Foreign currency rupee options will be available in the foreign exchange market from July 7, 2003. Till now, booking forward premiums on foreign currency was the only product available to hedge seekers.
According to the circular issued by the Reserve Bank of India (RBI), authorised dealers (ADs, which are basically banks) have to fulfill some stringent criteria before they can offer this product.
These conditions include a minimum of 9 per cent capital adequacy, continuous profitability in at least the last three years, net non-performing assets of not more than five per cent of net advances, and a minimum net worth of at least Rs 200 crore.
Initially, ADs can offer only plain vanilla European options but for acting as market maker in this product, they have to apply to RBI for prior permission.
Customers can only use the product to hedge their underlying portfolio. They can purchase call or put options, but are not permitted to write options which means they cannot sell the option to anybody.
While ADs shall obtain an undertaking from customers interested in using the product that they have clearly understood the nature of the product and its inherent risks, the option premium has to be quoted in Rupees or as a percentage of the Rupee/foreign currency notional.
The limit available for booking of forward contracts will be based on past performance basis so that contracts outstanding should not exceed 25 per cent of the average of the previous three years
