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6. To build a statistical base and provide data on the exports and imports of the country, exports and imports of their members, as well as other relevant international trade data.
Q2. Whatre the objectives of the international monetary system? (a) What challenges are faced by the countries in the present situation? (b) Whatre the possible remedies?
Answer: The International Monetary Fund (IMF) is the intergovernmental organization that oversees the global financial system by following the macroeconomic policies of its member countries; in particular those with an impact on exchange rate and the balance of payments. Its objectives are to stabilize international exchange rates and facilitate development through the encouragement of liberalizing economic policies in other countries as a condition of loans, debt relief, and aid. It also offers loans with varying levels of conditionality, mainly to poorer countries. The International Monetary Fund was conceived in July 1944 originally with 45 members and came into existence in December 1945 when 29 countries signed the agreement, with a goal to stabilize exchange rates and assist the reconstruction of the world's international payment system. Countries contributed to a pool which could be borrowed from, on a temporary basis, by countries with payment imbalances. The IMF was important when it was first created because it helped the world stabilize the economic system. (a) What challenges are faced by the countries in the present situation? Two criticisms from economists have been that financial aid is always bound to socalled "Conditionalities", including Structural Adjustment Programs (SAP). It is claimed that conditionalities retard social stability and hence inhibit the stated goals of the IMF, while Structural Adjustment Programs lead to an increase in poverty in recipient countries. The IMF sometimes advocates "austerity programmes," increasing taxes even when the economy is weak, in order to generate government revenue and bring budgets closer to a balance, thus reducing budget deficits. Countries are often advised to lower their corporate tax rate.
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Argentina, which had been considered by the IMF to be a model country in its compliance to policy proposals by the Bretton Woods institutions, experienced a catastrophic economic crisis in 2001, which some believe to have been caused by IMF-induced budget restrictions
Impact on peoples access to food in developing countries. Impact on Public Health Impact on Environment (b) Whatre the possible remedies? The delay in the IMF's response to any crisis, and the fact that it tends to only respond to them (or even create them) rather than prevent them, has led many economists to argue for reform. In 2006, an IMF reform agenda called the Medium Term Strategy was widely endorsed by the institution's member countries. The agenda includes changes in IMF governance to enhance the role of developing countries in the institution's decision-making process and steps to deepen the effectiveness of its core mandate, which is known as economic surveillance or helping member countries adopt macroeconomic policies that will sustain global growth and reduce poverty. On June 15, 2007, the Executive Board of the IMF adopted the 2007 Decision on Bilateral Surveillance, a landmark measure that replaced a 30-year-old decision of the Fund's member countries on how the IMF should analyze economic outcomes at the country level.
Q3. Whatre the different exchange rate systems in the world? Highlight its advantages & disadvantages.
Answer: Exchange rates are determined by demand and supply. But governments can influence those exchange rates in various ways. The extent and nature of government involvement in currency markets define alternative systems of exchange rates. In this section we will examine some common systems and explore some of their macroeconomic implications. There are three broad categories of exchange rate systems. In one system, exchange rates are set purely by private market forces with no government
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involvement. Values change constantly as the demand for and supply of currencies fluctuate. In another system, currency values are allowed to change, but governments participate in currency markets in an effort to influence those values. Finally, governments may seek to fix the values of their currencies, either through participation in the market or through regulatory policy.
Free-Floating Systems In a free-floating exchange rate system, governments and central banks do not participate in the market for foreign exchange. The relationship between governments and central banks on the one hand and currency markets on the other is much the same as the typical relationship between these institutions and stock markets. Governments may regulate stock markets to prevent fraud, but stock values themselves are left to float in the market. The U.S. government, for example, does not intervene in the stock market to influence stock prices. The concept of a completely free-floating exchange rate system is a theoretical one. In practice, all governments or central banks intervene in currency markets in an effort to influence exchange rates. Some countries, such as the United States, intervene to only a small degree, so that the notion of a free-floating exchange rate system comes close to what actually exists in the United States. A free-floating system has the advantage of being self-regulating. There is no need for government intervention if the exchange rate is left to the market. Market forces also restrain large swings in demand or supply. Suppose, for example, that a dramatic shift in world preferences led to a sharply increased demand for goods and services produced in Canada. This would increase the demand for Canadian dollars, raise Canadas exchange rate, and make Canadian goods and services more expensive for foreigners to buy. Some of the impact of the swing in foreign demand would thus be absorbed in a rising exchange rate. In effect, a free-floating exchange rate acts as a buffer to insulate an economy from the impact of international events. The primary difficulty with free-floating exchange rates lies in their unpredictability. Contracts between buyers and sellers in different countries must not only reckon with possible changes in prices and other factors during the lives of those contracts, they must also consider the possibility of exchange rate changes. An agreement by a U.S. distributor to purchase a certain quantity of Canadian lumber each year, for example, will be affected by the possibility that the exchange rate between the Canadian dollar and the U.S. dollar will change while the contract is in
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effect. Fluctuating exchange rates make international transactions riskier and thus increase the cost of doing business with other countries. Managed Float Systems Governments and central banks often seek to increase or decrease their exchange rates by buying or selling their own currencies. Exchange rates are still free to float, but governments try to influence their values. Government or central bank participation in a floating exchange rate system is called a managed float. Countries that have a floating exchange rate system intervene from time to time in the currency market in an effort to raise or lower the price of their own currency. Typically, the purpose of such intervention is to prevent sudden large swings in the value of a nations currency. Such intervention is likely to have only a small impact, if any, on exchange rates. Roughly $1.5 trillion worth of currencies changes hands every day in the world market; it is difficult for any one agencyeven an agency the size of the U.S. government or the Fedto force significant changes in exchange rates. Still, governments or central banks can sometimes influence their exchange rates. Suppose the price of a countrys currency is rising very rapidly. The countrys government or central bank might seek to hold off further increases in order to prevent a major reduction in net exports. An announcement that a further increase in its exchange rate is unacceptable, followed by sales of that countrys currency by the central bank in order to bring its exchange rate down, can sometimes convince other participants in the currency market that the exchange rate will not rise further. That change in expectations could reduce demand for and increase supply of the currency, thus achieving the goal of holding the exchange rate down. Fixed Exchange Rates In a fixed exchange rate system, the exchange rate between two currencies is set by government policy. There are several mechanisms through which fixed exchange rates may be maintained. Whatever the system for maintaining these rates, however, all fixed exchange rate systems share some important features. A Commodity Standard In a commodity standard system, countries fix the value of their respective currencies relative to a certain commodity or group of commodities. With each currencys value fixed in terms of the commodity, currencies are fixed relative to one another.
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For centuries, the values of many currencies were fixed relative to gold. Suppose, for example, that the price of gold were fixed at $20 per ounce in the United States. This would mean that the government of the United States was committed to exchanging 1 ounce of gold to anyone who handed over $20. (That was the case in the United Statesand $20 was roughly the priceup to 1933.) Now suppose that the exchange rate between the British pound and gold was 5 per ounce of gold. With 5 and $20 both trading for 1 ounce of gold, 1 would exchange for $4. No one would pay more than $4 for 1, because $4 could always be exchanged for 1/5 ounce of gold, and that gold could be exchanged for 1. And no one would sell 1 for less than $4, because the owner of 1 could always exchange it for 1/5 ounce of gold, which could be exchanged for $4. In practice, actual currency values could vary slightly from the levels implied by their commodity values because of the costs involved in exchanging currencies for gold, but these variations are slight. Under the gold standard, the quantity of money was regulated by the quantity of gold in a country. If, for example, the United States guaranteed to exchange dollars for gold at the rate of $20 per ounce, it could not issue more money than it could back up with the gold it owned. The gold standard was a self-regulating system. Suppose that at the fixed exchange rate implied by the gold standard, the supply of a countrys currency exceeded the demand. That would imply that spending flowing out of the country exceeded spending flowing in. As residents supplied their currency to make foreign purchases, foreigners acquiring that currency could redeem it for gold, since countries guaranteed to exchange gold for their currencies at a fixed rate. Gold would thus flow out of the country running a deficit. Given an obligation to exchange the countrys currency for gold, a reduction in a countrys gold holdings would force it to reduce its money supply. That would reduce aggregate demand in the country, lowering income and the price level. But both of those events would increase net exports in the country, eliminating the deficit in the balance of payments. Balance would be achieved, but at the cost of a recession. A country with a surplus in its balance of payments would experience an inflow of gold. That would boost its money supply and increase aggregate demand. That, in turn, would generate higher prices and higher real GDP. Those events would reduce net exports and correct the surplus in the balance of payments, but again at the cost of changes in the domestic economy. Because of this tendency for imbalances in a countrys balance of payments to be corrected only through changes in the entire economy, nations began abandoning the gold standard in the 1930s. That was the period of the Great Depression, during which world trade virtually was ground to a halt. World War II made the shipment of goods an extremely risky proposition, so trade remained minimal
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during the war. As the war was coming to an end, representatives of the United States and its allies met in 1944 at Bretton Woods, New Hampshire, to fashion a new mechanism through which international trade could be financed after the war. The system was to be one of fixed exchange rates, but with much less emphasis on gold as a backing for the system.
LERMS was to make balance of payment sustainable on ongoing basis allowing market force to play a greater role in determining exchange rate of rupee. Under LERMS, the rupee become convertible for all approved external transactions. The exporters of goods and services and those who received remittances from abroad were allowed to sell bulk of their forex receipts. Similarly, those who need foreign exchange to import and travel abroad were to buy foreign exchange from marketdetermined rate.
Summary 1. FDI is an investment that a parent company makes in a foreign country. On the contrary, FII is an investment made by an investor in the markets of a foreign nation. 2. FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit that easily. 3. Foreign Direct Investment targets a specific enterprise. The FII increasing capital availability in general. 4. The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor
global economy to suit their interests. In simple terms it removes all restrictions on businesses. FTAs severely constrain future governments in their policy options and help to lock in existing economic reforms which may have been imposed by the IMF, World Bank or Asean Development Bank, or pursued by national governments of their own volition. It works towards removing all restrictions on businesses as other free trade and investment agreements perform. FTAs are sometimes of narrow range in their dealing of traded goods. You can note the US-Cambodia bilateral textile trade agreement which was extended in January 2002 for a further 3 years. India and Sri Lanka signed a free trade agreement in December 1998 with India agreeing to a phase out of tariffs on a wide range of Sri Lankan goods within 3 years, while Sri Lanka agreed to remove tariffs on Indian goods over eight years. One of its objectives which were stated was to contribute, by the removal of barriers to bilateral trade "to the harmonious development and expansion of world trade". Other FTAs are much more comprehensive and cover other issues including services and investment. These agreements generally take existing WTO agreements as their benchmark. They often strive to even go further than what is set out in the WTO rules.
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Marked by massive movements of capital and abrupt shifts in comparative advantage, globalization affects countries' policy choices in many areas, including labor, trade, and tax policies. Helping a country benefit from globalization while avoiding potential downsides is an important task for the IMF. The global economic crisis has highlighted just how interconnected countries have become in todays world economy. Key IMF activities The IMF supports its membership by providing
policy advice to governments and central banks based on analysis of economic trends and cross-country experiences; research, statistics, forecasts, and analysis based on tracking of global, regional, and individual economies and markets; loans to help countries overcome economic difficulties; concessional loans to help fight poverty in developing countries; and Technical assistance and training management of their economies. to help countries improve the
International monetary systems are sets of internationally agreed rules, conventions and supporting institutions that facilitate international trade, cross border investment and generally the reallocation of capital between nation states. They provide means of payment acceptable between buyers and sellers of different nationality, including deferred payment. To operate successfully, they need to inspire confidence, to provide sufficient liquidity for fluctuating levels of trade and to provide means by which global imbalances can be corrected. The systems can grow organically as the collective result of numerous individual agreements between international economic actors spread over several decades. Role of IMF in IMS 1. Combating poverty in low income countries 2. Providing a forum for discussion and consultation among member countries 3. Increase global supply of international reserves. 4. Supervising the adjustable peg system.
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Institution International Bank for Reconstruction and Development (IBRD) 1945 International Financial Corporation (IFC) 1956 International Development Association (IDA) 1960 Multilateral Investment Guarantee Agency (MIGA) 1988 International Centre for Settlement of Investment Disputes (ICSID) 1966
Q.12 Explain how India has benefitted from World banks lending programme.
The World Bank Program in India To support India in achieving its long-term vision of a country free of poverty and exclusion, the World Bank Groups Country Strategy for India for FY 2009-2012 (CAS) is closely aligned with the objectives outlined in the country's Eleventh Plan. World Bank lending to India has diverged from initial plans spelt out in the Country Strategy due to the impact of the global financial crisis, the World Banks efforts to refocus, realign and consolidate the India program, and the increased demand from the Government for more financing. In FY10, the World Bank lent a record $9.2 billion to India, compared to $2.3 billion in FY09. Fourteen new projects were added in FY10, and the project pipeline has grown in light of increased demand from the Government of India. The average size of requested projects has increased. And, the volume of Bank lending has shifted further towards infrastructure, the delivery of essential social services, and increasing engagement on urban issues and agriculture. World Bank lending to India is organized around the following key challenges: 1. Achieving Rapid and Inclusive Growth Indias integration into the global economy has been accompanied by impressive economic growth that has brought significant economic and social benefits to the country. Nevertheless, disparities in income and human development are on the rise. A large section of the population - especially the poor, Scheduled Castes, Scheduled Tribes, Other Backward Classes, minorities and women - lack access to the resources and opportunities needed to reap the benefits of economic growth. To assist the government in achieving rapid inclusive growth, the World Bank is supporting activities which address both cyclical and structural impediments to growth, as well as the constraints to making growth inclusive:
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2. Ensuring Development is Sustainable Indias remarkable economic growth has been clouded by a degrading environment. The country is also very vulnerable to climate change on account of its high levels of population density, poverty, stressed ecological systems, and a substantial dependence on natural resources of much of Indias population. The following areas will thus require long-term vision and urgent action:
Protecting Indias fragile environment - air, water, forests and bio-diversity in the face of the rising pressures created by economic success Adapting to climate change and the growing scarcity of water Coping with accelerating urbanization through governance and environmental management strengthened urban
The World Bank is in the process of articulating a vision for an environmentally sustainable future for India (India 2030), and has projects in the pipeline to support the National Ganga River Basin Authority and industrial pollution management. 3. Increasing the Effectiveness of Service Delivery Most public programs suffer from varying degrees of ineffectiveness, poor targeting, and wastage of resources. In the current economic climate, India will have to dramatically improve the impact of every rupee spent. The World Bank is working with the Government of India to improve the delivery of key public services through systemic governance and institutional reforms of public sector service providers, decentralization of responsibilities, promoting effective systems of transparency and accountability, effective monitoring of service delivery, and expanding the role of non-state service providers.
financial capital, as well as financial transfers. The BOP summarizes international transactions for a specific period, usually a year, and is prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items. When all components of the BOP sheet are included it must sum to zero with no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counter balanced in other ways such as by funds earned from its foreign investments, by running down reserves or by receiving loans from other countries. Expressed with the IMF definition, the BOP identity can be written:
Measures to improve balance of payments in India Reduce domestic Consumption. Domestic consumption in India is proving resilient as rest of world slips into recession. This is causing imports to rise faster than exports. Reducing consumer spending would reduce imports, but, it may be deemed inappropriate as economic growth may be more important than balance of payments. Encourage depreciation of Rupee. Depreciation in the Rupee would make Indian exports more competitive and imports more expensive. The problem is that with a global recession many other countries will want to help their exporters through encouraging a weaker currency. Structural improvements. Long term supply side policies aimed at increasing the competitiveness of exports should help improve the balance of payments for India. However, they will take a long time to work.
In the foreign exchange market and international finance, a world currency, supranational currency, or global currency refers to a currency in which the vast majority of international transactions take place and which serves as the world's primary reserve currency. In March 2009, as a result of the global economic crisis, China and Russia have pressed for urgent consideration of a global currency. A UN panel of expert economists has proposed replacing the current US dollar-based system by greatly expanding the IMF's SDRs or Special Drawing Rights. Currencies have many forms depending on several properties: type of issuance, type of issuer and type of backing. The particular configuration of those properties leads to different types of money. The pros and cons of a currency are strongly influenced by the type proposed. Consider, for example, the properties of a complementary currency. U. S. Dollar In the period following the Bretton Woods Conference of 1944, exchange rates around the world were pegged against the United States dollar, which could be exchanged for a fixed amount of gold. This reinforced the dominance of the US dollar as a global currency. Since the collapse of the fixed exchange rate regime and the gold standard and the institution of floating exchange rates following the Smithsonian Agreement in 1971, most currencies around the world have no longer been pegged against the United States dollar. However, as the United States remained the world's preeminent economic superpower, most international transactions continued to be conducted with the United States dollar and it has remained the de facto world currency. Only two serious challengers to the status of the United States dollar as a world currency have arisen. During the 1980s, the Japanese yen became increasingly used as an international currency, but that usage diminished with the Japanese recession in the 1990s. More recently, the euro has increasingly competed with the United States dollar in international finance. Since the mid-20th century, the de facto world currency has been the United States dollar. According to Robert Gilpin in Global Political Economy: Understanding the International Economic Order (2001): "Somewhere between 40 and 60 percent of international financial transactions are denominated in dollars. For decades the dollar has also been the world's principal reserve currency; in 1996, the dollar accounted for approximately two-thirds of the world's foreign exchange reserves" (255). Many of the world's currencies are pegged against the dollar. Some countries, such as Ecuador, El Salvador, and Panama, have gone even further and
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eliminated their own currency in favor of the United States dollar. The dollar continues to dominate global currency reserves, with 63.9% held in dollars, as compared to 26.5% held in Euros
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Commercial letters of credit have been used for centuries to facilitate payment in international trade. Their use will continue to increase as the global economy evolves. Letters of credit used in international transactions are governed by the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits. The general provisions and definitions of the International Chamber of Commerce are binding on all parties. Domestic collections in the United States are governed by the Uniform Commercial Code. A commercial letter of credit is a contractual agreement between banks, known as the issuing bank, on behalf of one of its customers, authorizing another bank, known as the advising or confirming bank, to make payment to the beneficiary. The issuing bank, on the request of its customer, opens the letter of credit. The issuing bank makes a commitment to honor drawings made under the credit. The beneficiary is normally the provider of goods and/or services. Essentially, the issuing bank replaces the bank's customer as the payee. Elements of a Letter of Credit
A payment undertaking given by a bank (issuing bank) On behalf of a buyer (applicant) To pay a seller (beneficiary) for a given amount of money On presentation of specified documents representing the supply of goods Within specified time limits Documents must conform to terms and conditions set out in the letter of credit Documents to be presented at a specified place
Step-by-step process:
Buyer and seller agree to conduct business. The seller wants a letter of credit to guarantee payment. Buyer applies to his bank for a letter of credit in favor of the seller. Buyer's bank approves the credit risk of the buyer, issues and forwards the credit to its correspondent bank (advising or confirming). The correspondent bank is usually located in the same geographical location as the seller (beneficiary).
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Advising bank will authenticate the credit and forward the original credit to the seller (beneficiary). Seller (beneficiary) ships the goods, then verifies and develops the documentary requirements to support the letter of credit. Documentary requirements may vary greatly depending on the perceived risk involved in dealing with a particular company. Seller presents the required documents to the advising or confirming bank to be processed for payment. Advising or confirming bank examines the documents for compliance with the terms and conditions of the letter of credit. If the documents are correct, the advising or confirming bank will claim the funds by:
o o o
Debiting the account of the issuing bank. Waiting until the issuing bank remits, after receiving the documents. Reimburse on another bank as required in the credit.
Advising or confirming bank will forward the documents to the issuing bank. Issuing bank will examine the documents for compliance. If they are in order, the issuing bank will debit the buyer's account. Issuing bank then forwards the documents to the buyer.
currencies and lend (invest in) high-yielding currencies, and which (it has been claimed) may lead to loss of competitiveness in some countries. In a typical foreign exchange transaction, a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market began forming during the 1970s when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system. The foreign exchange market is unique because of
its huge trading volume, leading to high liquidity; its geographical dispersion; its continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 GMT on Sunday until 22:00 GMT Friday; the variety of factors that affect exchange rates; the low margins of relative profit compared with other markets of fixed income; and The use of leverage to enhance profit margins with respect to account size.
Q22. Rupee Dollar Option The Indian derivative market has seen the rupee-dollar forward contracts for quite some time now. But the market was introduced to a new currency derivative on 7th July, 2003 the rupee-dollar option contract. Options are relatively new instruments in the local financial market. Though cross-currency options have been available to corporate since January 1994, they have not yet become popular. For years, corporate have been accessing the foreign exchange market for dollarrupee forwards in order to hedge their exposures on exports, imports and loans. Forwards, therefore, have better understanding and acceptability with the corporate. As a result, the risk management decision for rupee-dollar exposures for all these years was mostly about whether to cover the risk by way of a forward contract or to leave it open. Now the corporate manager has the alternative to forward contracts in the form of rupee-options. But an option is a different animal altogether, and a novelty not only for the corporate, but also for Indian banks. In a forward contract, if a corporate hedges say, an import payment and the dollar depreciates by the payment date, the corporate cannot benefit from the dollar depreciation and has to pay at the
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agreed exchange rate under the forward contract. Even though the rate paid may be close to the budgeted rate and, therefore, need not be viewed as a loss, an opportunity has nevertheless been lost. In contrast, if an option contract is used for the same payment, the importer will pay a premium upfront and secure the right to buy the dollars at say, the forward rate. An option contract with an exercise price equal to the forward rate is called an at the money forward (ATMF). Now if the dollar depreciates, the importer is under no obligation to buy the dollars at the option contract rate. The importer will buy the cheaper dollars from the spot market. Does it mean that one is always better off hedging by way of options? Not necessarily so, because derivatives (forwards, options - the two basic families) are risk management tools and appropriate use of derivatives is the key to managing risks. For example, in the case of the importer discussed above, if the dollar had appreciated by the payment date instead of falling against the rupee, the importer would have felt better off (in retrospect though) with a forward contract. This is so because the option contract involved the payment of option premium. An option contract is like an insurance policy. In case of an insurance contract, the policyholder gets compensated in case of an eventuality like death, accident etc. However, no policyholder would want such an eventuality to happen. Be it car insurance or life insurance. One does not want to die just because one has an insurance policy on ones life; instead, the benefits of living longer are greater income inflows, besides the joys of living. An option contract is not much different. For the buyer of the option, the benefit is most when the need to exercise the option does not arise. Take for example, the importer discussed earlier, whose payout would be minimized if the dollar depreciates, rather than on the dollar does appreciation and the importer have to use the call option on the dollar. When and how to use option contracts is a matter of risk management practice and corporate treasurers need to bear this in mind. They would need to see the premium paid upfront as an insurance against unfavorable currency movement and not as a cost. There is a general lack of understanding on how the currency options should be used. This results in the option premium being seen as a cost and therefore the demand for zero cost option structures in the Indian market. It needs to be understood that zero cost option structures do not come free. It comes at the cost of limiting the possible gain - the very reason for which one would like to use options. While the interbank market in rupee: dollar options is thin, a number of banks actively quote prices to their customers. The relatively low volatility in the rupeedollar exchange rate, compared to say the dollar-euro or dollar-yen, makes the rupee-dollar option prices attractive. In time, as more and more corporate
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understand the use of options better; it has the potential as a risk management tool to emerge as a formidable alternative to forward contracts. Exchange rates keep adjusting to reflect the changes in economic environment for most developing countries, even though undue volatility in the exchange rates is not a comfortable scenario for the businesses. A two-way movement of the currency, which is a prerequisite for an efficient market in options, is already taking place, albeit in a limited way. After all, which exporter would have believed even a year back that the rupee would appreciate so dramatically? This helps in two ways. One, the pricing of options becomes viable. Option pricing is based on two way movement of the underlying - the rupee-dollar exchange rate. The writer/seller of the option will not find the business worthwhile if the market moves consistently only in one direction. In the absence of two-way movement of the underlying; is it a stock or a bond or a currency pair, the market liquidity suffers. Secondly, two-way movement of the currency will improve their understanding of the difference between forwards and options, and the need to use both derivatives at different times. While the banks offer a number of derivative structures based on options for the corporate, it is important that the user is conversant with such structures. Currency options, and in particular the rupee dollar options, are a new risk management tool for the Indian corporate treasury manager and therefore not many are expected to be familiar with options-based structure. It may therefore be useful to use plain vanilla options to begin with, for those who are new. This will be in the interest of the market that the participants understand the product that they are looking at. Treasury professionals, advisors and banks have an important role to play by explaining to corporate users and their management, the appropriate alternative strategies for using forward and option contracts, and the multitude of variants being sold by the banks. Unless options are used properly for risk management purposes by the corporate, the gains will not be seen and the market for options will not deepen.
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