Friday, July 30, 2010

Trading of Options in Currency Derivatives

SEBI has given permission to exchanges to start trading of options on currency derivatives. Now it depends on the Exchanges the timing of introduction of products.

It is good on the part of RBI and SEBI to introduced  Options in currency segment, It will definitely boost the volumes and it will have many ramifications in the market.

a) It will boost volumes and opportunities in currency market.
b) Price discovery process of Exchange rate will be more smooth
c) Forex market in India will become more transparent  and huge volumes will move from OTC market to Derivatives market
d) It will give corporates a finer price to hedge.
e) Banks will be spared from allegation of Mis - Selling as corporates would be counter party to Exchange.
f) There will be more arbitrage opportunities
g) It will give opportunity to Importers and exporters to hedge their forex exposure
h) Indian Traders taking position in multi markets and multi products will find it easy to hedge their exposure in such market instead of OTC market.

The Salient features of the introduction of Options are

a) The option would be introduced on USD- INR only (As of now the permission is given to introduce options on American dollars only)
b) The options will be European options.
c) Options will be available in 3 serial monthly and 3 quarterly contracts
d) There will be at least 7 strikes (3-1-3) in each calendar month
e) The Options would be cash settled
f) The Final settlement price will be RBI reference rate.
g) Margins would be SPAN.
h) There will be margin benefit on calendar spread.

The mechanics are same as used on CDX market but we may need some clarity on certain issues
a) Would the margin be calculated on portfolio of (Futures and options both together) ?
b) There need to be clarity on issue of Stamp duty which is imposed in some states

It is a good move and we can expect to see trading in next 3 months