India Inc may finally be allowed to sell call and put options. The Foreign Exchange Market Committee of the Reserve Bank of India on Friday recommended it, subject to the adoption of better risk management systems.
At present, only banks can trade in the product and companies can only buy it for hedging their exposures.
An option is a derivative product underlying a foreign exchange transaction. Buying an option gives the buyer a right to exercise the contract of either buying or selling dollars at a price decided in advance. Selling an option is an obligation to sell or buy dollars if the buyer wants to exercise the option.
Prabal Banerjee, head of treasury at Mahindra & Mahindra, said corporates could maximise their gains and minimise losses if they were allowed to sell currency options.
The permission to sell currency options will help create a bigger market as corporates will take part in market making." he added.
The committee also suggested that the banks with expertise in managing commodity price risks may be allowed to approve commodity hedging proposals from their corporate customers. Banks need authorisation from the RBI to manage commodity risks.
Currently, companies trading in international commodities like crude have to hedge their positions in the international market along with banks and their overseas trading partners.
The banks will, however, have to furnish forex data, including traded volumes for derivatives like foreign currency-rupee options, for the market on a regular basis.
In order to provide greater flexibility to the resident entities and to further the development of the forward segment of the market, all forward contracts booked by the residents, regardless of tenor, may be allowed to be cancelled and re-booked freely.
This recommendation had already been implemented along with the extension of forex trading timing from 4 pm to 5 pm.
Describing the committee's recommendations that banks could approve commodity hedging proposals from their corporate clients as a "good step," an executive of a big metal company said it would bring India at par with the developed countries in commodities trading.
At present, companies are allowed to hedge commodities, which are imported raw material for production. For example, a company is allowed to hedge copper concentration if it imports this commodity. But the company is not permitted to hedge other commodities like zinc and bauxite.
With the new recommendation, the companies will be allowed to hedge any commodity, subject to physical back up. "This provides a level playing field to Indian commodity players with their counterparts in the world market," he added.