Foreign exchange options in Sri Lanka rupees

The introduction of Sri Lanka Rupee (LKR) options in the forex market has provided market players with another tool to cover their foreign exchange exposure, the Sri Lanka Forex Association (SLFA) said.

In a statement this week it said the options also provide a great degree of variety in terms of product offerings and market capabilities.
“Although the market for options is still at a stage of infancy expectations are that it would grow to be one of the most widely used instruments in the market,” it said in a note explaining the benefits of this recent development.

The SLFA said December 1, 2006 could be described as a day where the Sri Lanka forex market took a crucial step towards the next level of development -- Rupee based options. The Central Bank of Sri Lanka following a series of discussion with SLFA issued the first set of guidelines for the trading and usage of “Foreign Exchange Options in LKR”.

An Option by definition gives the buyer the right during a specified period of time but not the obligation of purchasing or selling a currency or commodity at a pre determined price -- in exchange for the payment of a premium or for the omission of a certain benefit. Option related products are widely traded in developed markets and is the most current and popular form of hedging available for corporates, financial and non-financial institutions.

“While derivatives such as options were available to the local market from late 2005 it was restricted to non-LKR transactions, which meant that any institutions which needed to cover an LKR exposure would either have to do it on a spot basis or use forward contracts as a means of hedging,” the association said.