As part of developing the derivative market in India, Reserve Bank of India has permitted the foreign currency-rupee options, with effect from July seven, 2003.

The move would help add to the spectrum of hedge products available to residents and non-residents for hedging currency exposures, RBI said in a notification to the authorised dealers in Mumbai on Tuesday.

The ADs could offer the product on fulfillment of certain terms and conditions, it said.

This product may be offered by the ADs, having a minimum capital adequacy ratio of nine per cent on a back-to-back basis and should have been profitable continuously for at least three years, the apex bank said.

The net non-performing assets should not be more than five per cent and minimum net worth should not be less than Rs 200 crore (Rs 2 billion), RBI added.

Initially, the ADs can offer only plain vanilla European options.

RBI said only one hedge transaction can be booked against a particular exposure/part thereof for a given period.

Option contracts cannot be used to hedge contingent or derived exposures (except those arising out of submission of tender bids in the foreign exchange).

Customers who have genuine foreign currency exposures were eligible to enter into option contracts, it added.

For the present, the ADs were expected to manage the option portfolio within the risk management limits already approved by the Reserve Bank.

RBI said the banks should put in place necessary systems for marking to market the portfolio on a daily basis.

The banks should also train their staff adequately and put in place the necessary risk management systems before they undertake option transactions. They should take steps to familiarise their constituents with the product, it said.

On the reporting aspect, the apex bank said the ADs were required to report to RBI on a weekly basis the transactions undertaken by them.

The need for continuance of the product would be reviewed after six months based on the market development, it added.