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Forex

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Trading dollar-rupee options

The call and put seller is the counterparty .

, ET Bureau|
Apr 01, 2019, 08.51 AM IST
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Dollar-1---TS
A put buyer gains if the dollar corrects (the rupee rises) and vice versa.
What are dollarrupee options?

They are instruments which give a buyer the right to buy or sell the dollar (against the rupee). For e.g., if you’re bullish dollar, you buy a dollar call and if you’re bearish dollar, you buy a dollar put. If the dollar rises (the rupee falls) the call buyer makes a profit. If, however, the dollar corrects, the call buyer loses. A put buyer gains if the dollar corrects (the rupee rises) and vice versa.


Who is the counterparty?

The call and put seller is the counterparty .

He sells the calls and puts and receives a premium from the buyer. His maximum profit is the premium earned and his losses can be unlimited. It is for this reason that he is considered more savvy than the call buyer. A call seller loses if the dollar at expiry is above the strike sold plus premium received. A put seller loses if the dollar at expiry trades below the strike sold minus premium received. There are other ways in which option sellers can hedge themselves, but that will be discussed in

Illustrate a trade where a call buyer makes money...

Assume you believe the dollar will strengthen against the rupee to 70 by April 25 from its Friday close of 69.17. You buy a dollar 70 strike call for 27 paise or Rs 0.27. The size of the contract is $1,000. So your outgo is Rs 0.27 X1,000, which is Rs 270 per lot.

Your gain happens if the dollar expires on April 25 above 70.27 since you paid premium of 27 paise. In reality the option value will rise pre-expiry if the rupee weakens, based on delta — rate of change in option price vis-à-vis change in the underlying dollar-rupee, and vega, the change in anticipated price swings or implied volatility of the option. To simplify, if the delta of 70 strike is 0.25, every 10 paise rise in the spot dollar will change the option price by 2.5 paise.

Where can I trade these options?

On the NSE and the BSE through a registered broker through your share trading account.

Also Read

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Rupee opens 16 paise down against dollar

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