Study On Foreign Exchange Rate From The Underlying Assets Of RMB Foreign Exchange Option And Strategy Of Avoiding Foreign Exchange Exposure

In the context of economy globalization, economic entities are breaking throughboundary limitation to achieve optimum distribution of resources throughinternational trade. Meanwhile, economic entities shall pay continual attention to theimpact from fluctuation of foreign exchange rate on international trade settlement.Fluctuating exchange rate leaves many economic entities which are engaged ininternational trade and cross-border investment being exposed to the tremendousforeign exchange risk. Since China pushed the reform aiming at generating floatingexchange rate on July,21th,2005, the fluctuation range and dispersion degree ofRMB exchange rate are on escalation, which stimulates economic entities whichstands in such a instable foreign currency market to be more urgent to take financialtools to avoid the risk from exchange rate fluctuations. Currently, the financial toolsand methods of avoiding foreign exchange rate risk which are available for domesticeconomic entities participating in international trade and cross-border investment areconfined to Forwards FOREX, RMB Currency Futures and RMB Currency Swapsand others. However, the tools listed above all lack of the option right whichdetermines the execution of contract or not up to the spot rate of settlement date. InApril,2011, the SAFE (State Administration of Foreign Exchange) officially releasedRMB Exchange Option for enterprises hedging and foreign exchange rate riksavoiding. Before RMB Exchange Option was officially launched, the domesticacademic researches focused on discussion of hedging logic of Foreign ExchangeOption and exploration on the pricing of RMB Exchange Option. However theresearch which combines the analyzing of historical price of underlying asset of RMBExchange Option, Prediction of forward price and Employment Strategy of RMBExchange Option is in negligible quantity. Different RMB exchange fluctuation range and direction are about to determinehedging and investing strategy of RMB. Since PBOC (People’s Bank of China)officially launched the policy of a managed floating exchange rate regime based onmarket supply and demand with reference to a basket of currencies, SAFE set RMBexchange rate fluctuation range limit respectively as3‰,5‰,1%correspondingly onJuly,22,2005, May,8,2007and April,16,2012. This article embraced domestic spotRMB exchange rate and offshore NDF (Non-Delivery Forward) RMB exchange rateranging from July,22,2005to31, August,2012as sample. Then domestic sopt andoffshore forward market data are divided into three different fluctuation range periodsfor testifying whether RMB exchange rate fluctuations in three different time periodspresent the consistency with the fluctuations range regulated by policy. Meanwhile,for the sake of strategy arrangement of RMB Exchange Option, this article conductedco-integration analysis between domestic spot RMB exchange rate and NDF RMBexchange rate from different tenors, which is employed to explore and induceappreciation space, exchange rate fluctuation direction and range of RMB in thefuture.