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What are Currency Options?
Currency Options are contracts that grant the buyer of the Option the right, but not the obligation, to buy or sell underlying Currencies at a specified exchange rate during a specified period of time. For this right, the buyer pays a premium to the seller of the Option.
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What is the need for Exchange Traded Currency Options?
1.Options have the comparative advantage of maintaining a certain degree of flexibility in hedging because, while protecting against a downside risk, they allow the investor to benefit from profiting from favourable movements of the Forex rates by simply not exercising the Option.
2. The exchange platform comes with all benefits resulting from transparency: tighter spreads, better access, more safety, etc.
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What is the underlying asset for USD-INR Options?
Underlying is the US Dollar-Indian Rupee (USD-INR) Spot rate.
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What is the type of Option?
USD/INR Option contracts are premium-styled European Call and Put Options.
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What are the trading hours and the size of USD/INR Options contracts?
The trading hours are from 9.00 am to 5.00 pm Monday to Friday; and the contract size is USD1,000.
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What are the quotes for USD/INR Options?
The premium is quoted in INR terms. However, the outstanding position is in USD.
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What is the contract cycle for USD/INR Options?
The contract cycle consists of three monthly contracts, followed by three quarterly contracts for the cycles ending March/June/September/December.
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What is the settlement mechanism for USD/INR Options?
USD/INR Options contracts are settled in cash in Indian Rupees.
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Which day is the expiry/last trading day?
The expiry/last trading day for the Options contract is two working days prior to the last working day of the expiry month.
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How is the settlement price determined?
The final settlement price is the Reserve Bank of India USD-INR Reference Rate on the date of expiry of the contract.
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Which day is the final settlement day?
The Options contract expires on the last working day (excluding Saturdays) of the contract month. The last working day will be the same as that for Interbank Settlements in Mumbai. The rules for Interbank Settlements, including those for ‘known holidays’ and ‘subsequently declared holidays’, would be as laid down by FEDAI.
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How are contracts settled at expiry?
On the last trading day of the Futures contracts, at 12:00 noon, the NSCCL (National Securities Clearing Corporation Limited) marks all positions of a CM (Clearing Member) to the final settlement price as published by RBI and the resulting profit/loss is settled in cash.
The final settlement loss/profit amount is debited/credited from/to the relevant CM’s clearing bank account on T+2 working days following the last trading day of the contract (contract expiry day).
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What is the Initial Margin levied in USD/INR Options?
The Initial Margin is based on a worst-case-scenario loss of a portfolio of an individual client, comprising their positions in Options and Futures contracts on USD/INR across different maturities and across various scenarios of price and volatility changes. The Initial Margin is deducted from the Liquid Net Worth of the clearing member on an online, real-time basis.
The sigma is calculated using the methodology specified for Currency Futures in SEBI circular no. SEBI/DNPD/Cir-38/2008 dated 06 August 2008 and is the standard deviation of the daily returns of the USD/INR Futures price.
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What is the Extreme Loss Margin?
The Extreme Loss Margin of 1.5% of the notional value of the open short Option position is deducted from the liquid assets of the CM on an online, real-time basis.
The notional value is calculated on the basis of the latest available Reserve Bank Reference Rate for USD-INR.
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What is the Net Option Value?
The Net Option Value is the current market value of the Option times the number of Options (positive for long Options and negative for short Options) in the portfolio. The Net Option Value is added to the Liquid Net Worth of the CM. Thus, Mark-to-Market gains and losses are not settled in cash for Options positions.
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What is the Calendar Spread Margin levied in USD/INR Options?
A long Currency Option position at one maturity and a short Option position at a different maturity in the same series, both having the same strike price, are treated as a Calendar Spread. The margins for Options Calendar Spreads are the same as specified for the USD/INR Currency Futures Calendar Spread.
The Calendar Spread Margin is calculated on the basis of the delta of the portfolio in each month. A portfolio consisting of a near month Option with a delta of 100 and a far month Option with a delta of -100 would bear a spread charge equal to the spread charge for a portfolio which is long 100 near month Currency Futures and short 100 far month Currency Futures.
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How is the premium paid by the buyer settled?
The premium is paid by the buyer in cash and paid out to the seller in cash on T+1 day. Until the buyer pays the premium, the premium due is deducted from the available Liquid Net Worth on a real-time basis.
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What is the position limit at client level?
The gross open positions of the client across all contracts (both Futures and Options contracts) cannot exceed 6% of the total open interest or USD10 million, whichever is higher. The Exchange disseminates alerts whenever the gross open positions of a client exceed 3% of the total open interest at the end of the previous trading day.
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What is the position limit at trading member level?
The gross open positions of the trading member across all contracts (both Futures and Options contracts) cannot exceed 15% of the total open interest or USD50 million, whichever is higher.
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What is the position limit for banks?
The gross open positions of the bank across all contracts (both Futures and Options contracts) cannot exceed 15% of the total open interest or USD100 million, whichever is higher.
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What is the position limit at CM level?
No separate position limit is prescribed at CM level. However, the CM ensures that their own trading positions and the positions of each trading member clearing through them is within the limits specified above.
