Benefits of derivatives to the market

The Central Bank is gearing to introduce guidelines for trading in derivative options - so far in foreign currency – in rupees by early next year, in a bid to bring in better rates to the customers, officials said.

“We plan to introduce a set of guidelines and indices to quote the rupee options rates,” a Central Bank source told The Sunday Times FT. He said that the regulator does not expect an upsurge of activity in the market but added that this is a start and these new financial instruments are an increasingly important vehicle for unbundling risks. “These instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it,” he said, adding that such unbundling improves the ability of the market to create a set of product and asset prices far more attuned to the value preferences of consumers than was possible.

Sachith Perera, Manager Treasury at HSBC, said that derivatives allow parties to mitigate risks arising from volatilities in financial markets by sharing in respective risks. “An exporter can hedge the risk of falling foreign exchange rates by exchanging such exposure with an importer who runs the risk of rising exchange rates.

This example is true for any commodity or interest rates. In short, it allows companies to manage their risks better,” Perera said.

He said that derivatives also enable local companies to compete in the global market with fine margins, margins that would not allow them to absorb losses due to market volatilities. “A hedged exposure is beneficial than an open exposure,” he said, adding that such derivatives also will help the Sri Lankan financial market to develop a level of sophistication that would help the market to develop as a regional financial hub.