SHANGHAI :Chinese companies sold a record amount of currency options in the first half of this year as domestic businesses, particularly exporters, bet on a steady yuan and used derivatives to make some extra money.
WHY IT’S IMPORTANT
The trend is further evidence Chinese exporters are reluctant to convert their foreign exchange receipts back into low-yielding yuan, despite broad dollar weakness, but are seeking to hedge against potential currency risks.
Broad dollar weakness has underpinned the yuan, but domestic economic weakness and lingering trade uncertainty with the United States have limited its upside.
BY THE NUMBERS
Commercial banks sold a record $132.5 billion worth of dollar/yuan options January to June on behalf of their clients, official data from the State Administration of Foreign Exchange (SAFE) showed.
The yuan strengthened 1.9 per cent against the greenback in that period even though the dollar index dropped nearly 11 per cent as the central bank anchored the currency.
One-month dollar/yuan implied volatility is around 2.5 per cent, the lowest since July 2024.
CONTEXT
The central bank’s tight grip over the yuan, limiting gyrations in either direction, has prompted exporters to take advantage of the low volatility to trade options to enhance returns from their dollar holdings, traders and analysts said.
Some banks recommended “selling call options” to their corporate clients, two banking sources with direct knowledge of the matter said.
By selling into one-year dollar/yuan call options with strike prices higher than the current spot level, corporate clients can benefit regardless of how the yuan moves, one source said. If the spot rate moves higher within 12 months, the option will be exercised, giving the exporter a higher rate. If not, they will collect a premium on the option.
