Trump gives desi firms headache, forces many to cover rupee risks

Several large Indian companies have bought currency derivatives to hedge their risks and mitigate the impact of volatility ahead of the likely unveiling of new tax measures by the US President.

Also, US Federal Reserves policy decision has added to uncertainty over the dollar's future move. The Bloomberg dollar index gained 0.5 percent on Wednesday after the Fed's decision.

A large oil-to-telecom behemoth, a giant construction conglomerate, and several diamond merchants were seen cutting derivative deals through option trades Wednesday, dealers said.

President Donald Trump may announce corporate tax reductions in the last week of September.

"The currency market was going through a bit of uncertainty ahead of policy actions in the US over the next two weeks," said Anindya Banerjee, a currency analyst at Kotak Securities. "It persists even after the US Fed meeting. While investors keeps a close tab on US Fed policy statements, there will be safe-haven rush toward the end of the month if President Trump keeps his election promises and reduces corporate tax rates. "

"Corporates are seen buying protection against volatility," he said.

Options, a mechanism in currency derivative trading, are mostly bought to protect any offshore receivables or payables that will vary in accordance with the rise or fall in the rupee's value to the dollar.

Some companies are buying 'call' options (with month-end maturity), billed as a protection against sharp increases in the dollar's value, dealers said. Others are buying 'put' option, a move that would help protect overseas receivables if the rupee rises.

"The rupee volatility (against dollar) is likely to increase," said Abhishek Goenka, founder and CEO of IFA Global, a Mumbai-based forex firm. "While the local unit is going to break the traded range, speculators are entering in such option trades to gain from expected volatility."

Since the beginning of the financial year in April, the rupee has been hovering around 64 to a dollar, with a 30-40 paise range. It closed at 64.27 a dollar on Wednesday, a tad stronger than a day earlier.

With the Implied Volatility remaining low, option premiums are now available cheap. The option premium rises only when market volatility jumps.

According to the Bloomberg one-month Implied Volatility, the gauge was at about 4.47% on Wednesday compared with 6.92% in November last year.