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人民币衍生产品 Chinese Yuan Derivatives in China & Offshore

人民币衍生产品 Chinese Yuan Derivatives in China & Offshore. Dr. Peter G. Zhang zhang.gp@shfe.com.cn Chief Financial Engineering Advisor & Senior Director of R&D Center Shanghai Futures Exchange October, 2004. WWW.SHFE.COM.CN. Major Contents. Exchange Traded Derivatives in China

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人民币衍生产品 Chinese Yuan Derivatives in China & Offshore

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  1. 人民币衍生产品Chinese Yuan Derivatives in China & Offshore

  2. Dr. Peter G. Zhangzhang.gp@shfe.com.cnChief Financial Engineering Advisor& Senior Director of R&D CenterShanghai Futures ExchangeOctober, 2004 WWW.SHFE.COM.CN

  3. Major Contents Exchange Traded Derivatives in China OTC Derivatives of RMB RMB Forwards OTC Derivatives in China RMB Derivatives Trading Offshore Non-deliverable Forwards (NDF) Non-deliverable Options (NDO) Non-deliverable Swaps (NDS) Government Initiatives Product Innovation Great Potentiality in China Important Implications for RMB Rate Formation Mechanism and Production Innovation for Chinese Banks in China WWW.SHFE.COM.CN

  4. Only 8 products trading in 3 Exchanges Shanghai Futures Exchange (SHFE)： Copper 、Aluminum 、Natural Rubber and Fuel Oil Dalian Commodity Exchange (DCE): Soybean bean and Soybean meat Zhengzhou Commodity Exchange(ZCE)： Wheat and Cotton Commodity Futures in China WWW.SHFE.COM.CN

  5. Embedded Options in bonds issued by Government-Sponsored Banks Embedded Options in Corporate bonds 23 convertible bonds (March 29, 2004) 12 in Shanghai Stock Exchange (10 in 03) 11 in Shenzhen Stock Exchange (6 in 03) Options Embedded in Convertible Bonds WWW.SHFE.COM.CN

  6. PBOC: “The Tentative Administrative Methods for RMB Forward Settlement” January 18, 1997 BOC: April 1st , 1997 CCB: April, 2003 ICBC: April, 2003 ABC : April, 2003 Major Problem: Real demand principle for trade specifications RMB Forwards WWW.SHFE.COM.CN

  7. Annual Turnover of RMB Forwards(US$ billion)

  8. Limitations of RMB Forwards *Total Turnover of merely USD 9 billion was only 1.06% of total trade of USD 852 billion!*RMB forwards are essentially RMB futures contracts with security deposit and maintenance requirement*“Real demand principle” requirement is the major factor affecting the market development

  9. FX Swaps FX Options Bond Options Swaps/Interest rate, FX and Credit default Swaptions Deposits with embedded options Inter-bank Derivatives WWW.SHFE.COM.CN

  10. Major Commercial banks with their clients Off-setting with Major International Banks Counter-Parties of Inter-Bank Derivatives Trading WWW.SHFE.COM.CN

  11. Great depreciation pressure from 1997 to 2000 around the Asian financial crisis Great revaluation pressure from late 2002 to 2004 May testing of 2002 Sept G7 meeting of 2003 February G7 meeting of 2004 From depreciation to Revaluation WWW.SHFE.COM.CN

  12. From depreciation to Revaluation WWW.SHFE.COM.CN

  13. RMB NDF From Premiums to Discounts WWW.SHFE.COM.CN

  14. Discounts from CYN Non-deliverable Forwards WWW.SHFE.COM.CN

  15. Non-deliverable Forwards NDF Non-deliverable Options NDO Non-deliverable Forward Options NDFO Non-deliverable CNY Swaps NDS Non-deliverable FX Swaps Structured Notes Deposits with embedded Options Offshore CNY/RMB Derivative Products WWW.SHFE.COM.CN

  16. Came into existence in 1996 before Asian financial crisis, yet liquidity was extremely low Liquidity began to pick up late in 2002 Trading turnover estimated around US$150 billion in 2003! RMB NDF-most Popular Product offshore WWW.SHFE.COM.CN

  17. RMB NDF Turnover Estimation WWW.SHFE.COM.CN

  18. Pricing CYN NDFs The spot RMB/US$ rate is 8.275 and the one-year RMB NDF rate is 2750 pips discounts, so he buys the RMB NDF at 8.275 – 2750/10000 = 8.00 with notional principle of US$ 1.0 million. If fixing rate is 3500 pips, the corresponding rate is 8.275 – 3500/10000 = 7.925 1,000,000*(8.275/7.925) – 1,000,000 = 1,044,164.04 – 1,000,000 = $44,164.04 WWW.SHFE.COM.CN

  19. P/L of CYN NDFs WWW.SHFE.COM.CN

  20. Major Trading Strategies of CYN NDFs According to Hong Kong Monetary Authority (HKMA), calendar spreading is the most popular trading strategy using CNY NDFs. WWW.SHFE.COM.CN

  21. Example of CYN NDF Bull Spreading WWW.SHFE.COM.CN

  22. RMB ND OptionsHistorical Volatilities WWW.SHFE.COM.CN

  23. Implied Volatilities of CYN Non-deliverable options WWW.SHFE.COM.CN

  24. RMB NDFs and NDOs WWW.SHFE.COM.CN

  25. Correlation of CYN NDFs and CNY NDOs WWW.SHFE.COM.CN

  26. Major Trading Strategies of RMB NDOs RMB call/US$ put; RMB put/USD call Bullish spread Call Spreading Put Spreading RMB & HK$ Put Spread: selling RMB put & buying HK$ put WWW.SHFE.COM.CN

  27. “RMB/CNY Derivative Products” By Dr. Peter G. Zhang, 2004 (English, Chinese, Korean,Japanese, French, German and Spanish) forthcoming in October 2004 →The Chinese Economy → The Chinese Capital Market → FX Derivatives in Developed Markets → FX Derivatives Used during Asian Financial Crisis → CNY/RMB Derivatives in Offshore Market → Future Development WWW.SHFE.COM.CN

  28. “Interim Rules for Inter-bank derivatives trading” issued by the China Banking Regulatory Commission (CBRC) on October 11, 2003 (draft version) and Issued officially on February 4, 2004 “Nine Turning Policies” issued by the State Council February 1, 2004 on Feb.1st, 2004 Government Initiatives for Derivatives in China WWW.SHFE.COM.CN

  29. To encourage the development of inter-banks derivatives trading Admission of market admission, Risk management, penalty rules Four State-owned Banks, Minsheng Bank and Everbright Bank licensed Citibank, Standard Chartered Bank, Nanyang Commercial Bank licensed, and CS First Boston Rules for Inter-bank Derivatives in China --- CBRC WWW.SHFE.COM.CN

  30. To increase product variety of commodity futures contracts To encourage researches on Stock and Bonds derivatives to prepare for financial futures Guidelines for Developing Ex-Traded Derivatives in China --- State Council WWW.SHFE.COM.CN

  31. Potentiality of Derivatives Market in China Economy Trade/GDP ratio 1980 14.3%; 1990 29.1%; 2000 43.4% 2002 50.2%; 2003 60.4%; 2004 76.5% (1HY)WTO Time Table (December 2006) National Treatment of Foreign Banks in ChinaQFIIs & QDIIsSteady FDI into ChinaShifting of Production capacity into China WWW.SHFE.COM.CN

  32. Potentiality of Derivatives Market in China Commodity Futures Energy and other Futures Copper and other Commodity Futures OptionsFinancial FuturesGovernment Bonds Futures Stock Index FuturesFinancial Futures Options WWW.SHFE.COM.CN

  33. Volume & Weights of Major Products in the world WWW.SHFE.COM.CN

  34. Potentiality of Derivatives in China(USD trillion) Chinese GDP growth rate 8% World ETD turnover/GDP = 873.7/36 = 24.3 Ratio annual growth rate 10% compared to average annual growth rate of 17% from 1998 to 2003 WWW.SHFE.COM.CN

  35. “Interim Rules” of CBRC OTC Market Developing Rapidly “Nine Turning Policies” of State Council Preparing for the Exchange-Traded Products The Spring of Derivatives Industry Will Come Before Long! (Zhang (2004)) OTC vs. Exchange Traded Derivativesin China WWW.SHFE.COM.CN

  36. Thank You! zhang.gp@shfe.com.cn 86-021-6840-0580 WWW.SHFE.COM.CN

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