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TMI BlogForeign currency- Rupee OptionsX X X X Extracts X X X X X X X X Extracts X X X X ..... dealers having a minimum CRAR of 9 per cent, on a back-to-back basis. b) Authorised dealers having adequate internal control, risk monitoring/ management systems, mark to market mechanism and fulfilling the following criteria will be allowed to run an option book after obtaining a one time approval from the Reserve Bank: i. Continuous profitability for at least three years ii Minimum CRAR of 9 per cent iii. Net NPAs at reasonable levels (not more than 5 per cent of net advances) iv. Minimum Net worth not less than Rs. 200 crore c) Initially, authorised dealers can offer only plain vanilla European options. d) i. Customers can purchase call or put options. ii. Customers can also enter into packaged products involving cost reduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge contingent or derived exposures (except exposures arising out of submission of tender bids in foreign exchange). 2. Users a) Customers who have genuine foreign currency exposures in accordance with Schedules I and II of Notification No. FEMA 25/2000-RB dated May 3, 2000 as amended from time to time are eligible to enter into option contracts. b) Authorised dealers can use the product for the purpose of hedging trading books and balance sheet exposures. 3. Risk Management and Regulatory Issues a) Authorised dealers wishing to run an option book and act as market makers may apply to the Chief General Manager, Reserve Bank of India, Exchange Control Department, Forex Markets Division, Central Office, Fort, Mumbai-400001 with a copy of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly basis. FEDAI will publish daily a matrix of polled implied volatility estimates, which market participants can use for marking to market their portfolio. 4. Reporting Authorised dealers are required to report to the Reserve Bank on a weekly basis the transactions undertaken as per the format appended to this circular,Annexure I. 5. Accounting The accounting framework for option contracts will be as per FEDAI Circular No.SPL-24/FC-Rupee Options /2003 dated May 29,2003. 6. Documentation Market participants may follow only ISDA documentation. 7. Capital Requirements Capital requirements will be as per guidelines issued by our Department of Banking Operations and Development (DBOD) from time to time. 8. Banks should train their st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all options on a currency is given by D = e-rfT N(d1) And for European put option on a currency, D = e-rfT [N(d1) -1] Delta Hedging As per the Black Scholes model it is possible to set up a riskless portfolio i.e. hedge one's risk by taking a position in the underlying for a position in the derivative. Expressed in terms of delta, the riskless portfolio is: -1: Option +D: USD/INR The delta of an option changes with exchange rate. So to remain hedged, delta has to be rebalanced periodically. Gamma The gamma, G, of a foreign exchange option is the rate of change of the delta of the option with respect to change in the exchange rate. It is the second partial derivative of the portfolio with respect to the exchange rate: G = For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of time. Theta is also referred to as the time decay of the option. Theta is usually negative for an option (An exception to this could be an in-the-money European call option on a currency with very high interest rates). This is because as time passes, the option tends to become less valuable. Theta Hedging Theta is not the same type of hedge parameter as delta. There is uncertainty about the future stock price, but there is no uncertainty about the passage of time. Rho Rho is the rate of change of the option value with respect to the interest rate. = <> In case of currency options, there are two rhos corresponding to the two interest rates. The rho corresponding to the domestic interest rate is given by Call: = X T e-rT N(d2) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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