Research On RMB Spot Exchange Rate And Non-deliverable Fowards

China has initiated a series of reforms on exchange rate mechanism since July 21, 2005, and now it has successfully turned to a managed floating regime. One of the profound influences on the markets is that the volatility of both spot exchange rate and forward exchange rates of RMB in foreign exchange markets has been notably increased, which stimulates the hedge demand of transnational companies and financial institutes. Unfortunately, there exist few flexible financial instruments eoungh to fit most of the various hedging goals. More worsely, the foreign exchange derivatives markets is far from mature in China, the typical features of which are, for example, few exchangeable derivative with relative small volume. Meanwhile, the key function of price discovery in domestic markets is still weak although it becomes more and more efficient. The Chicago Mercantile Exchange started trading Chinese RMB futures in August 2006, and iniated a furious compete in the pricing ability with the domestic markets.This paper first gives a comprehensive discription of the development of foreign exchange markets. With the help of the interest rate parity theory, it analyzes the main change in the RMB exchange markets after exchange rate reformations. Then, by using economeric tools such as Granger casuality tes,cointegrate theory,error correction models, it studies the price discovery behavior between spot exchange rate and RMB non-delivery forward exchange rates(NDF) in different time periods from different aspects. We find out the long-term equilibrium relationship between spot exchange rate and six-month(or one-year)term RMB non-deliverable forward exchange.The statistics test result shows that before the reform of exchange rate system, the RMB NDF is the single-directional guide to spot rate, RMB spot and Non-Deliverable Forward exchange rate have bi-directional Granger causality after the reform. Since Chicago Mercantile Exchange started trading RMB Non-Deliverable Futueres in August 2006, NDF influences the RMB exchange rate is more evidence.The error correction models show that spot Spot Exchange Rate has long-term equilibrium relationship with one-month (six-month or one-year as the same) term RMB non-delivery forward exchange, and if long-term equilibrium relationship was broken, the NDF exchange rate return to long-term equilibrium value quicker than spot exhchange rate.Armed with the above analysis, we finally give some advice about further reformation of RMB exchange mechanism.