Designing A Series Of RMB Exotic Options

In the year of2004, China accessed to the World Trade organization.After that, Chinese government started a new round of foreign exchangereform and made a breakthrough that RMB pricing mechanism became moremarket oriented. Then Chinese company was confronted with more foreignexchange risk when RMB foreign exchange became more volatile. In orderto avoid foreign exchange risk and mitigate revenue fluctuation, Chinesecompany should enhance their risk management ability. This paper beginswith analyzing foreign exchange risk Chinese company faced and how tohedge it by using FX forward and other derivatives, and then makesderivation of the pricing formula for both standard European call option andmore complicated exotic options. Since option is quite complex and hard tomeasure its risk, this dissertation is using Greeks to analyze its riskrespectively. Next, based on the trade amount and settlement time period ofa trade company, we retrieve the market price of the basic financialinstruments to calculate the price of designed hedging strategies. Finally, weintroduce a mature risk management system—VAR to evaluate themaximum loss of these hedging strategies and choose a most appropriate onefor the trade company after overall considerations.