Forex mart has a new animal -dollar STRIPS

STRIPS may not have made an entry into the domestic debt market but the foreign exchange market is witnessing the advent of a new product from the same lineage "" dollar STRIPS.

STRIPS stands for separately traded registered interest and principal of a security. For instance, a 5-year bond can have 10 semi-annual coupons and one payment of the principal. Stripping this bond will create 11 instruments ""10 coupons and one principal. Each of them can be traded separately. It is aimed at catering to the needs of investors with varying maturity profiles.

Corporates having export receivables and harbouring the view that the rupee will appreciate in the medium to long term against the dollar are signing up dollar-rupee currency options for 6 to 12 months.

Under the new structure, the deal spanning over 12 months will be broken down into 12 contracts with individual expiry dates, explained a bank dealer.

Assuming that a corporate had a receivable of $12 million, it can enter into 12 contracts of $1 million each maturing at the end of the each month.

Under the currency option, the corporate can buy a put option for half of the amount ($500,000), which gives it the right to sell dollars at the decided price (strike price) in the event that the spot rupee dollar exchange rate appreciates beyond the strike price at the end of the one-month period.

However, if the rupee dollar rate depreciates in value and the dollar fetches more number of rupees against the strike price, the bank could insist on the exporter to exercise the option to sell dollars.

This will be facilitated by the corporate selling a call option to the banks for the full $1 million amount at the time of striking the deal. The entire package would form part of monthly deal. In the process, 12 such deals are contracted by the bank with the exporter, said a dealer.

The bank thus ensures that the flow of dollars is unidirectional (from the client to the bank) and dependent only on who exercises the option.

The major advantage of the new STRIPS product is that corporates do not have to book the entire amount in the forward market and can take a delivery of receivable or roll over the contract for the full amount depending on the dollar-rupee movement.

The product gives flexibility to the corporate to exercise his judgment on the exchange rate with reduced level of risk. This is because the entire amount does not get affected should his view on the rupee dollar movement be reverse to that of the exporters, explained a senior bank official.

Taking a call

• Under the new structure, deal spanning over 12 months will be broken down into 12 contracts with individual expiry dates
• Major advantage of the new STRIPS product is that corporates do not have to book the entire amount in the forward market and can take a delivery of receivable or roll over the contract for the full amount depending on the dollar-rupee movement