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Corporates Buy USD/CNY Bonus Forwards

Derivatives Week

--Eleni Himaras

Corporate end-users are hedging against a rise in the U.S. dollar/Chinese yuan using bonus forwards in an otherwise quiet Asian fx market.

A bonus forward allows corporates to sell the dollar and buy the yuan at a more favorable rate than a plain vanilla forward, as long spot stays below a predetermined barrier at maturity. For example, the corporate may enter a one-year contract to sell the dollar at a strike of CNY0.03 above spot, as long as spot is less than CNY6.85. At maturity, if spot is CNY6.80, the payout is at CNY6.83. However, if the contract matures when the pair is above CNY6.85, the corporate would have to sell the dollar at CNY6.85. The corporate is taking the view that the pair will not rise above CNY6.85 in one year, for the added bonus of CNY0.03 in payout.

"There is still client interest in the yuan because of the gradual opening up of the currency and gradual moving of Hong Kong towards being an offshore center for trading," said Eddie Wang, head of fx structuring at Crédit Agricole CIB in Hong Kong. "It’s mostly corporates who have business in China and need to hedge yuan cash flow."

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