The Securities and Exchange Board of India (SEBI) on Friday allowed exchanges to introduce currency options on the U.S. dollar pairing with the rupee, a development that provides another alternative to corporates for hedging against currency fluctuations.
“It has now been decided to permit introduction of options on U.S. dollar-Indian rupee spot rate on the currency derivatives segment of stock exchanges,” SEBI said in a circular.
According to the circular, only dollar-rupee contracts of size $1,000 will be allowed.
With this, now exchanges like the National Stock Exchange and MCX (Multi-Commodity Exchange) will have to seek regulatory approval, following which they would go live. Currency option is a derivative instrument that gives the owner the right, but not the obligation, to exchange money denominated in one currency into another currency at a pre- agreed exchange rate on a specified date.
As per the SEBI guidelines, trading in currency options will be from 9 a.m. to 5 p.m.
The size of the contract will be $1,000. Premium will be quoted in rupee terms.
However, the outstanding positions will be in dollar terms. The available contracts will be: three serial monthly contracts followed by three quarterly contracts of the cycle March/June/September/ December.
A minimum of three in-the-money, three out-of the-money and one near-the-money strikes would be provided for all available contracts. The contract would be settled in cash in the rupee. The expiry/last trading day for the options contract would be two working days prior to the last working day of the expiry month. The final settlement price would be the Reserve Bank reference rate on the date of expiry of the contracts.
The options contract would settle on the last working day (excluding Saturdays) of the contract month. The last working day would be taken to be the same as that for Interbank Settlements in Mumbai. The rules for Interbank Settlements, including those for ‘known holidays' and ‘subsequently declared holiday' would be those as laid down by FEDAI. On expiry date, all open long in-the-money contracts, on a particular strike of a series, at the close of trading hours would be automatically exercised at the final settlement price and assigned on a random basis to the open short positions of the same strike and series.
The initial margin requirement would be based on a worst scenario loss of a portfolio of an individual client comprising his positions in options and futures
contracts on the same underlying across different maturities and across various scenarios of price and volatility changes. In order to achieve this, the price range for generating the scenarios would be 3.5 standard deviation and volatility range for generating the scenarios would be 3 per cent.
In August 2008, the market regulator allowed stock 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, the 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.
The Reserve Bank of India and SEBI jointly regulate these products. While the RBI approves the products, SEBI decides on the trading platforms.
On the likely benefits of exchange-traded currency options, RBI Chief General Manager Foreign Exchange Department (Trade) G Jaganmohan Rao had said, “By doing that, we will have another option in our pocket. Companies and exporters both will benefit.”
USE to launch operations
The United Stock Exchange (USE) will launch operations in currency options and interest rate futures after launching currency futures in September, a top official of the bourse said.
“We will launch full-fledged operations in currency futures in September, followed by currency options and interest rate futures,” United Stock Exchange Managing Director and CEO T. S. Narayanasami told PTI on Friday.
