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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

Aboutsixweeksago,theReserveBankofIndia(RBI)madeachangeintheexchangeregulationsoncurrencyoptions.Thechangenowpermitsexportersandimporterstowrite,thatis,sell,callandputoptionsontheforeigncurrencytotheextentoftheoutstanding,unhedgedexportsandimports.Thisisamajordeparturefromtheage-oldpolicyofallowingimportersandexporterstoenterintoderivativecontractsonlyforhedgingcommercialexposures.Oneisunabletounderstandtherationalebehindthechange. Thepricingandhedgingofoptionsisarguablyoneofthemostcomplex ...