USDINR derivatives' premiums shoot up, wipe out lakhs of rupees in investor capital

A trader has shared that he is at a net loss of Rs 2.48 lakh with a put option in USDINR cutting him the most with a loss of Rs 2.46 lakh.

Prices of certain currency derivatives have shot up in minutes wiping out lakhs of retail traders' money, after brokerages sent out notifications about an RBI circular that comes into effect on April 5.

The most discussed contract was USDINR May 82.75 PE, the premium of which shot up from 25 paise to Rs 20--or nearly 100x--in minutes.

"With the directive reaching the traders at the last minute, panic has set in and traders are trying to exit their positions at whatever price and that is causing premiums to shoot up," said trader Jitendra Jain.

A few brokerages have said they will square off the traders' positions if they are not in line with the directive on April 5. This can mean exiting the position at market order, which is whatever the price the market asks for, and that can be much more expensive than what the traders are paying now.

The RBI circular

The Reserve Bank of India (RBI) had sent out a circular on January 5, asking stock exchanges to inform users that they must be able to establish (if required) that they have an underlying exposure to a currency—for example as an importer or exporter—before they can trade in the currency's derivative. Traders are allowed to take derivative positions up to $100 million on their own and must route positions higher than that through an authorised dealer/custodian.

Also read: Bourses ask brokers to ensure compliance with RBI directive on currency derivatives' trading
The directives in the circular are to be effective from April 5.

Leading stock exchanges the National Stock Exchange (NSE) and the BSE Ltd issued circulars to brokerages on this on April 1, just days before the directions were to come into effect. Sources close to the development told Moneycontrol that they were waiting to see if they could get an extension to the deadline but that did not come through.

Losses mount

A trader shared that he is facing a net loss of Rs 2.48 lakh with a put option in USDINR cutting him the most with a loss of Rs 2.46 lakh.

He wrote that he acted in panic because the premium was "behaving like crazy".

Jain has posted on the social media platform X.com that it took seven years for the dollar to appreciate Rs 20 against the Indian rupee but just seconds for the currency-pair derivative to appreciate by Rs 20.

The movement of USDINR from Rs 63 to Rs 83 was made from 2018 to 2024.

But the movement of the currency-pair derivative was covered in seconds.

Also read: Popular FX derivatives market faces crushing blow in India

Another trader told Moneycontrol that the market regulator should investigate the movement in this contract because for the derivative to move Rs 19, the underlying (USDINR) should move by that magnitude too, which it hasn't.