Exotic foreign-exchange derivatives are making a comeback in India, reflecting the central bank’s efforts to deepen the financial markets. After the Reserve Bank of India’s allowed lenders to offer derivative products earlier this month, banks such as ICICI Bank and Axis Bank sold barrier forex options to customers including Reliance Industries and Supreme Petrochem.
The return of exotic forex derivatives as well as the introduction of swaptions is part of efforts to give corporates more risk-management options as India’s global trade integration expands. Still, the authorities have tightened rules given that India had to ban derivative products in the aftermath of the 2008 financial crisis when a large number of firms were left with huge losses on bets gone wrong.
“Exotic derivatives, especially the knock-in barrier options for genuine imports hedging, may offer an ideal mix of risk management at a reduced cost than traditional vanilla options,” said Alok Wadhawan, deputy general manager, corporate finance, at Jindal Steel & Power Ltd.
“If banks price these derivatives correctly, there will eventually be an uptick in demand for such products from corporates,” he further added. The payoff on these products depends on whether or not the underlying asset has reached a pre-determined price.