Currency Traders Play With Fire As Rupee Stability Spurs Riskier Options

Currency traders in the India’s foreign exchange market are choosing exotic option trades in the dollar-rupee pair amid the Reserve Bank of India’s aggressive intervention to keep the rupee stable, according to four foreign currency traders who spoke to NDTV Profit anonymously.

This lucrative, but riskier, trade play is likely to burn a hole in market players’ pockets if the rupee comes under pressure, they added.

Indian rupee has been trading in a narrow range of 83.25-83.40 a dollar over the last four months on account of the central bank’s active two-sided intervention in the forex market.

A lack of significant trading opportunities in the spot market has turned currency traders to exotic foreign exchange options trading to make money, according to the traders quoted above. The build-up of such risk, if any external shock arises in the future, will result in hefty monetary losses, they added.

Exotic options are options contracts that differ from traditional options in their payment structures, expiration dates, and strike prices. These options can be customised to meet the risk tolerance and desired profit of the investor.

Although exotic options provide flexibility, they do not guarantee profit.

Options currently at play include knock-in and knock-out trades. These are options which get activated or expire whenever the rupee reaches a specific level against the dollar.

On the National Stock Exchange, the open interest on most-active options expiring on Dec. 29 at the strike price of 83.25 stood at 6.23 lakh contracts on Friday. According to the trader mentioned above, any level above 3 lakh contracts is considered high interest. NSE accounts for the highest volume of currency futures and options trading.

Some banks are selling call options on the dollar-rupee currency pair as the volatility in the spot rupee in 2023 has been lower than the implied volatility for options, a senior forex trader with a large private bank said, speaking anonymously.

On Friday, the rupee closed at 83.21 against the dollar, ensuring that the option sellers made a profit.

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