Regulators seek bourses' view on currency options

The exchange-traded currency derivatives market in India is on a roll, with the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI) asking stock exchanges for feedback on introduction of currency options.

According to people familiar with the development, the joint technical committee, which comprises officials from RBI and Sebi, met a couple of weeks ago to deliberate on currency options. “The committee has already started discussing the launch of (currency) options and stock exchanges have been asked to submit their views on the product,” said a person privy to the development. At present, the National Stock Exchange and the MCX-Stock Exchange offer currency trading facilities.

Globally, options is a popular among both hedgers and speculators as its downside is limited. One can enter into an options contract by only paying the premium. The buyer is under no obligation to exercise the contract on the due date. In other words, only the premium amount is lost if the market goes against the bet.

This is different from futures contracts, where entities have to pay margins. According to rough estimates, options account for nearly 20 per cent of the global foreign exchange trade. The foreign exchange options market is considered the largest and the most liquid market for options in the world.

Madhusuman Somani, director (financial markets), YES Bank, said, “Options will help entities hedge against currency volatility while limiting the downside.”

“Say, for instance, someone is bidding for a project that has an exposure to foreign currency. He will be better off using options to hedge, as even if he fails to get the project, his downside will be limited to the premium,” said Somani, who also feels that “options per se will not increase volatility in the Indian currency”.

However, even while ground is being prepared for options, there is a belief that the central bank is sceptical about the product. It is said that RBI is of the view that currency options will lead to a significant rise in volatility of the Indian currency.

Incidentally, foreign institutional investors (FIIs) have still not been allowed to participate in the exchange-traded segment. The exchange-traded currency derivatives market in India made its debut only in August 2008 with rupee-dollar futures.

At present, regulators allow only futures contracts to be traded on exchanges. Recently, rupee-yen, rupee-euro and rupee-pound sterling contracts were given the go-ahead. The size of the market has been growing exponentially. From a modest beginning of a few hundred crore rupees, the daily turnover now crosses $7-8 billion almost on a daily basis.