The APP of Zhitong Finance has learned that the HKEx has published a research report on the "tools for RMB currency risk Management of the Hong Kong Exchanges and Clearing US Dollar against RMB (Hong Kong) option contract" to explore the changes in the macro environment since the RMB exchange rate reform, and pointed out that RMB internationalization has entered a new stage, and Hong Kong's role as an offshore RMB hub connecting the mainland and global markets is becoming more and more important.
The following is the full text of the research report:
Abstract
Hong Kong Exchanges and Clearing launched RMB currency options mainly because market participants have a growing demand for diversified tools to buy, sell and manage the offshore RMB exchange rate, hoping to meet the needs of the market.
Hong Kong Exchanges and Clearing's RMB currency option contract and RMB currency futures contract series complement each other. These option contracts can be used as risk management tools for nonlinear sensitivity, allowing investors to use the RMB exchange rate to trade volatility, which can meet the hedging needs of the market that RMB currency futures have failed to meet in the past. With the development of RMB exchange rate towards free floating and related policies, the RMB exchange rate is moving from policy-led to market-led, which is expected to increase the volatility of the US dollar against the RMB (Hong Kong) exchange rate. One month before the RMB exchange rate reform in August 2015, the extended volatility of the US dollar against the RMB (Hong Kong) was about 1% to 2% in one month, and climbed to 4% to 10% in the following year. The increase in the spot exchange rate volatility of the US dollar against RMB (Hong Kong) can be said to have created an opportunity to launch RMB currency options contracts, enabling market participants to trade volatility and to hedge exchange rate risks.
In addition, the global over-the-counter RMB options market had an average daily turnover of about $18 billion in 2016, with an average of $150 million per transaction. In addition, in the over-the-counter RMB (Hong Kong) derivatives market, the current volatility positions are mostly in the form of simple ordinary options (standard call / put options without special structural design). It is very different from the market structure dominated by structural forward positions two or three years ago.
Given the relative lack of transparency in the over-the-counter market, margin requirements under the new regulations and counterparty risks, there is a growing demand for over-the-counter renminbi currency options trading. USD / RMB (Hong Kong) options contracts listed on the Hong Kong Futures Exchange (HKFE) and centrally settled through the Hong Kong Futures Clearing Limited (Futures Clearing Corporation), it can optimize the price discovery function, provide price transparency and reduce counterparty risk for this important and growing RMB (Hong Kong) options market.
1. Macro market environment: market demand and current support
1.1 two-way volatility drives demand for RMB risk management tools
On August 11, 2015, the people's Bank of China (PBOC) launched a managed floating exchange rate system based on market supply and demand. The RMB exchange rate was adjusted with reference to the closing rate of the interbank foreign exchange market on the previous trading day, as well as the supply and demand of foreign exchange and changes in the exchange rate of a basket of currencies. One month before the reform in August 2015, the extended volatility of the US dollar against the renminbi (Hong Kong) was 1-2 per cent in one month, rising to 4-10 per cent in the year after the reform.
The internationalization of RMB has entered a new stage. As the most critical offshore RMB hub connecting the mainland and global markets, Hong Kong is playing an increasingly important role. Hong Kong should continue to strengthen its advantages and accommodate more innovative RMB-denominated products on top of the new role of the "common market", so as to consolidate Hong Kong's long-term development as a financial centre. This new role can be divided into three aspects: (1) optimized offshore RMB market; (2) RMB risk management center; and (3) establishment of a "portal market", as detailed below.
(1) as far as the offshore RMB market is concerned, the driving force of market growth in the past mainly depended on market expectations of RMB appreciation and arbitrage between the onshore and offshore markets. Now, there are more and more related financial products in the market, more risk management tools can be used in more different investment organizer strategies, and the market scale continues to deepen and expand. All this meets the needs of the global allocation of RMB assets and related cross-border capital flows. In developed countries such as Japan, Britain and the United States, the size of credit, equity and bond markets is more than five times their GDP, while these ratios are only about 2.1 times in China. It shows that China still has a lot of room for development in the deepening of financial markets and the diversification of financial products. Coupled with the fact that the International Monetary Fund has included the RMB in the Special drawing Rights (SDR) basket, it is expected that two-way fluctuations in the exchange rate of the RMB will become the new normal. More and more investors pay more and more attention to this market movement and begin to manage exchange rate risk.
Further develop and enrich diversified financial products and related financial servicesConducive to Hong Kong's continued development of its offshore RMB marketTo become a major location for cross-border investment (especially overseas investment originating in the mainland) and related risk management Now is a good opportunity for Hong Kong to further expand the depth and efficiency of its offshore RMB market. If more effective and reasonable pricing benchmarks for the onshore and offshore RMB markets can be developed, the situation of RMB pricing in the two markets "going their own way" is expected to improve, so that the price difference between the onshore and offshore RMB markets can be maintained at a reasonable level. To achieve this goal, the onshore and offshore RMB bond markets, foreign exchange markets and derivatives markets need to be further interconnected, increase market liquidity, and increase the number and diversification of market participants.
(2)Hong Kong already has the advantage of becoming a risk management centre, which will help speed up the restructuring and adjustment of the mainland's current economic and financial system.For example, the market generally expects that the flexibility of the RMB exchange rate will be further improved when RMB internationalization enters the next new stage. at that time, the demand for exchange rate risk management is bound to further increase. On the other hand, mainland companies are expanding their global networks and actively participating in different projects in countries along the Belt and Road Initiative route. In this regard, Hong Kong can also "seize the opportunity" to meet the needs of these companies for overseas investment risk management and the expansion of international business networks.
(3) with the gradual opening up of China's financial market, Hong Kong is no longer just an active product pooling market for mainland entities to invest in, but also gradually becomes a market for mainland entities to invest in other markets.Portal market. This trend has become more obvious since the launch of the pilot scheme on the trading interconnection mechanism between the mainland and Hong Kong markets. The Shanghai-Hong Kong stock market interconnection mechanism (Shanghai-Hong Kong Stock Connect) was launched in November 2014, and the Shenzhen-Hong Kong stock market interconnection mechanism (Shenzhen-Hong Kong Stock Connect) was launched in December 2016. and the mainland and Hong Kong bond market connectivity cooperation (Bond Link) launched in July 2017, Hong Kong, Shenzhen and Shanghai have become a large-scale common market. With Hong Kong acting as a bridge, this common market supports the global asset allocation of mainland funds on the one hand, and provides a sound infrastructure and platform for international funds to invest in the mainland capital market on the other. It is foreseeable that Hong Kong's main role as a connecting market will be further strengthened if the interconnection framework is extended to other product categories. According to the current trend of more frequent cross-border investment activities, the demand for risk management in the market is expected to increase, perhaps even several times.
1.2 support of Hong Kong Exchanges and Clearing RMB products and platforms
Against the macro background of the above analysis, overseas market interest in China's fixed rate and currency products markets is growing, and naturally the demand for risk management and investment is also on the rise. In this regard, Hong Kong Exchanges and Clearing has been increasing investment in many aspects, hoping to become an offshore RMB product trading and risk management center. At present, Hong Kong Exchanges and Clearing's trading platform offers different types of RMB products, including bonds, exchange-traded funds, real estate investment trusts, equity securities, RMB fixed rate and currency derivatives, as well as commodity derivatives, and so on. The whole product line is aimed at meeting market demand.
Since Hong Kong Exchanges and Clearing launched the RMB (Hong Kong) futures contract against the US dollar in 2012, product trading volume has increased steadily since 2015 and has become one of the most actively traded RMB futures contracts in the world. After that, Hong Kong Exchanges and Clearing further developed a more diversified product portfolio, launching futures contracts (yen, euro and Australian dollar) between RMB and other currencies (yen, euro and Australian dollar) on May 30, 2016 to facilitate cross currency hedging. In addition to RMB currency risk management tools, Hong Kong Exchanges and Clearing also launched five-year Treasury bond futures (treasury bond futures) of the Ministry of Finance of China on April 10, 2017, enriching its RMB interest rate risk management tools. This treasury bond futures can effectively hedge interest rates, especially after the bond trading on July 3, 2017. Bond Link is a pilot scheme linking Bank of China Ltd. 's bond market with the global market, enabling international investors to buy and sell bonds directly in the China Foreign Exchange Trading Center, the trading platform of the mainland's interbank bond market, for the first time through "Northbound Trading".
In addition, as RMB has become a reserve currency, the relationship between RMB and international currency has attracted people's attention, and there is also a huge demand potential for RMB currency index benchmark in the market. In June 2016, Hong Kong Exchanges and Clearing launched the Thomson Reuters / Hong Kong Exchanges and Clearing RMB currency series index (RXY index or RXY series index) jointly developed with Thomson Reuters to facilitate market participants to keep an eye on the RMB exchange rate trend. Hong Kong Exchanges and Clearing also plans to launch futures and options products of the index in the future to provide the market with more effective RMB risk management tools.
In addition, Hong Kong Exchanges and Clearing also plans to improve his RMB product line and first launch his gold futures contract for dual currency (US dollar and RMB pricing and settlement) trading and physical settlement in the commodity market on July 10, 2017. to provide effective solutions for risk management and investment for gold producers, users and investors. Manage the risks arising from the spread between the spot and futures markets of gold and between the RMB and the US dollar.
Hong Kong Exchanges and Clearing has also optimized its infrastructure platform to lay a solid foundation for the further development of RMB derivatives in the Hong Kong market. Hong Kong Exchanges and Clearing's subsidiary, Hong Kong OTC Clearing Limited (OTC Clearing Company), opened in 2013, providing an important capital market infrastructure to meet the needs of fixed rate and money products market participants for settlement services. in particular, locally traded products such as RMB-denominated derivatives.
Hong Kong Exchanges and Clearing USD / RMB (Hong Kong) Futures: one of the most liquid USD / RMB (Hong Kong) futures contracts in the world
Now the market has become increasingly aware of the need to hedge the RMB exchange rate risk and its benefits. The first renminbi derivative traded on the Hong Kong Exchanges and Clearing platform was the US dollar / renminbi (Hong Kong) futures launched in September 2012. Both individual and institutional investors are beginning to realize how RMB exchange rate fluctuations affect their portfolios in terms of RMB assets, liabilities and cash flow. The two-way trend of RMB has become one of the important metrics of investor risk management framework.
In 2016, Hong Kong Exchanges and Clearing's US dollar against RMB (Hong Kong) futures obtained 538594 contracts for the whole year, an annual increase of 105%, and the number of outstanding contracts reached 45635 at the end of the year, an annual increase of 98%, all a record. In addition, the average daily turnover climbed to 4325 in December 2016. The trading volume of cash-settled RMB (Hong Kong) against US dollar futures also increased in the second half of 2016, with open contracts rising steadily since its launch. In December 2016, the average daily turnover of 95 contracts was 95, with outstanding positions reaching a high of 1494 at the end of the year.
Entering 2017, Hong Kong Exchanges and Clearing US dollar / RMB (Hong Kong) futures products have set a number of new records:
On January 5, 2017, 20338 contracts were sold (with a nominal value of US $2 billion); the second and third largest transactions were on May 31 and June 1, respectively, also more than 8600 contracts (with a nominal value of more than US $860 million)
Approximately 46711 open contracts (nominal value of $4.7 billion)
January 4, 2017 night turnover of 3642 contracts (nominal value of US $360 million)
Increased market participation: the total number of exchange participants who have participated in buying and selling this product has increased to 112.
two。 Hong Kong Exchanges and Clearing USD / RMB (Hong Kong) option: an effective risk Management tool for over-the-counter Trading
At present, the over-the-counter RMB options market is already very large, with an average daily turnover of US $18 billion and an average of US $150 million per transaction (see figure 3). Unlike two or three years ago, the over-the-counter RMB (Hong Kong) derivatives market was dominated by structural forward positions, almost all emerging volatility risks are managed by standardized options (that is, standard call / put options without special structural design), reflecting the growing demand for standard options to hedge currency risks.
Compared with the over-the-counter RMB currency option market, Hong Kong Exchanges and Clearing's currency option market has its own characteristics, which are explained as follows.
2.1 continuous quotation
Traditionally, the over-the-counter RMB currency options market operates in the mode of bilateral transactions and request for quotation (RFQ). Investors must contact the market participants who can provide the price one by one, negotiate with them and ask for the option quotation, and then compare the price themselves. This trading model affects the efficiency of price discovery.
In contrast, Hong Kong Exchanges and Clearing's USD / RMB (Hong Kong) options have a significant advantage over over-the-counter market practices in terms of transaction execution or price discovery: in general, Hong Kong Exchanges and Clearing's designated liquidity provider of RMB currency options can provide continuous quotations for a series of options with an average bid-ask spread of 12 to 40 pips for shorter periods and 80 to 160 pips for longer maturities. The offer flow of such orders allows investors to trade at a specified exercise price and holding period, which is conducive to the establishment of liquidity. In addition to continuous quotation, investors may also require designated liquidity providers to provide quotations for specific exercise prices and contract periods.
Compared with over-the-counter RMB derivatives, one of the characteristics of over-the-counter trading on the exchange is that it can pool liquidity, providing continuous liquidity and narrow bid-ask spreads. In addition, the regulatory and capital efficiency of buying and selling listed products (Section 2.2 below) has become more and more obvious. In short, the floor market can provide an orderly and highly transparent trading environment on a fair basis.
2.2 Capital benefits
New rules in Europe and America, such as EMIR in Europe and CFTC in the United States, are affecting over-the-counter market participants. With effect from 1 March 2017, all counterparties involved (mainly financial entities and systemically important non-financial entities) are required to exchange daily variable margin for their unsettled over-the-counter portfolios, this is a relatively new requirement for many OTC market participants. In addition, the provisions on the exchange of initial margin are being prepared to be enforced in phases and fully implemented by September 2020.
Over-the-counter RMB derivatives can improve capital efficiency for investors, mainly because they have comparative advantages over the over-the-counter market in many aspects. Table 1 below shows a comparison between over-the-counter RMB derivatives and over-the-counter RMB derivatives.
2.3 unique and flexible risk management tools suitable for different RMB market conditions
Hong Kong Exchanges and Clearing's USD / RMB (Hong Kong) option contract is designed to reflect the characteristics of its USD / RMB (Hong Kong) futures contract, enabling it to provide cross-product hedging and cross-product margin calculation. and provide a unique return structure for the same nominal amount.
(I) Cross-product hedging
The USD / RMB (Hong Kong) option directly complements Hong Kong Exchanges and Clearing's existing USD / RMB (Hong Kong) futures. By combining the two, investors can deploy trading and hedging strategies for different market conditions, but the counterparty risk is lower than that of over-the-counter derivatives. At a time when the RMB liberalization process and policies continue to be market-oriented, the RMB exchange rate continues to fluctuate, and the two products provide investors with hedging tools in this regard. (the comparison of options and futures is shown in Table 2)
(ii) Cross-market calculation of margin
Hong Kong Exchanges and Clearing's USD / RMB (Hong Kong) option contract is traded on a margin basis according to the SPAN method adopted by the Futures Clearing Corporation, in which the net hedging is an important factor when calculating margin requirements for futures and options with the same underlying assets. As a result, investors who also hold positions in USD / RMB (Hong Kong) futures and options can enjoy the benefits of cross-market margin calculation and will have to pay less margin than independent unilateral holdings.
From the perspective of risk management, the unique risk and return model of option contracts makes option contracts have many uses. With different options / futures strategies, investors can use option contracts to access a variety of market parameters (such as spot exchange rate, volatility and timing, etc.).
Option contracts are suitable for a variety of RMB market conditions, provide flexible strategies to deal with different market conditions, and can be used in bull markets, bear markets, range volatility or volatile markets. (see Section 3.2 for basic applications of the product.)
2.4 other features of floor trading
Cost-effective高：Trading options contracts generally only pay option deposits and margin, and the real-time payment is only a small part of the nominal value of the contract, providing leverage and high cost efficiency. In the case of Hong Kong Exchanges and Clearing's USD / RMB (Hong Kong) option, the transaction fee is even lower because the transaction fee is exempted for the first six months (March 20, 2017 to September 29, 2017) and there is no need to pay the SFC levy.
High transparency of the transaction:The options contracts traded on the floor are all standard contracts and the transactions are orderly and transparent. Investors can obtain real-time floor option prices from the trading platforms of information suppliers and brokers.
It is easier to enter the market:Exchanges are generally open to different types of investors, including but not limited to retail investors, corporate users, asset managers and hedge funds. Take Hong Kong Exchanges and Clearing as an example, investors can trade this option product through more than 120 exchange participants who can buy and sell RMB products. By contrast, the over-the-counter RMB currency options market is only open to institutional users.
Based on the above characteristics, the cumulative trading volume and open contracts of Hong Kong Exchanges and Clearing's US dollar against RMB (Hong Kong) options rose steadily. As of July 31, 2017, the total trading volume since the launch of the product was 4914 contracts ($49.1 billion in nominal terms), with open contracts continuing to reach a record high. As at 31 July 2017, the total number of open contracts in all contract months was 1727 (US $173 million in nominal terms).
3. Hong Kong Exchanges and Clearing USD / RMB (Hong Kong) option: product Design and Application
Hong Kong Exchanges and Clearing's USD / RMB (Hong Kong) option contract is an European spot option, which can only be exercised on the expiration date rather than before, mainly based on the current over-the-counter market practice (most currency options are European). After exercising the option on the expiration date, the exercising party shall deliver US dollars equal to the full principal of RMB at the exercise price, and the relevant arrangements shall meet the needs of the option users for the exchange of RMB principal.
3.1 pricing behavior and risk pricing factors of concern
Option premium, that is, option price, is a function that includes several factors, such as the exercise price and spot price of related assets, the interest rate, maturity and volatility of the two related currencies. Economists Garman and Kohlhagen extend the Black-Scholes pricing model, which is usually used for stock options, to the pricing of currency options, which is called the Kaman Colhagen model.
Currency option is a multi-faceted tool, and the price of currency option in the secondary market has a variable response to different market parameters. Based on the diversity of option terms (contract period, exercise price, etc.), it is not feasible for market participants to find exactly the same options in the market to hedge. Therefore, people who buy and sell options should closely monitor various market parameters and do a good job in risk management. At present, there are specific ways to measure the value of options in response to changes in different market parameters, collectively referred to as "Greeks". The analysis of Greeks is extremely important for option valuation and risk management.
Greeks decomposes the risk contained in the option price or portfolio into multiple components, allowing the person who buys and sells the option to decide which risks to retain and hedge. Different risk metrics included in Greeks include:
Delta value:The change of option Price under the change of spot Price of related assets
Gamma value:The change of Delta value under the change of spot Price of related assets
Theta value:The loss of the time value of the option, that is, the change of the option price over time
Vega value:The change of option Price under the fluctuation of related assets
Phi value:Change in risk-free interest rate of benchmark currency
Rho value:Changes in risk-free interest rates in fixed currencies
3.2 Product applications
The main users of RMB currency options and futures include enterprises, asset management companies and fund companies, proprietary trading companies, brokerage firms and professional investors, who use RMB currency products for different purposes.
The following are several hypothetical examples of the application of RMB currency options products (the analysis does not include transaction costs, and past performance does not represent future performance).
3.2.1 basic applications
(a) risk management strategies in the event of RMB depreciation
Background hypothesis
Investors are worried about the devaluation of the renminbi. He needs to sell RMB assets for US dollars in three months' time.
Applicable option
An example is the purchase of a three-month call option (that is, buying US dollars and selling RMB) at an exercise price of 6.8500.
Situational hypothesis
When the option expires, if the exchange rate of the US dollar against RMB (Hong Kong) rises to 6.7000 and the option expires and is not exercised, investors can sell RMB assets and convert RMB into US dollars at the better exchange rate of 6.7000. If the exchange rate of the US dollar against RMB (Hong Kong) falls to 7.0000, the investor exercises the option to convert the proceeds from the sale of RMB assets into US dollars at the original exercise price (that is, 6.8500).
Potential risks and rewards
Potential return: if the RMB depreciates, investors can still convert RMB into US dollars at a better exchange rate.
Potential risk: investors have to pay a premium.
(B) risk management strategies in the event of RMB appreciation
Background hypothesis
Investors are worried about the appreciation of the yuan. He needs to sell US dollar assets into RMB after three months.
Market strategy
An example is the purchase of a three-month put option (that is, selling US dollars to buy RMB) at an exercise price of 6.8500.
Situational analysis
When the option expires, if the exchange rate of the US dollar against RMB (Hong Kong) falls to 7.0000 and the option expires and is not exercised, investors can sell US dollar assets and convert US dollars into RMB at the better exchange rate of 7.0000. If the exchange rate of the US dollar against RMB (Hong Kong) rises to 6.7000, the investor exercises the option to convert the proceeds from the sale of US dollar assets into RMB at the original exercise price (i.e. 6.8500).
Potential risks and rewards
Potential return: if the RMB appreciates, investors can still convert US dollars into RMB at a better exchange rate.
Potential risk: investors have to pay a premium.
3.2.2 Advanced applications
(a) increase yield-sell-reserve option
Background hypothesis
Exporters have US dollar receivables within three months and hope to convert US dollars into offshore RMB at a higher exchange rate than the futures price. Exporters do not have to sell US dollars immediately upon receipt of the account, so they can sell only when the exchange price is better, and hope to use the expected cash to increase the yield.
Market strategy
Exporters sell call options against RMB (Hong Kong) with an exercise price of 7.1000 in March 2017 for a premium of 775 pips. Spot exchange rate of US dollar against RMB (Hong Kong): 6.9300; March 2017 futures price: 7.0450; volatility: 7.40 buy.
Situational analysis
When the option expires, if the exchange rate of the US dollar against RMB (Hong Kong) is less than 7.1000, the option expires outside the price and is not exercised. Exporters retain RMB (Hong Kong) option funds as an additional return for their positions. If the exchange rate of the US dollar against RMB (Hong Kong) is higher than 7.1000 and the option is exercised, the exporter converts US dollars into RMB (Hong Kong) at the exchange rate of 7.1000, which is still better than the futures price hedged three months ago. As exporters have received RMB (Hong Kong) premium, the exchange rate of US dollars is actually 7.1775.
Potential risks and rewards
Potential return: exporters earn additional returns by using idle funds by putting options. Even if the buyer exercises the option, the exporter's actual exchange rate for the dollar is better.
Potential risks: if the US dollar appreciates sharply against the RMB (Hong Kong), exporters will have to bear the opportunity cost of exchanging dollars at the current exchange rate.
(B) reduce costs-buy the call spread option portfolio
Background hypothesis
Investments managed by portfolio managers include RMB assets. He plans to buy the US dollar against the RMB (Hong Kong) call option to devalue the RMB (Hong Kong) for a period of one year. However, based on the time value, upward sloping volatility curve and futures curve, forward USD / RMB (Hong Kong) call options are very expensive. For example, the price of a call option against RMB (Hong Kong) in the US dollar, which expires in December 2017 and has an exercise price of 7.2500, is 2515 pips. (us dollar / RMB (Hong Kong) spot exchange rate: 6.9300; December 2017 futures price: 7.2650; volatility: 8.85 sell)
Market strategy
Portfolio managers can sell call options against RMB (Hong Kong) that expire in December 2017 at an exercise price of 7.5000, charge a premium of 1585 pips, and be bearish on the dollar against RMB (Hong Kong), but not exceeding 7.5000. (the exercise price is bought with a range of 7.5000). The option premium from the exercise price 7.5000 call option can reduce the net cost of the hedging strategy (purchasing the US dollar / RMB (Hong Kong) call option at a lower exercise price of 7.2500). The portfolio is now paying a net premium of 930 pips.
Situational analysis
When the option expires, if the exchange rate of the US dollar against RMB (Hong Kong) is less than 7.2500, both options expire outside the price and do not need to be exercised. The portfolio manager has to bear the net option money as the hedging cost, but the cost is still lower than not adopting this strategy. If the exchange rate of the US dollar against RMB (Hong Kong) is higher than 7.2500 but lower than 7.5000, the manager exercises the purchased option and lets the sold option expire. This is the best case because the manager keeps hedging while reducing the cost of hedging. If the exchange rate of the US dollar against RMB (Hong Kong) is higher than 7.5000, both options are exercised. Although the manager lost his hedging, he received a net cash flow of RMB (Hong Kong) of 2500 pips, which helped to compensate for his hedging in the spot market.
Potential risks and rewards
Potential return: this strategy can reduce hedging costs by holding a view on the trend of the RMB exchange rate.
Potential risk: this strategy may only hedge part of the risk in some cases.
(C) risk reversal portfolio
Situational analysis
Traders expect the spot exchange rate of the US dollar against RMB (Hong Kong) to rise in the next three months. He bought a call option on the US dollar against RMB (Hong Kong) that expired in March 2017 at an exercise price of 7.1500 and paid a premium of 715 pips (8.35 sell). However, he did not want to take on the full amount of the option money, nor did he want to take a position too aggressively, so he chose to sell the USD / RMB (Hong Kong) put option at an exercise price of 6.9500 in March 2017 for a premium of 525 pips (6.70 buy). His net cost is 190 pips.
Result
Us dollar / RMB (Hong Kong) spot exchange rate and forward ╱ futures curve both moved upward. Assuming that the spot exchange rate and futures prices both rise in parallel by 600 pips, the price of the call option is 955 pips and the put option is 355 pips. The net worth of this strategy is 600 pips. Traders made a profit of 200% by looking at the right trend. Another option is that the trader can wait for the Japanese to exercise the call option and let the put option expire.
Potential return
There are several ways to achieve potential returns through risk reversal portfolios:
If the spot exchange rate and forward exchange rate of the US dollar against RMB (Hong Kong) ╱ futures go up, the value of the call option will be higher than that of the put option, and traders can choose to liquidate their positions to make a profit.
If the demand for USD / RMB (Hong Kong) call options is greater than that for put options, the value of call options will be higher than that of put options (referred to as volatility deviation) in terms of extended volatility.
Potential risk
If the exchange rate of the US dollar against RMB (Hong Kong) moves unfavourably, the trader will not only lose the premium used to buy the call option, but also lose his short position in the put option. Under such circumstances, although the initial cost is relatively low, the loss has increased.
(d) volatility trading-saddle combination (two options at the same exercise price)
Situational analysis
Traders expect the spot exchange rate of the US dollar against RMB (Hong Kong) to continue to fluctuate in the short term and the volatility curve may rise. He bought a call option on the dollar against RMB (Hong Kong) that expires in December 2017 with an exercise price of 7.2500, and a put option on the dollar against RMB (Hong Kong) that expires in December 2017 with an exercise price of 7.2500. Call options are priced at 2490 pips (volatility 8.85 sell) and put options are priced at 2350 pips. The premium amounts to 4840 pips.
Result
The vega position of the saddle combination is 550pips (275pips per option). Assuming that the extended volatility of the exercise price 7.2500 expire in December 2017 increases to 10.00, the value of the call option is 2810 pips and the put option is 2670 pips. The strategy is currently priced at 5480 pips, with a value variation of 640 pips (vega is about 1.15 pips).
Potential return
The forward saddle combination provides the biggest risk factor for volatility risk, which is the most direct method for buyers and sellers of the transaction and to forecast the trend of their volatility curve. (the delta value of a saddle combination is usually neutral when a transaction is established.) Short-term saddle portfolios can be used to trade the volatility of related assets (gamma trading).
Potential risk
Buying and selling saddle combinations is subject to volatility risk. If the underlying asset fluctuates but the volatility is small, the option trader has to manage the delta but fails to profit from the volatility.
Other possible applications
When the volatility is high, a restrained combination (a subscription with different exercise prices and a put option), also known as "bilateral transactions", can be used. If it is expected that there will be fluctuations in certain price ranges but the volatility will not be too large, butterfly trading (saddle combination long position plus lashing combination short position) can be carried out, that is, saddle combinations can be sold to finance saddle portfolios.
3.3 physical settlement when options are exercised
3.3.1 call option
Suppose:
Exercise price (k) = 6.90; official settlement price (s) = 6.95
If the settlement price > exercise price, the option is exercised; for example, the settlement price ≤ exercise price, the value of the option at maturity is zero.
Physical settlement process (see figure 5):
If the call option is exercised, upon physical settlement, the buyer pays the final settlement value to the clearing house, that is, the contract amount (US $100000) xk (6.90) = RMB (Hong Kong) 690000 yuan, and receives from the clearing house the relevant currency value equal to the contract amount (US $100000).
On the other hand, the seller delivers to the clearing house the value of the relevant currency equal to the contract amount (US $100000) and collects the final settlement value from the clearing house, i.e. the contract amount (US $100000) xk (6.90) = RMB (Hong Kong) 690000 yuan.
3.3.2 put options
Suppose:
Exercise price (k) = 6.90; official settlement price (s) = 6.85
Such as settlement price
Physical settlement process (see figure 6):
If the put option is exercised, upon physical settlement, the buyer will collect the final settlement value from the clearing house, that is, the contract amount (US $100000) xk (6.90) = RMB (Hong Kong) 690000 yuan, and deliver to the clearing house the relevant currency value equal to the contract amount (US $100000).
On the other hand, the seller collects the relevant currency value equal to the contract amount (US $100000) from the clearing house and pays the final settlement value to the clearing house, i.e. the contract amount (US $100000) xk (6.90) = RMB (Hong Kong) 690000 yuan.
