11.17 Exchange-traded currency derivatives: USDINR futures and options

11.17.1The contracts#

Specification of the USDINR contracts on NSE (as read on 6 Nov 2026; sources below):

Item	Futures	Options
Underlying	rupees per US dollar	same
Unit of trading (one lot)	USD 1,000	USD 1,000
Quotation	₹ per USD, four decimals	premium in ₹ per USD
Tick	₹0.0025 (0.25 paise), i.e. ₹2.50 per lot	₹0.0025
Trading hours	9:00 a.m.–5:00 p.m. IST, Monday–Friday	same
Monthly contracts	12 monthly expiries	3 serial monthly and 3 quarterly (Mar/Jun/Sep/Dec)
Weekly contracts	weekly futures expiring on Fridays, launched 11 Oct 2021	weekly options also listed (secondary; not checked)
Last trading day (monthly)	two working days before the last business day of the expiry month, trading ends 12:30 p.m.	same
Style	—	European, premium paid up front
Final settlement price	FBIL reference rate for USD/INR on the last trading day	same
Settlement	cash in INR; daily MTM T+1, final T+2	premium T+1, final T+2

Sources and caveats The NSE circular NSE/CD/49814 of 4 Oct 2021 (introduction of weekly USDINR futures) gives, from NSE itself, the unit, quotation, tick, hours, cash settlement, T+1/T+2, a daily settlement price computed from the last half-hour's volume-weighted futures prices across exchanges, and a final settlement price equal to the "reference rate published by FBIL for INR / 1 USD pair". The monthly expiry rule and the option cycle are from the MSEI USDINR specification and search extracts of NSE's specification page; NSE's own page timed out on every fetch attempt this session, so check the rows on https://www.nseindia.com before trading. BSE lists equivalent contracts.

Reference rate Financial Benchmarks India Pvt Ltd (FBIL) took over computing and publishing the USD/INR reference rate from the RBI on 10 July 2018 (RBI press release, 4 Jul 2018). Older documents, including the MSEI page above, still say "RBI reference rate"; it is now the FBIL rate. FBIL moved the rate's publication from 1:30 p.m. to 1:00 p.m. Mumbai time from 6 January 2025 (HKEX circular FIC/001/25, which uses the same rate to settle its rupee futures; secondary for FBIL). The contract stops trading at 12:30 p.m. so that no one can trade after the fixing data are known. On 5 Nov 2026 the FBIL rate was 94.3996 (11.11).

11.17.2Who may use them: the exposure requirement#

Rupee derivatives, whether OTC or exchange-traded, exist in Indian law to hedge currency risk. The rules are set by the RBI under FEMA (the market is jointly regulated with SEBI, which regulates the exchanges). The key concept is underlying exposure: a user should have a contracted or anticipated foreign-currency exposure that the derivative hedges.

Before 2024 A 2014 framework let users take exchange-traded positions up to a threshold per exchange without producing documents for the exposure (USD 10 million per exchange, later replaced by a single USD 100 million limit across all exchanges). Many brokers and retail traders read the documentation-free threshold as permission to trade without exposure at all, and proprietary traders and individuals came to dominate turnover.

The April 2024 episode On 5 January 2024 the RBI issued a consolidated Master Direction on risk management and inter-bank dealings, effective 5 April 2024, which restated that exchange-traded rupee derivatives need underlying exposure. In the days before 5 April, brokers told clients without exposure to close their positions, and volumes and option prices moved sharply (press reports). On 4 April 2024 the RBI issued a clarification (Press Release 2024-2025/32): the regulatory framework was unchanged; the earlier threshold had been a convenience that "did not provide any exemption from the requirement of having the exposure"; users with a valid underlying exposure could continue to take positions up to "a single limit of USD 100 million combined across all exchanges" without documentary evidence, but "users are expected to ensure compliance with the requirement of having underlying exposure"; and the directions would "now come into effect from Friday May 03, 2024" (RBI press release, read 6 Nov 2026). The Governor said afterwards that there was no change in policy and the date was moved at the request of market participants (Business Today, 5 Apr 2024; secondary). A Reuters report at the time quoted brokers expecting rupee ETCD volumes to fall by more than 80% and NSE data showing proprietary traders and individuals at about 80% of notional turnover in February 2024 (via ThePrint; secondary, not verified against NSE data).

October 2026 During the 2026 rupee stress (11.11), the RBI tightened again on 10 October 2026:

• A.P. (DIR Series) Circular No. 25 (RBI/2026-27/291) lowered to USD 5 million (outstanding notional, from USD 100 million) both the threshold up to which users may hedge contracted exposures with Authorised Dealers without documentary evidence and the threshold for positions in INR currency pairs on recognised stock exchanges without establishing the underlying exposure, combined across exchanges. Effective immediately (RBI circular, read 6 Nov 2026).
• A.P. (DIR Series) Circular No. 26 (RBI/2026-27/292) created a Foreign Exchange Risk Reserve (FERR): for INR foreign-exchange derivative contracts with notional above USD 2 million that hedge current-account transactions in which the user buys foreign currency against the rupee (that is, importers' hedges), the Authorised Dealer must keep 20% of the INR equivalent of the notional as cash with the RBI, daily, until the contract ends. It applies to contracts undertaken after the circular. Splitting transactions to avoid it is a violation (RBI circular, read 6 Nov 2026).
• Secondary reports add that Authorised Dealers may not let users rebook contracts cancelled after the directions (rollovers at maturity remain allowed), that users must undertake that the same exposure is not hedged with another dealer (News On AIR and other secondary summaries, 10–11 Oct 2026), and that Circular No. 27 of 12 Oct 2026 and FAQs of 15 Oct 2026 extend the reserve to dealers' own hedges and exclude market-making (secondary). The sources reviewed describe the FERR only for contracts between an Authorised Dealer and a user. Whether it reaches exchange-traded contracts was not verified.

Economics The reserve is a tax on buying dollars forward, aimed at the leg that adds to pressure on the rupee. If the reserve earns nothing and the bank passes its funding cost through, the cost per year is $0.20 \times r$ of the notional: at a 5.75% funding rate, 1.15% a year, more than half the 1.83% annualised forward premium of Worked example 11.7. Problem 11.23 works through this. The rule narrows the gap between OTC and exchange hedging costs for small hedgers and widens it for large importers, and it is the kind of rule that changes without notice: date every number you use.

11.17.3Pricing USDINR futures#

A USDINR future settles on the FBIL rate, which is a spot rate (for value two business days later). So a future expiring at $T$ is a contract on the spot rate $S_T$, and CIP (11.8) applies with the carry period running from today's spot value date to the expiry's spot value date, which is the same number of days as from today to expiry (holidays apart).

Proof

The forward price is (11.17) by the replication argument of Proposition 11.8. Futures and forwards with the same delivery have the same price when interest rates are deterministic (M07 Proposition 7.5); with stochastic rates the difference depends on the covariance between USDINR and Indian short rates over a few weeks, which is negligible for contracts of at most a year. The second equation is algebra: $F/S - 1 = (r_d - r_f)\tau/(1 + r_f\tau)$.∎

The forward premium is carry The basis $b_t = F_t - S_t$ (M07 convention) shrinks to zero by expiry (M07 Proposition 7.7). If spot does not move, a long USDINR futures position loses the basis, 25.7 paise per dollar, ₹257 a lot, and a short position earns it. The premium is not a forecast of depreciation (11.9). A long-dollar speculator in futures is paying the rupee–dollar rate differential, and a dollar seller (the exporter) is earning it. That is why, in India, exporters who hedge earn carry and importers who hedge pay it. Whether a hedge "paid off" after the event depends on whether the rupee fell by more or less than the premium over the period: in a year like 2022, when USDINR rose 11.3% (11.7, on the impossible trinity), importers' hedges paid off; in a year when the RBI holds the rupee steady, unhedged importers save the premium and hedged exporters keep it. Neither side gets a free lunch. The premium is the price of certainty, and UIP failures (11.9) are what make carry a risk premium rather than a forecast.

Arbitrage and who can do it Proposition 11.9 gives the no-arbitrage band for the forward with bid–ask spreads. In practice the band is enforced by banks (Authorised Dealers), which can borrow and lend in both currencies and trade both OTC forwards and exchange futures. Under the exposure rules of 11.17.2, non-bank traders without exposure cannot run the arbitrage at scale, so exchange futures can drift to the edge of the band for longer than equity index futures do.

11.17.4Hedging an importer's payable and an exporter's receivable#

Effective rate From M07 Proposition 7.7(c), a hedger who opens a futures hedge at $F_1$ and closes it at $t_2$, transacting in spot at $t_2$, realises

If the payment date coincides with the contract's last trading day and the hedger buys dollars at the FBIL fixing, $b_2 = 0$ and the hedge locks in $F_1$ exactly. In practice two things break this:

1. Date mismatch. The payable falls between expiries. Close the futures on the payment date; the remaining basis $b_2 = F_2 - S_2$ is the carry still left in the contract, roughly $S_2(r_d - r_f)\tau_2$, which is small and fairly predictable. Basis risk in USDINR comes mostly from changes in the rate differential, not from the spot rate.
2. Fixing versus execution. The futures settle on the FBIL rate; the importer buys dollars from its bank at the bank's rate at the time of payment, plus a margin. The difference is a few paise and is not hedgeable with futures.

Contract count With exposure $Q$ dollars and lot size 1,000, the naive count is $N = Q/1{,}000$. Two refinements (M07 · 7.6):

• Minimum-variance ratio $h^* = \rho\sigma_{\Delta S}/\sigma_{\Delta F}$ (Proposition 7.8), estimated from changes over the hedge horizon. For a USDINR future against USDINR spot, $\rho$ is close to one and $h^*$ close to one; it matters when the exposure is in a currency without a liquid INR contract, for example a dirham payable hedged with USDINR.
• Interest tail $N_{\text{tail}} = N^* e^{-r\tau}$ (7.19), because futures gains and losses are settled daily but the exposure is paid at $T$.

Futures or options A futures hedge removes the downside and the upside. An importer who buys USDINR calls pays a premium to cap the rupee cost and keeps the benefit if the rupee strengthens; an exporter buys USDINR puts. That leads to pricing the options.

11.17.5Options on USDINR: Garman–Kohlhagen#

Proof

Under the rupee risk-neutral measure $\mathbb Q$, every rupee price of a traded asset discounted at $r_d$ is a martingale. The rupee value of the dollar deposit is $S_te^{r_ft}$, so $e^{-r_dt}S_te^{r_ft}$ is a $\mathbb Q$-martingale, which with GBM dynamics forces $dS_t = (r_d - r_f)S_t\,dt + \sigma S_t\,d\widetilde W_t$. This is (8.20) with $r = r_d$ and $q = r_f$. Equivalently, in the PDE derivation of M08 · 8.6 the hedger who holds $\Delta$ dollars earns $r_f\Delta S\,dt$ of interest, exactly as a stockholder earns $q\Delta S\,dt$ of dividends, so the PDE is (8.18) with $q = r_f$. The payoff $(S_T - K)^+$ is the same as for a stock. Hence the price is (8.23) with $r = r_d$, $q = r_f$, and the put follows from (8.24). For the Black-76 form, substitute $S = Fe^{-(r_d - r_f)\tau}$: $Se^{-r_f\tau} = Fe^{-r_d\tau}$ and $\ln(S/K) + (r_d - r_f)\tau = \ln(F/K)$.∎

Everything in M08 carries over with $q = r_f$:

• Put–call parity: $c - p = Se^{-r_f\tau} - Ke^{-r_d\tau} = e^{-r_d\tau}(F - K)$ (8.4)–(8.5).
• Spot delta $e^{-r_f\tau}N(d_1)$; futures delta $e^{-r_d\tau}N(d_1)$, the number of dollars of USDINR futures per dollar of option to hedge (M08 · 8.8).
• Exchange options settle on the FBIL rate at expiry, which is a spot rate, so they are options on $S_T$; the Black-76 form with the futures price for the same expiry is the convenient way to price them off the futures curve.

Where the model fails for the rupee Garman–Kohlhagen assumes constant volatility and lognormal moves. USDINR has long calm periods in which the RBI damps volatility, and occasional sharp depreciations (2013 and 2026, 11.16; 2022, 11.7). Emerging-market currency smiles are usually skewed towards depreciation of the emerging currency: out-of-the-money USD calls trade at higher implied volatility than equally distant USD puts (a positive risk reversal). Check the current USDINR smile; it is not quoted in this course. Use (11.28) as the quoting language, as in M08 · 8.10 and M09, not as a description of the distribution.