The Securities and Exchange Board of India (Sebi) has approved the launch of exchange-traded currency options on the rupee-dollar spot rate. The move is expected to boost the turnover of the exchange-traded currency derivatives segment, where only futures trading is currently available.
Options would also provide market participants an additional tool to hedge against currency volatility.
According to a circular issued on Friday, exchanges have been allowed to introduce ‘premium-styled European call and put options’. A European option is one that can be squared off only on the day of expiry (maturity). This is in sharp contrast to an American option that can be squared off before expiry. Stock options offered by Indian exchanges till now are American options.
“It has now been decided to permit introduction of options on the USD-INR spot rate on the currency derivatives segment of stock exchanges. Eligible stock exchanges may do so after obtaining prior approval from Sebi,” said the circular.
The National Stock Exchange (NSE) and MCX Stock Exchange (MCX-SX) are the only two exchanges that currently offer trading in currency futures. The combined daily turnover of the currency derivatives segment is $3-4 billion. It is expected that the two exchanges will soon apply to the regulator for launching currency options. MCX-SX, which has been barred from launching new segments, would also be able to offer currency options, since they would be launched on the existing currency futures segment.
The regulator has fixed the contract size at $1,000 with three serial monthly contracts, followed by three quarterly contracts of the March/June/September/December cycle. The maturity of the contracts shall not exceed 12 months, said Reserve Bank of India (RBI) in a related circular. While the premium would be quoted in rupee terms, the outstanding positions would be in dollar terms.
The contract would be settled in cash in rupees, with the final settlement price being the Reserve Bank Reference Rate on the date of the expiry of the contracts.
