The Chinese road map is well onits way to a freely traded Yuan as China’s foreign exchange regulator announceed the trading of call and put foreign currency options in the country to help traders and investors reduce their exposure to exchange rate fluctuations.
Trading of call and put options will begin on Dec. 1 this year, the State Administration of Foreign Exchange (SAFE), the national currency regulator, said in a statement on its website.
A foreign currency call option is a financial contract between two parties that gives the buyer the right, but not the obligation, to purchase an agreed upon quantity of underlying foreign currencies from the seller at an agreed upon time for a certain price.
Meantime, a put option gives the buyer the right to sell an underlying foreign currency at strike price while the seller — usually banks — is obligated to buy the assets upon their maturity if the buyer exercises the option.
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The SAFE said the introduction of call and put options to the on-shore market will boost hedging flexibility amid currency fluctuations and reduce transaction costs for Chinese companies.
The new SAFE arrangement prohibits the “naked selling” of options to prevent massive speculative transactions, stipulating that only traders and investors with foreign trade or investment businesses can buy such forex options.
Previously, Chinese companies or investors involved in foreign trade or investment corporations could only hedge currency risks through offshore non-deliverable forwards (NDF) markets.