• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Rukmani Vishwanath

Mumbai , Oct. 21

A NEW trend is emerging in the domestic financial markets. Corporates are rushing to hedge their exchange risks with the help of rupee options instead of locking into traditional forward contracts.

Bankers and analysts contend, that the recent volatility in the rupee has once again spurred corporate interest in the rupee options market, which had more or less petered out after starting off with a bang in July this year.

Bankers contend that in the last three months, the entire market has done deals in excess of $2.5 billion and enquiries are pouring in. The reason for this newfound interest seems to be, that while the view on the domestic currency remains one of "appreciation", there is an underlying sense of uncertainty about its fundamental strength.

Corporates are going in for option structures that outright beat the locking into forwards, according to Ms Shilpa Kumar, Joint General Manager, Markets Group, ICICI Bank. The bank has done deals of around $500 million so far, according to Ms Kumar.

Options become useful when the basic trend in the market changes. There is substantial interest in rupee derivatives from large corporates and even small and mid-size companies for purposes of hedging their exchange risk, she said.

"In a forward market you are locking yourself into a certain expectation. Corporates who take a view that the rupee is going to appreciate might not want to lock into forward contracts. However, in event of there being a depreciation, they would like to protect themselves against that risk with the help of an options structure," she said.

Analysts ascribe much of the appreciation in the rupee to a weakening in the dollar. If this trend were to reverse, a lot of corporates with their unhedged exposures would be caught on the wrong foot. In these cases, an option contract serves as insurance for the company that can avail the benefit of a spurt in the rupee, but protect itself against a fall in the currency.

"Options allow the corporate an escape route whereby they can hedge their risk without obligation. However, the market still remains one-sided, with mostly dollar exporters using the market rather than importers. Options are being used more for hedging and not so much for trading," according to Mr Rahul Bhardwar, Senior Manager, Corporate Treasury sales, HSBC.

There is an increased awareness among corporates across the spectrum about rupee options these days and the bank is averaging around two deals a day, with the deal size varying from $1 to -$10 million, he said.

Trading in rupee options got off to a brisk start in July with the market clocking transaction volumes of $200-$250 million in the very first day. However, subsequently interest in rupee derivatives petered out, as the rupee was on a one-way path of strengthening.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Corporates rush for rupee options

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line