Hedge for currency exposures to protect the downside while retaining the upside, by paying a premium upfront. This would be a big advantage for importers, exporters (of both goods and services) as well as businesses with exposures to international prices. Currency options would enable Indian industry and businesses to compete better in international markets by hedging currency risk.
Non-linear payoff of the product enables its use as hedge for various special cases and possible exposures e.g. If an Indian company is bidding for an international assignment where the bid quote would be in dollars but the costs would be in rupees, then the company runs a risk till the contract is awarded. Using forwards or currency swaps would create the reverse positions if the company is not allotted the contract, but the use of an option contract in this case would freeze the liability only to the option premium paid up front.
The nature of the instrument again makes its use possible as a hedge against uncertainty of the cash flows. Option structures can be used to hedge the volatility along with the non-linear nature of payoffs.
Attract further forex investment due to the availability of another mechanism for hedging Forex risk.
Non-linear payoff of the product enables its use as hedge for various special cases and possible exposures e.g. If an Indian company is bidding for an international assignment where the bid quote would be in dollars but the costs would be in rupees, then the company runs a risk till the contract is awarded. Using forwards or currency swaps would create the reverse positions if the company is not allotted the contract, but the use of an option contract in this case would freeze the liability only to the option premium paid up front.
The nature of the instrument again makes its use possible as a hedge against uncertainty of the cash flows. Option structures can be used to hedge the volatility along with the non-linear nature of payoffs.
Attract further forex investment due to the availability of another mechanism for hedging Forex risk.
