×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

Firms can use zero-cost options: RBI

Firms can use zero-cost options: RBI
Comment E-mail Print Share
First Published: Tue, Dec 28 2010. 10 25 PM IST
Updated: Tue, Dec 28 2010. 10 25 PM IST
Mumbai: The Reserve Bank of India (RBI) on Tuesday said companies can continue to use zero-cost options for hedging their foreign exchange exposures.
When a company enters into a foreign exchange option transaction with a bank, the structure is such that the bank sells a ‘call’ option to the company, which, in turn, sells a ‘put’ option to the bank. This nullifies the cost of entering into such a transaction. It is known as a zero-cost structure, for which no premium income is earned.
The buyer of a ‘put’ option has the right but not the obligation to sell a specified amount of an underlying asset at a set price within a specified time.
Similarly, the buyer of a ‘call’ option has the right but not the obligation to buy an asset in a similar manner.
RBI had in November 2009 banned this product but allowed importers and exporters to write and sell ‘put’ options both in foreign currency-rupee and cross-currencies and earn premium on them. The move drew flak from multi-national companies as they ran a risk of incurring huge losses if their bets went wrong, as one leg of the transaction is unhedged.
RBI, in its final guideline on over-the-counter foreign exchange derivatives, released on Tuesday, said companies having a “minimum net worth of Rs 200 crore and an annual export and import turnover exceeding Rs 1,000 crore” and satisfying other risk management criteria, are allowed to use cost reduction structures.
The guidelines are effective 1 February.
Contracts booked this financial year and outstanding contracts at any point in time should not exceed the eligible limit, which is the average of the previous three financial years’ actual import or export turnover or the previous year’s actual import or export turnover—whichever is higher.
Contracts booked in excess of 75% of the eligible limit cannot be cancelled, RBI warned. It said higher limits will be permitted on a “case-by-case” basis.
RBI said in a statement some stakeholders, “particularly the Indian MNCs having global operations had represented that prohibitions on the use of cost reduction structures would impede their forex risk management operations and their global competitiveness.”
anup.r@livemint.com
Comment E-mail Print Share
First Published: Tue, Dec 28 2010. 10 25 PM IST
More Topics: RBI | FIIs | Foreign Currency Risks | Rupee | Currency |