Currency Options in India

A Currency option is a derivative contract which gives the buyer of the option the right, but not the obligation, to buy or sell the currency at a stated date and at a predetermined price. The seller of the contract has the obligation to honour the contract when the contract is exercised. The dynamics and mechanism of currency options trading are very similar to equity options.

There are two types of currency options: Call and Put. A call option gives the right to buy and a put option gives the right to sell. In every transaction, one currency is bought and another sold.

Benefits of opting for the USD-INR pair in the currency derivatives market

Any resident Indian or NRI can participate in the USD-INR pair, even if there is no underlying, up to a limit. This is unlike the forward market where you can only hedge an underlying currency exposure.

The bid-ask spreads are as low as 0.0025 in the near month pair and that substantially reduces the liquidity risk while trading. Also, the USD-INR is a fairly liquid pair and is possible to get quotes both ways with minimal risk.

Unlike the forward market mechanism, which is a closed market, the USD-INR pair is based on the transparent market mechanism. This makes it a lot more preferable for individual traders with limited access to information and insights. In fact, like your normal equity / F&O trading screen, you can log into your trading terminal and see the 5 best buy and sell quotes with volumes that reduces information asymmetry substantially.

You can access the USD-INR pair either through your broker or directly from your internet trading platform which adds to the convenience and reduces the hassles of trading

Trading in the USD-INR Futures in the currency derivatives market

As traders intending to take positions in the USD-INR pair, you need to understand a basic difference vis-à-vis the equity markets. When you buy the equities, you are actually betting on the price of the equity to go up. On the contrary when you are buying the USD-INR paid, you are actually betting on the US dollar to appreciate or in other words you are expecting the INR to depreciate against the US dollar. If you are actually expecting the INR to appreciate against the dollar then you should be selling the USD-INR futures. Settlement of currency derivatives will happen on the last working day of the month which will also be the date for interbank settlements in Mumbai. Unlike commodities trading, all USD-INR pairs as well as pairs with Pound, Euro and Yen are all necessarily cash settled.

Currency Options Contract Specifications

Four types of currency pairs are available for trading in currency options-

• USD-INR
• EUR-INR
• GBP-INR
• JPY-INR

Lot Size: The lot size varies depending on the currency pair. For USD-INR, 1 lot size denotes USD 1000. For EURINR, 1 lot size is EUR 1000. For GBPINR, it is GBP 1000 and for JPYINR, it is JPY 10000.

Underlying: The underlying would be the exchange rate in Indian rupees for each currency pair.

Exercise Style: European in nature which means the contracts can either be squared off by taking an opposite position or can be exercised on expiry.

Tick Size: The strike price interval in these contracts is Rs 0.25.

Contract Cycle: There are three monthly contracts and 1 quarterly contract.

Margin: Premium for buying and SPAN + Exposure margin for selling

Expiration day: Two days prior to the last working day of the month.