The Reserve Bank of India and the Securities and Exchange Board of India on Friday decided to allow recognised stock exchanges to introduce plain vanilla Currency Options on US dollar/ rupee exchange rate for residents.
The move to permit the introduction of options on the US dollar-rupee spot rate comes two years after the regulators permitted residents to participate in the currency futures market . This will expand the existing menu of exchange-traded tools for hedging against adverse exchange rate movements.
NSE and MCX-SX, which introduced currency futures in 2008, are all set to launch currency options.
A currency option contract grants the holder the right, but not the obligation, to buy or sell currency at a specified exchange rate during a specified period of time. For getting this right, a premium is paid to the broker.
The regulators have specified that the size of each currency options contract will be $1,000. The options will be premium-styled European call and put options. While the premium will be quoted in rupees, the outstanding position will be denominated in dollars.
The maturity of the contracts, which will be settled in cash in rupees, will not exceed 12 months. The settlement price will be the RBI's reference rate on the date of expiry of the contracts. Members registered with the SEBI for trading in currency futures market will be eligible to trade in the options market.
Members registered with the SEBI for trading in currency futures market will be eligible to trade in the exchange-traded currency options market of a recognised stock exchange.
Banks authorised by the RBI are permitted to become trading and clearing members of the exchange traded currency options market of the recognised stock exchanges on their own account and on behalf of their clients subject to their fulfilling minimum prudential requirements -- have a minimum net worth of Rs 500 crore, minimum capital to risk weighted assets ratio of 10 per cent, net NPAs should not exceed three per cent, and have made a net profit for the last three years.
“Introduction of Currency Options has been long awaited by the market and is definitely a step in the right direction. Currency Options is primarily a retail product and we expect corporates and SMEs to enter this market in a big way by hedging their forex risk at minimal cost,” said Mr T.S. Narayanasami, Chief Executive Officer, United Stock Exchange (USE). USE plans to launch currency futures and options shortly.
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