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Tuesday, Nov 23, 2004

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Rupee options a hit among corporates

Richa Sharma

"Corporates are opting for zero cost options in larger numbers. In the case of these leveraged options, a premium is not required to be paid up front."

Mumbai , Nov. 22

THE rupee options market has seen increased activity with leveraged options finding favour with corporates in recent times. Daily volumes have increased by nearly 50 per cent to reach a turnover of about $50 million to $100 million, compared to a daily turnover of $25 million to $50 million a month or two back, dealers said.

The reason for the popularity of these instruments over forwards is that options do not confer an obligation on the buyer to perform a contract, dealers said. An option is a contract, which gives the buyer a right but not an obligation to fulfil the contract on a due date; a premium is required to be paid to the `writer' or seller of the option for this contract.

If an exporter books a forward contract, he is bound to fulfil it at the due date, while they are not tied down to an exchange rate in an option. In a forward contract, merchants cannot take advantage of a subsequent movement of exchange rates in their favour.

According to traders, earlier a secular movement in the rupee was observed but now there is inter-day volatility. So corporates are getting edgy about the direction of the rupee. Even with the rupee appreciating uni-directionally to 45.04/05 levels from the 45.75 levels seen in mid-October, volatility has increased, as the rupee moves into the 10-15 paise band in a day.

According to dealers, the view on the rupee has changed, as now the expectation is of a 44.00 level against the anticipation of a 47.50 level nearly two months ago. With the dollar weakening across all major currencies, the rupee is expected to appreciate, but this has failed to assuage sentiments given the high volatility in the dollar-rupee exchange market.

"Rupee options are increasing in popularity, as the view on the domestic currency is changing," said Mr Abhishek Chaudhary, forex options trader, ICICI Bank. He said ICICI Bank was an active player in the rupee options market and volumes transacted by the bank had doubled recently. Over the last couple of months, nearly a 300-per cent jump in business had been recorded with about $1.5 billion worth of deals being transacted.

Not only have the plain vanilla options, active up to one year, gained popularity, options having a time period of over a year have also seen a demand.

"Deals have been struck for five-year options too, with two to three years instruments also being traded in large amounts," Mr Chaudhary said.

Plain vanilla options are the put or call options, which can be exercised by corporates. A put option is a right to sell - so purchase of a USD put will give a corporate the right but not the obligation to sell dollars at a particular date, at a pre-determined rate, known as the strike price. An exporter, who would want to sell dollars if the market moves against him but does not want to sell dollars if the market exchange rate is in his favour, would normally buy a USD put.

A call option, on the other hand, is a right to buy - so a USD call option would give the buyer a right but not an obligation to buy dollars at a strike price, at a particular exercise date.

"Corporates are opting for zero cost options in larger numbers. In the case of these leveraged options, a premium is not required to be paid up front," said another trader at a leading private sector bank.

The writer of the option - in this case the bank selling the option to the corporate - recovers a margin by selling these zero cost options to salespersons who sell these products to corporates. The margin is not made from the sale of the option contract directly to the customer. A salesperson sells the option contract to a customer, recovers a margin on that.

The salesperson buys this contract from the bank, which is the writer of the option, and the bank has a margin by selling it to the salesperson. These zero cost options are not without a cost actually, only without a premium.

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