The Hindu Business Line : Trading in rupee options picking up

Currently, most foreign and private banks are active players in the market. Most active among the private banks are ICICI Bank, HDFC Bank and IDBI Bank.

In fact, ICICI Bank reported a contribution of Rs 7.14 crore in its profits for the third quarter ended December 31, 2004 from its transactions and trading operations in rupee derivatives.

"While leading private and foreign banks have started trading in dollar-rupee options in full swing, PSBs have not yet entered the fray fully," said an analyst.

Most banks seem to prefer the product structure of a `Straddles' contract, where the bank may buy a `call' option and a `put' option at the same time and sell a `call' and `put' option at the same time, he said. "A lot of banks are playing the game of trading in `Vols'-- the view taken on trading in the level of volatility in the currency, than the level of the currency itself," the analyst said.

The two-way volatility in the domestic currency in the past few months has fuelled all-round interest in option structures, which is seen by many market players as a preferable alternative to locking into traditional forward contracts.

The reason being, while a forward contract requires the purchaser to `lock into the contract', of agreeing to buy the currency at a pre-determined price, an options deal gives the buyer the right but not the obligation to fulfil the contract on the due date. "Dollar-rupee options are fast becoming one of the most popular products on offer in bank treasuries, as against currency swaps or interest rates swaps, as players can squeeze better margins from this product, as it is relatively new and has complex structures," said another analyst.

Trading in rupee options got off to a vigorous start in July 2003 with the market clocking transaction volumes of $200-250 million on the very first day. Subsequently, trading interest in rupee derivatives had petered out.But in 2004, volatility and extreme swings in the domestic currency led a lot of corporates, exporters and importers to get into options contracts as a means to hedge their forex risks.

The market is now witnessing volumes of $50-100 million on an average and up to $200 million on days when rupee witnesses heavy volatility, according to analysts.

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