China to make room for FX futures and options

China’s financial futures exchange announced that they are looking to expand derivatives trading to meet objectives of Shanghai becoming a

China’s financial futures exchange announced that they are looking to expand derivatives trading to meet objectives of Shanghai becoming a commercial hub by 2020. The Chinese Yuan has trade limitations and new FX futures will pave the way for better trading and risk management for corporates and institutions.

In recent years Shanghai has shown improvements in its conduct with the Yuan. Honk Kong has been mastering itself as the home for offshore Yuan trading and now takes the bulk of daily trade volumes.

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China introduced stock index futures in 2008, trade volumes have been promising with an average of 200,00 lots for the CSI 300 contract. A seat on the CFFEX costs around $3,500 with yearly volumes of less that 200,00 orders and $4,700 for more than 200k orders.

Currency futures were first introduced by ICE in the 70’s and followed by the CME. The bulk of on exchange FX was carried out using the Globex system design was based on the Reuters network, covering most of the major trading pairs.

Globex was introduced in 1992 by Reuters. The popularity of this platform has declined as exchanges such as the CBOT have moved towards different vehicles for matching and executing trades.

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Currency futures reduce counter-party risk which is paramount to OTC trading. exchanges have opened their doors to the popular contacts with Brazil, Korea, Japan, South Africa, Budapest and Indian amongst the largest players.

India, one of China’s main competitors introduced currency futures in 2008, currently has daily trade volume of around $10 billion a day (roughly FXCM, Gain and Saxo Banks daily FX trade volume).

Traders can use arbitrage strategies with spot against the futures price. Currency futures are priced using the spot rate and interest rates. The following formula is used to set the price for a contract for a given currency pair:

F = S (1 + RQ x T) ÷ (1 + RB x T)
Where:
F = the price for the currency futures contract
S = the spot rate for the currency pair
RQ = the interest rate of the quote currency
RB = the interest rate of the base currency
T = the tenor or time to maturity (in days)

Forexmagnates team had a detailed look at the Chinese FX market, available in the latest quarterly report.

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