Oct 01 2018

USDINR Ideas – Options are cheaper now – 1Oct2018

After the chaos in end August and early September, when the rupee plunged from 69 to 72.90 in a month, the Indian unit has stabilized around 72 – 73. As a consequence, the USDINR options volatility has come down sharply (after rising in August and September). This is good news at a time of doom and gloom.


How can one benefit from such a fall in options volatility?

A 3-month at-the-money USDINR option (option strike = forward rate), if taken in early September (when options volatility was 8.775%), would cost Rs. 1.26 per USD. In other words, if I buy an 3-month option with a strike equivalent to the forward rate, I need to pay an option premium of Rs 1.26 lacs for an amount of USD 1 lac.

If I buy the same 3-month option today, when the options volatility has come down to 7.65%, the option premium will be Rs. 1.10 per USD or Rs. 1.1 lacs for an amount of USD Rs 1lac. As such, there is a cost saving of more than 12%.


Deal Date 10 September 2018 1 October 2018
USDINR Spot 72.65 72.65
Maturity 3 months 3 months
Strike Price 73.4750 ( = Forward Rate) 73.4750 ( = Forward Rate)
Amount (USD) 100,000 100,000
Option Premium (INR per USD) 1.26 1.10
USDINR ATM Volatility 8.775% 7.65%


Have a look at the chart below. The blue line (left hand side Y-axis) indicates the 3-month USDINR at-the-money volatility – notice the sharp decline since mid September. The orange candlesticks indicate the USDINR spot (right hand side Y-axis).