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Foreign Exchange

China’s Safe pushes FX option innovation

China’s State Administration of Foreign Exchange (Safe) is encouraging dealers operating onshore to increase the innovation in FX options they offer to corporates for hedging purposes according to Derivatives Intelligence, a sister publication to Euromoney FXNews.

At a recent meeting between Safe and a delegation of onshore dealers, the regulator said structures, such as swaptions and accumulators, should be pursued as long as they fall within regulations. It is understood Safe wants to increase the use of FX options as a hedging tool to further the globalization of the yuan, making it a reserve currency to rival the US dollar.

Safe opened the onshore market to FX options last April in a bid to increase the number of hedging tools available to corporates doing business in China. Only forward contracts were available to corporates prior to the market’s inception.

The regulator also made the options available in the interbank market. Seven interbank dealers signed up initially and now there are 27.

Despite the increase, FX options are still an emerging segment of the Chinese market, according to David Liu, vice-president at Deutsche Bank in Shanghai. Speaking at an industry conference on Thursday, Liu said corporate clients are shifting from forwards to options.

“We can find more and more accepting this as a hedging tool,” he said. “Options are very flexible, compared to forwards.”

Liu noted that further innovation in the onshore FX market will take time. He said clients are only now becoming comfortable with plain vanilla options. Getting them interested in anything more complex might not happen until at least 2013, he said.

Yet corporates, especially multinational firms doing business in China, are taking note of the low-volatility environment as a good time to buy USD/CNY call options, Liu said.

“At present, the vol is at a very low level,” he noted. “If we expect the vol to increase then it’s a good opportunity to co-option.”

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