The National Stock Exchange (NSE) today said it will introduce trading in currency options on USD-INR (US Dollar-Indian Rupee) pair on Friday.

The bourse has received approval from the capital market regulator Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI) for introducing exchange traded currency options on US Dollar -Indian Rupee Spot rate, NSE said in a statement.

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The introduction of currency options will provide an alternative to investors for hedging against currency fluctuations.

A derivative instrument, currency option gives the owner the right, but not the obligation, to exchange money denominated in one currency into another at a pre-agreed exchange rate on a specified date.

"To begin with the exchanges shall offer three consecutive monthly contracts and 1 quarterly contract. New contracts shall be issued on expiration of an existing month contract," the NSE added.

According to the bourse, USD-INR options contracts shall expire at 12 noon, two working days prior to the last business day of the expiry month.

The Reserve Bank of India and Sebi jointly regulate these products. While RBI approves the products, Sebi decides on the trading platforms.

Worldwide, the currency derivatives market is bigger than the equities market.

Earlier this month, Sebi gave its nod to the NSE and the BSE-backed United Stock Exchange for starting trade in currency options, but another bourse MCX-SX blamed the market regulator for discrimination against it, saying thet it was yet to get the approval.

At present, futures trading in four currency pairs is being offered through the exchanges. These pairs are Dollar- Rupee, Euro-Rupee, Yen-Rupee and Pound-Rupee.

In July this year, Sebi allowed bourses to introduce currency options on the US dollar pairing with the rupee.

Two year ago, the market regulator allowed exchanges to introduce currency futures, a forex derivative contract to buy or sell one currency against other on a specified future date, at a price decided in the contract.

Initially, currency futures were limited to rupee-dollar only. But in January 2010, it was extended to three more currencies?the euro, the British pound sterling and the Japanese yen?pairing with the rupee.

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