A few large Indian companies are returning to exotic currency options to deal with the rupee's volatility as they look to manage hedging costs and foreign exchange risks.
Companies are specifically turning to barrier options, a class of knock-out or knock-in options that are exercisable or expire worthless depending on whether a particular level on the underlying asset is reached.
The company is adding barriers to the option structure that it normally does to manage the dollar receivables, the executive said, adding that it is using European knock-in option to manage the costs of the range forward options used to hedge. By adding a knock-in option, the exporter can manage the strike price and premium paid, depending on the view on the rupee and hedging needs.
When used with proper risk assessment, barrier options help to manage the premium cost, a trader with a large private sector bank said.However, the risk is that if the price of the knock-in option is not reached, the customer will be unhedged at the time of expiry, the trader said.
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