Currency options open up market

PUBLISHED : Saturday, 12 November, 2011, 12:00am
UPDATED : Saturday, 12 November, 2011, 12:00am


Beijing has further liberalised the foreign-exchange market by allowing banks and companies to sell yuan options, a move to help them hedge against fluctuations in the currency's value.

According to the new rule published by the State Administration of Foreign Exchange (Safe) yesterday, Chinese exporters and importers can not only buy yuan options but also sell the contracts from December 1. China let businesses and banks trade yuan options in April but investors could only purchase the contracts from banks at that time.

The expanded trading of the options could better help investors and traders hedge against volatility in exchange rates.

By purchasing a yuan option from the bank, a call option, the buyer has the right to buy a certain amount of foreign currencies for a fixed price at a specified time in the future.

The contract helps companies planning to import commodities or investors attempting foreign investments in future to avoid paying extra for foreign-exchange purchases if the yuan weakens.

Companies or investors who have bought a certain amount of foreign currency for import or overseas investments are now allowed to sell to the banks the put option after completing the transactions.

They will benefit from selling if the yuan strengthens against the foreign currencies when the contract expires.

The buyers and sellers of the contracts were limited to only those who conduct foreign trades and investments, the regulator said.

'The new rule creates more hedging tools for companies in trading foreign currencies,' Safe said. 'It is a move to further develop the country's foreign-exchange market.'

China's yuan option market was still at a rudimentary stage and the regulator would still monitor trading of the contracts closely, while imposing other restrictions in future, analysts said.

Yuan trading has been volatile in the past two months as the euro-zone debt crisis has helped the US dollar, viewed as a safe haven, get stronger.

The new rule was endorsed by Safe on November 8 and was announced yesterday.

Beijing has been liberalising the foreign-exchange market for the past few years in line with its ambitions to make the yuan an international currency.

Residents in Shanghai can now buy foreign currency equivalent to US$50,000 a year without giving reasons for the use of the money.

Less than a decade ago, they were restricted to buying only US$2,000 for an overseas trip but only after they had obtained a visa.