Vanilla European Rupee Options Ahead

The Reserve Bank of India (RBI) has decided to permit banks to offer only vanilla European options in the first round of foreign currency rupee options, which are being introduced to deepen the derivatives market.

Vanilla options is a term used to categorize the basic call and put options with either American or European exercise. It normally refers to the standard options traded on exchanges.

Foreign currency options, sometimes referred to simply as currency options, are options to purchase or sell one currency at a price denominated in another currency. The exercise price of a currency option thus represents an exchange rate. The currency in which the premium and exercise price are denominated is referred to as the trading currency.

The currency to be purchased or sold at the exercise price is the underlying currency. The RBI said that customers can purchase call or put options but writing of options by customers is not permitted.

The customers can, however, enter into packaged products involving cost reduction structures provided the structure reduces the risk and it does not involve customers receiving premium. The RBI today circulated a draft on foreign currency-rupee options and sought the bankers