It was recently we covered details about the expected rise in the Chinese Yuan to USD Exchange rates in the article: Chinese Yuan Exchange Rates rise Expectations. It seems that the Beijing is going further for bolder initiatives to offer more hedging products for Forex by opening up newer products focussed on hedging. SAFE or State Administration of Foreign Exchange which governs the foreign exchange market activities in China, has come out with China Yuan Options Trading.
As per the news recently came in, it is learnt that China has decided to launch Yuan options trading, to enable more flexible markets for forex currency hedging thereby making way for easing the business sceanrio.
This move from Beijing will have many folds impact:
- It will help develop the currency derivatives (expecially Yuan currency Derivatives) Trading market
- It will offer more flexibility in hedging to exporters, traders as well as various other market participants
- The Forex market, which till now has been only an OTC or over the counter market, will now be regulated and more importantly, will have a centralized reference for forex rates
But hold on, there are a few restrictions for the Yuan Options trading in the initial phase of launching this trading.
What are the restrictions in China Yuan Options Trading?
First and foremost, the options market is opening up and this will be its first phase. So the regulator does not want any speculative trading going on in Options market which might impact the Yuan Currency. So to begin with, the onshore options trading will have a restriction which allows only firms and banks to use it exclusively for hedging only.
Then, there will be only CALL options available for trading on Yuan Currency Options Market. There will be NO PUT options trading allowed. The aim is to use Options market only for hedging, rather than speculations.
When will the China Yuan Options Trading start (on which date)?
It is learnt that China Yuan Options Trading will start on date 1st April 2011 onwards.
What will be the option type for Yuan Options Trading?
In the beginning the Yuan Options will be of European type, meaning you cannot exercise them prior to expiry date.
What will be the advanatges and disadvantages for Yuan Options Trading?
More and more flexibility is expected to come in the market for Yuan Derivatives Trading, which will surely be advantageous. It will also provide a regulated market for hedging rates determination, which till now has been an OTC market.
On the flip side, the market participants can anytime become speculators and start hammering the prices. However, with the initial level of regulations in place, it seems to be difficult for speculators to goof up with the Yuan Options Trading market
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