Exporters, Importers May Get to Write Covered Options

Mumbai: Looking to shore up liquidity of the currency options market, the Reserve Bank of India (RBI) on Thursday proposed to allow exporters and importers to write covered options against their actual contracted export or import exposure.

Under the current regulatory framework, writing of options by the users on a standalone basis is not permitted.

However, end-users can enter into option strategies of simultaneous buying and selling of plain vanilla European options, provided there is no net receipt of premium.

"...in order to encourage participation in the Over the Counter (OTC) currency options market and improve its liquidity, it has now been decided to permit resident exporters and importers of goods and services to write (sell) standalone plain vanilla European call or put options only against their actual contracted export or import exposures, i.e. covered call or covered put, respectively," the RBI's draft guidelines said.

Comments on the draft guidelines on 'Writing of Covered Options' have been sought by July 10.

The RBI said covered options against a related contracted exposure will add to the liquidity of the options segment in the over-the-counter market.

Citing an example, the RBI said if an exporter is permitted to sell a call against his underlying, it will enable him to express his/her view in the market and earn a premium for the same. The market will also benefit by additional liquidity and the fact that risks will be shared among market-makers and end-users.

Bid-offer spreads will reduce over time, which in turn may attract greater all-round participation.

In the first bi-monthly monetary policy, the RBI had proposed to permit Indian exporters and importers to write covered options on the basis of actual contracted forex exposure.

This was proposed with a view to encouraging hedging of forex exposure and enhancing the liquidity of the currency options market.

Currency options are contracts that grant the buyer of the option the right, but not the obligation, to buy or sell underlying currency at a specified exchange rate during a specified period of time.