MCX-Stock Exchange will launch currency options contracts based on the rupee-dollar exchange rate starting Friday.

Lot size for a contract will be $1,000. Option prices (premium) will be quoted in rupees with a minimum price movement (tick size) of 0.10 paisa.

The options will be in European style; that is, they can be exercised only on the date of expiry.

Joseph Massey, MD and CEO, MCX-SX, said, “This product completes the spectrum of hedging instruments available on the MCX-SX currency segment and adds further efficiency to risk mitigation mechanism in USD-INR.”

Call options give the buyer (the option holder) the right to buy the dollar at a particular strike price. For this right, the buyer has to pay a premium to the option seller (called option writer).

However, it is up to the option buyer to exercise this right as he might let the option expire if the rupee-dollar exchange rate is lower than the strike price.

Put options give the option buyer the right to sell the dollar at a particular strike price. However it is up to the option buyer to exercise this right as he might let the option expire if the rupee dollar exchange rate is higher than the strike price.

Strike price is the price at which the buyer (of an option) exercises his right.

When a call option buyer exercises his option, he will buy dollars in multiples of 1,000s at the strike price. Similarly, on exercise, a put option buyer will sell in multiples of 1.000s at the strike price.

Option sellers are obliged to sell dollars when a call option buyer exercises his right and buy dollars when a put option buyer exercises his right.

Call options and put options on the rupee-dollar will be available in 25 strike prices each. This would include 12 in-the-money strike prices, one at-the-money and 12 out-of-the-money strike prices for both call and put options.

In-the-money strike prices for call options are less than the rupee-dollar exchange rate. At-the-money strike price is equal to the rupee-dollar exchange rate and out-of-the-money strike prices are greater than the rupee-dollar exchange rate.

For put options, in-the-money strikes are greater; at-the-money is equal to; and out-of-the money are lesser than the rupee-dollar exchange rate.

MCX-SX will offer three serial monthly contracts on the rupee-dollar followed by one quarterly contract. Trading hours are between 9 a.m. and 5 p.m. from Monday to Friday.

Contracts expire two business days before the last trading day of the expiry month.

Final settlement price will be RBI’s reference rate as on the date of expiry of the contract.

raghavendrarao.k@thehindu.co.in

(This article was published on August 9, 2012)
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