ABN AMRO, Citibank, HSBC and Standard Chartered are looking to structure exotic foreign exchange options on the Indian rupee following the official opening of the onshore market last Monday. Market professionals have been eagerly anticipating the start of an options market since last year (DW, 4/28/02). "There's already been a huge amount of interest," said Madhav Shankar, senior manager of derivative sales at Standard Chartered in Mumbai, adding that he expects daily volumes could reach USD80 million (notional) in the next few months. In contrast, a dealer estimated average daily (notional) fx option turnover in Singapore is USD150 million. Douglas Bongartz-Renaud, global head of fx options at ABN in Amsterdam, said "The creation of an onshore rupee options market is a very significant event."
Currently, plain-vanilla puts and calls are permitted on all major currencies with no restrictions on maturity. One dealer said that in the first week there were already trades extending out to five years.
Under the new rules end users can only use options for hedging, noted Bongartz-Renaud. He added, clients have to be net buyers in terms of premium. Bankers, however, expect the Reserve Bank of India to further deregulate the market in the coming months to allow more exotic structures, but point out that end users can already enter zero-premium structures.
The most popular zero-premium structure is likely to be a collar, in which end users purchase protection via a put and finance it by selling a call, according to market officials. "The market is fairly conversant in using such structures in cross-products already, such as on dollar/sterling," said an official at HSBC. He added that participants such as exporters would be attracted to structures with low up-front costs.
More exotic foreign exchange structured products could be permitted in six months while notes or deposits with embedded fx risk will likely appear in the coming months, according to officials. "The [central bank] circulars have been silent on whether [structured notes with fx risk] can be offered--it's now a question of getting clarification," said an official at Citibank, noting that the bank is looking to speak with the Reserve Bank of India in this regard in the coming weeks.
"We hope that with the orderly opening of the market, in six-12 months we'll see the basic set of second and third generation derivatives, such as average rate options, barriers and digitals," said ABN's Bongartz-Renaud.
Alpana Killawala, spokeswoman at the RBI, said, "There's no particular timeframe on when such products could be introduced but as the market evolves we'll keep reviewing our position and the needs of the market." Killawala declined to comment in regards to structured notes.
