (BIS, Bank for International Settlements) issued a latest report, which indict that global foreign exchange trading volume is up20%compared with April2007until April2010, and the average daily trading volume is$4trillion, and foreign exchange market has become the world’s largest financial market.The collapse of the Bretton Woods system in1973and the advent of the flexible exchange rate regime for major currencies necessitated, as also facilitated, the development of foreign exchange markets. One witnessed a growing trend towards the adoption of more flexible exchange rate arrangements worldwide. This exchange rate flexibility exposed market participants to risks arising as a result of exchange rate fluctuations. These risks assumed significance in globally integrated foreign exchange markets characterized by increased volume and volatility of capital flows. High economic growth and capital account liberalization led to increased currency exposure of both domestic entities and foreign counterparts, leading to rise in demand for risk management instruments for hedging exposure linked to real and financial flows. Currency hedging products thus emerged.In1990s, emerging markets such as BRIC has achieved outstanding result in economic development. With these market gradually join into the global market, the international trade and cross-border capital flows make its foreign exchange trading volume increases rapidly, which the needs of avoiding the foreign exchange risks the market participants become urgent, and how to stabilize exchange rate is the major problem which monetary authorities facing under this situation. Emerging market foreign exchange market development is relatively backward, and most of the emerging market countries cannot be trade freely, due to several reasons, market player set up a currency market out of its territory, and the market is called offshore market, offshore market is the concept of relative to the onshore market. The different market pricing mechanism and market participants makes two market prices is not always the same. Similar to most emerging market countries, due to reasons such as foreign exchange control, and there exists a RMB offshore market. Since the reform of the RMB exchange rate regime in2007, the expansion of foreign exchange rate fluctuation had increased.What’s the relationship between offshore currency market and onshore market? The purpose of this paper is to answer this question through to study of the Indian currency as a sample. The paper empirically examines the influence of the establishment of NSE currency future to the Indian rupee using recently developed multivariate GARCH techniques. The empirical results show that the establishment does have mean spillover impact on spot rate. The magnitude of volatility was higher in earlier period and became lower after the introduction of currency futures in India. This is probably due to the fact that introduction of currency futures in India enlarge the participations of the player which increase the market efficiency. Hence, the study suggests the introduction of currency futures in emerging markets may improve its currency market. Value-at-Risk (VaR) has been widely promoted by the Bank for International Settlement (BIS) as well as central banks of all countries as a way of monitoring and managing market risk and as a basis for setting regulatory minimum capital standards. By using this method, this papers to analyses the difference of risk of the onshore market before and after the introduction of currency futures to find the influence of this event. The empirical results show that the introduction of currency futures does help improving the risk management of the market.At last, according the empirical results, several suggests has been given to improving RMB currency market.