RBI has recently allowed the foreign currency options which corporate treasurers can use to hedge against volatility of currency market. RBI appears to be cautious, permitting the instrument with a number of checks in place: Limit available to corporates for options transactions has been kept within the limit of forward contracts. RBI wants the market to absorb the nuances of the product before permitting the exotic options like digital or binary options.

The launch of foreign currency options got a roaring welcome on the first day of trade. But with most agreeing on the rupee's outlook, it may be sometime before the market sees sustained volumes.

After decades of hedging currency risk the conventional way: Using forward contracts, the Reserve Bank of India (RBI) on June 21, 2003, allowed currency options effective July 7 to help corporates hedge currency risk more effectively. Bank treasurers are confident that currency options will be a huge success, but like all new products that have been launched in the Indian financial markets in the past, after the initial brouhaha, there is always the long hiatus before activity picks up again.

We saw it happen with interest rate swaps and forward rate agreements when they were introduced in July 1999. It happened again last month, when transactions in interest rate futures (IRFs) dropped to Rs. 6.8 cr on the second day of trade, after clocking in Rs. 140 cr on the day of its launch. Currency options have been no different. After doing deals worth nearly $300 mn on Monday, the first day of trades, treasurers did little more than twiddle their thumbs on Tuesday, as deal value fell over 90% to $15-20 mn.

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