Under the new rules, companies are only permitted to buy options and not sell them. Effectively Safe is increasing the options open to corporates to manage their FX exposure,” said Lee. “For 80% of companies, spots and forwards are sufficient, but for the other 20% when there is some uncertainly over cashflow, spots and forwards might not be the most efficient hedge. All such transactions must be cleared through China Foreign Exchange Trade System (CFETS), the mainland’s inter-bank market clearing and settlement system. Deutsche Bank was among the first seven banks licensed by Safe for FX options trading, executing the first transaction which referenced US dollars and renminbi. “From a corporate perspective in China, this onshore FX option market is essential and is a major development,” said Lee. European-style options can only be exercised at maturity. Options give the buyer the right, but not the obligation, to buy or sell currency at a specified exchange rate during a defined time period. Effective April 1, the new rules, issued by the State Administration of Foreign Exchange (Safe), will allow trading of so-called European-style FX options between licensed local banks, institutions and corporations. Last week’s debut of FX option transactions in China will enable onshore companies to better hedge their longer-term currency exposures, according to Deutsche Bank’s Beng-Hong Lee, head of FX trading, China.
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