Sebi expected to come out with the operational guidelines.
In a move to help importers, exporters and commodity traders hedge currency risks, the Reserve Bank of India (RBI) has allowed options trading in the currency futures market.
“It has been decided to permit recognised stock exchanges to introduce plain-vanilla currency options on the spot US dollar/ rupee exchange rate for residents,” RBI said in the Annual Policy Statement.
While exchange-traded currency derivatives were introduced in August 2008, the daily average volume has now gone up to Rs 37,523 crore. The daily average volume at the two exchanges — the National Stock Exchange and the Multi-Commodity Exchange (MCX-SX) — are Rs 17,541 crore and Rs 19,983 crore, respectively.
“The introduction of options trading is a welcome move. This will lead to further deepening of the market. With this, one more instrument will be available to companies as well as importers and exporters,” said Nandkumar Surti, chief investment officer, JPMorgan AMC.
At present, Indian residents are permitted to trade in futures contracts in four currency pairs on the two exchanges.
There are many advantages of options trading in the currency market. For one, options give buyers a right, but not the obligation, to exercise it. Options are also a cheaper hedging tool compared to futures.
In the futures market, an investor has to pay the mark-to-market difference. In options, the risk is confined to the premium that has already been paid.
In the past, both RBI and the capital markets regulator, the Securities and Exchange Board of India (Sebi), have discussed the possibility of introducing options trading. Now, Sebi is expected to come out with the operational guidelines.
In options trading, the strike price will be based on the spot price. There is a likelihood that monthly contracts for 12 months may be introduced, like in the futures market. According to data with Clearing Corporation of India, which settles currency forward contracts, 42 per cent currency options volumes come from option contracts of 6-12 months in the over-the-counter market.
Importers and exporters as well as commodity traders will find it convenient to hedge their positions in currency markets by buying or selling call or put options, depending upon their requirements. While call options are bought when prices are expected to rise, put options are bought when prices are expected to come down.