China starts yuan options to provide more hedging tools

China will begin the domestic trading of yuan options against other currencies beginning April 1 in an effort to meet market demands of more currency hedging tools as the yuan becomes more flexible.


The State Administration of Foreign Exchange (SAFE) said in a circular on its website Wednesday that it will launch trading of so-called "European-style" yuan options on the interbank market.


In a European-style option, investors can only exercise their rights after the contracts expire.


Also, banks and enterprises will be allowed to buy options at the initial phase, not to sell them, a move, the regulator said, that aims to ease foreign exchange trading risks.


It also said the trading will be restricted to firms using it for real trading and investment, rather than speculation. Banks involved in the business should have more than three years of experience in trading foreign-exchange forwards.


Options give the buyer the right, not the obligation, to buy or sell currency at a specified exchange rate during a stated period of time.


"As China's yuan exchange rate is becoming more flexible, enterprises' and banks' demands for hedging tools are on the rise, which boosts the development of the foreign exchange derivative market", the SAFE said.


Except for during special conditions such as the global financial crisis, the yuan's flexibility had been increasing since the country shifted to a managed floating exchange rate regime in 2005, and "it will be the future trend", it said.


It said current conditions of domestic foreign exchange market are suitable for the launch of the business, and more market-oriented interest rate systems and banks have had some experiences in trading foreign currency options.


Guo Tianyong, a professor with the Central University of Finance and Economics, said the move is a "major breakthrough" for the currency in the financial derivative investment market.


A more developed foreign exchange derivative market would help push forward the yuan's globalization, he said.


But most importantly, it will help Chinese enterprises and traders avoid the risks of exchange rate fluctuations and, at the same time, receive returns from such investments, he added.


The SAFE announced, late last month, that it will launch a currency swap business for bank customers beginning March 1 in another move to help enterprises hedge against exchange rate risks.
(Source:http://news.xinhuanet.com)