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Relaxed Currency Derivatives Norms to Bring More Arbitrage Opportunities

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Relaxed Currency Derivatives Norms to Bring More Arbitrage Opportunities
Move likely to deepen domestic currency market and make it more popular among overseas investors
Easier currency derivative rules have helped traders exploit the opportunities of arbitrage between rates in the overseas options markets and those back home.
In effect, the arbitrage is helping deepening the domestic currency market, which is increasingly becoming a preferred destination for overseas investors.The option premium, or the cost of insurance against volatility, is about 50 basis points less than the offshore market across various currency pairs – the rupee-dollar, rupee-pound, rupee-yen, and the rupee-euro.
“Arbitragers have found a new destination – the options market,” said Anindya Banerjee, currency analyst at Kotak Securities. “With more space available, they are now betting between the offshore and domestic exchange traded options markets. This will help deepen the currency derivative market in line with developed markets.”
Earlier in March, the authorities allowed global investors to take long (buy) or short (sell) positions up to $100 million from $15 million earlier in the exchanged traded currency derivative market that include both futures and options.The mechanism operates as follows: Going by the current market condition, the option premium is at 1.5% of the underlying value for a two-month option contract. Traders would buy it in the domestic exchange platforms only to sell in the overseas options market, which is quite active among foreign banks dealing in the rupee. The offshore market, popular among institutional investors, offers a premium of 2% and yields a 50-bps gain.
Currency option is like an insurance contract where one pays only the premium. In case of selling, one just pays the margin money just like in the futures market as the risk to the option seller is unlimited.“As and when companies discover an opportunity for zero-arbitrage, whether it is locally or overseas or between the both, they go for it,” said KN Dey, founder, United Financial Consultant, a forex advisory firm.
The Economic Times, New Delhi, 19th April 2018

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