Oct 26 2018

Gains From Using Vanilla Options

Case :

A large importer based in Pune. We had just started a relationship and the client was getting extremely worried about persistent rupee weakness. Their import payments of USD 7,00,00 each were due for September and October 2018.

Myforexeye Value Addition :

The client approached us in a state of panic rightly so because rupee fell from 68.50 in start of August to 71.50 levels in September and continued to depreciate.  In first week of September, when USD/INR levels were around 71.70, we suggested the client to do Vanilla options for their payments in September and October. We made the client buy a USD/INR call option at a strike price of 72.00 for end of September, paying an option premium of 40 paise and another USD/INR call option at a strike price of 72.50 for end of October, paying an option premium of 55 paise.

On the maturity of the option bought for September, spot reference was 72.70 and the client exercised the option with a strike price of of 72.00 thereby gaining 70 paise. After adjusting the option premium, the client gained 30 paise on USD 7,00,000 accounting to a profit of INR 2,10,000. On the maturity of  the option bought for October, spot reference was 73.35 and the client exercised this option as well with a strike price of 72.50 thereby gaining 85 paise. After adjusting the option premium, the client in this case also gained 30 paise on USD 7,00,000 accounting to a profit of another 2,10,000 rupees.

This way the client gained a total of INR 4,20,000 by following our suggestion as we were able to analyse the market correctly.