The recent move by the RBI to introduce currency options would go a long way in providing the banks and corporates with an effective hedging tool against currency risk.

The Reserve Bank of India introduced foreign currency rupee options from July 7, 2003, with the objective to neutralize the currency risk on the nation's large external liability portfolio and ensure smooth functioning of the markets. Foreign currency rupee options which are options to purchase or sell one currency at a price denominated in another currency will help to develop and deepen the domestic derivatives market. The very fact that the market witnessed volumes of $250 mn on July 7, is a sign that our derivatives market was waiting for such a tool to hedge currency risk. Seeing the current volatility in the forex market it seems that the launch of this product will lend a lot of flexibility to treasury management.

Foreign currency rupee options are introduced with the aim to help banks, corporates, residents and non-residents better manage their currency risks against adverse movements of the rupee against the foreign currency especially the dollar. It will not only benefit the banks and the corporates but also the apex bank which is an active player in the foreign exchange market. According to Prof. Sankarshan Basu (Finance and Control), Indian Institute of Management, Bangalore, "Trading in exotic options will make risk management easier and more streamlined for corporates." What we have today in the currency market is forward covers. The availability of options will help companies to cover losses by buying parallel options as the loss is capped to the extent of the premium paid to buy the product as against the forwards in which the loss is unlimited depending on the movement of the currency.

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