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A V Rajwade: Think before you write an option

Their pricing and hedging is arguably one of the most complex subjects in the theory and models of financial economics

A V Rajwade

About six weeks ago, the Reserve Bank of India (RBI) made a change in the exchange regulations on currency options. The change now permits exporters and importers to write, that is, sell, call and put options on the foreign currency to the extent of the outstanding, unhedged exports and imports. This is a major departure from the age-old policy of allowing importers and exporters to enter into derivative contracts only for hedging commercial exposures. One is unable to understand the rationale behind the change. The pricing and hedging of options is arguably one of the most complex ...