The booming exchange-traded currency derivatives segment will soon see the introduction of options trading. The National Stock Exchange (NSE) and the United Stock Exchange (USE) have received the regulator’s approval for launching options trading on the rupee-dollar spot rate.
According to market participants, the move will boost the turnover of exchange-traded currency derivatives, where only futures trading is allowed at present. Options will provide an additional tool to hedge against currency volatility.
Apart from NSE and USE, the MCX Stock Exchange (MCX-SX) offers currency futures.
The popularity of currency derivatives can be gauged from the fact that the daily combined turnover of the three exchanges — NSE, USE and MCX-SX — is well above Rs 40,000 crore. This is much higher than the cash segment turnover at NSE and the Bombay Stock Exchange (BSE).
USE said it “would begin operations in currency options very soon”. NSE is expected to launch currency options within a fortnight. Exchanges have been doing mock trading in options for quite some time now.
According to BSE Managing Director and Chief Exceutive Officer Madhu Kannan, options trading will provide “a powerful mechanism for corporate entities and SMEs (small and medium enterprises) to hedge their currency risk and at the same time bring all the benefits of exchange-traded products like transparency and efficient price discovery”. BSE holds 15 per cent in USE. All its members are connected to the USE platform.
It is well over two months since the Securities and Exchange Board of India (Sebi) released a circular allowing options contracts on the rupee-dollar spot rate. Sebi said, “It has now been decided to permit options on the USD-INR spot rate on currency derivatives segments of stock exchanges. Eligible stock exchanges may do so after obtaining prior approval from Sebi.”
The regulator has allowed exchanges to introduce premium styled European call and put options. A European option can be squared off only on the day of expiry (maturity). The American option can be squared off before the expiry day. Stock options offered by Indian stock exchanges are American options.
The regulator has fixed the contract size at $1,000, with three serial monthly contracts followed by three quarterly contracts. The maturity of the contracts cannot exceed 12 months. While the premium will be quoted in rupee, the outstanding positions will be in dollar terms. The gross open position of each trading member across all contracts (both futures and options contracts) has been capped at 15 per cent of the total open interest, or $50 million, whichever is higher.
For banks, this has been capped at 15 per cent of the total open interest, or $100 million, whichever is higher.
