Chinese companies benefit from new rules on forex derivatives

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China’s expansion into the world of international trading continues with the expansion of its range of forex derivatives. The State Administration of Foreign Exchange, the country’s main regulatory authority for currency trading, has strengthened the offerings available to companies. The announcement comes after Beijing’s commitment to strengthen China’s position in the global financial market landscape.

Leading global banks in Asia have responded to China’s news by launching new currency option products on the yuan. HSBC and Standard Chartered Bank have developed new offerings to meet the needs of Chinese companies that want to use specific hedging strategies. Standard Chartered products offer users the ability to use European style vanilla options on renminbi. HSBC has also launched a similar offer, allowing greater flexibility in managing currency risk.

The new rules on structured derivatives will allow companies to use different strategies to minimize their risk. Previously, companies were limited to use derivatives, they could not use options directly based on the yuan.

Increase in CNY Onshore and Offshore

The Chinese yuan was one of the most successful currency pairs of the BRICS countries, in the BIS’ recent triennial survey it was ranked the ninth most traded currency pair in the world. Initiatives taken by regulators to increase the use of the yuan will help and assist the currency’s continued growth. Analysts expect to see the Chinese yuan in the top five most traded currencies in 2020.

China has developed its infrastructure to improve its global competitiveness, the Shanghai Free Trade Area was the first step in a series of measures to become the driving force behind financial transactions in Asia, with for example the development of forex brokers accepting Chinese clients.

Global forex and CFD brokers have expanded their product range to offer emerging currency trading (including forex broker in Hong Kong (外匯經紀商香港)). The activity of less liquid emerging currencies is gradually increasing, the expansion of the fluctuation band allowed for the yuan allows traders to explore currency trading opportunities.

Why trade forex?

The currency market is first and foremost a means for international companies to manage their foreign exchange risk. Indeed, if a company with its parent company in Europe but sells products in the United States and Japan, it is exposed to the risk of the value of the Euro against the Dollar and the Yen. This company will, therefore, trade in Forex in order to hedge against possible movements of these currencies against each other.

Due to these characteristics and its accessibility, Forex has quickly become a highly speculative market, both for professionals such as banks and hedge funds and for individuals.

Principles and characteristics

Liquidity

Due to its size and the players present, Forex is a very liquid market. This facilitates speed of execution, absorption of large volumes and reduction of spreads.

Spread

Spread is a key element of Forex trading. This is the difference between the purchase and sale prices of a pair. In English we speak of bid-ask spread. The EUR/USD is for example quoted: 1.1013 / 1.1015. As a trader, you buy at the highest (1.1015) and sell at the lowest (1.1013). A trader will prefer tight spreads. In addition, a spread can be fixed or floating, depending on currency pairs and brokers.

Factors affecting currency prices

The price of a Forex pair depends on the value of the currencies making up the pair. This is affected by a multitude of political-economic factors and investment flows. Prices can thus change quickly and significantly depending on local and global situations. Important factors include national economic policies, central bank monetary policies, possible government intervention, but also natural disasters.

Market open at any time

The main advantage of Forex for active traders is that it is an international market, open 24 hours a day non-stop from Sunday evening to Friday evening. Depending on the time slot, a market place is necessarily open somewhere in the world, starting with New Zealand and going all the way to New York, via Asia and Europe. The Forex cash flow is therefore quoted continuously. Opportunities can be present at any time although the most active hours are generally when the European and American markets are open.

Leverage effect

Another significant advantage for individuals is the leverage. It allows access to the market with a low capital. Typically, brokers offer levers ranging from 5 times to more than 500 times the stake. Warning: the more the lever is used, the higher the risk of loss.