First, the ability of a firm or an individual to execute a derivative contract is based on an underlying exposure embodying risk. Second, these contracts, at least those involving Rupee, are predominantly to be executed by physical delivery.
Over the years, to enable the firms to manage their foreign exchange risk flexibly and efficiently, several relaxations have been introduced, such as, carrying out derivative transactions on the basis of past performance rather than on the basis of individual underlying contracts, cancelling derivative contracts even as the underlying exposure exists (and getting the benefit or bearing the loss thereof) with scope to rebook the contract against the same exposure, etc.