The Hindu : $250 m worth deals struck on Day One

Online edition of India's National Newspaper
Tuesday, Jul 08, 2003

Business

Business

$250 m worth deals struck on Day One

By Our Special Correspondent

MUMBAI JULY 7 . While the rupee touched a 33-month high against the U.S. dollar, rupee options, a rupee derivative product launched today, witnessed an active trading in the foreign exchange market. The opening day's total trades are estimated at $ 200-250 million.

Most foreign banks, new generation private banks and some leading corporates, including Reliance Industries, have actively participated in today's trade, according to market sources. Among public sector banks, State Bank of India participated in the trade. Other leading companies that participated in the deal are Larsen & Toubro and Tata Engineering.

So far there was only plain rupee dollar forward contract since Indian corporates (exporters) started hedging. Today the second derivative product, option, has starred in the rupee-dollar market other than the forward contract. On the opening day, few banks were quoting the option price based on their `option pricing module' but it will take more time to get the option to be more liquid as the historical forward cover.

"This is a good beginning and corporates would definitely be benefited in the long run as they have a second hedging derivative now other than the old forward contract,'' said K. N. Dey, Basix Forex and Financial Solutions, a leading forex analyst. Still this option written by banks is to be either back to back or managed within their internal risk management systems.

Option products are likely to be preferred by exporters as these trades are having a call option and a put option. According to experts, corporates will benefit in protecting its risk as well as use the ongoing market, based on the movement of the exchange rate whether it is favourable or not.

What option cost the corporates here is only the upfront premium that they pay. For example, if an exporter today buys a put option at a strike price of Rs. 47 to a dollar for January 2004 delivery the exporter may have to pay an upfront cost of 40 to 50 paise per dollar.

On the due date, if the spot price of the dollar is less than the option price he would exercise the option or else if the spot (exchange) price is more than the strike price he would use the market rate (of course, taking into account the upfront cost paid).

This will take some time for this derivative product to pick up as the large public sector banks and the medium public sector banks have to play an active role in pricing the option.

There are two basis differences between a forward contract and the option.

On the due date of the forward contract the corporate has to execute the contract whether it is in its favour or not. But in the case of option the corporate can either execute the option or use the market depending the condition in the spot market. Second, there is no upfront cost for a forward cover but there is an upfront cost while buying an option.

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