The Research Of RMB Option Portfolio Strategy In The Current Market Environment

In recent years the reformation of the mechanism of RMB exchange rate and the process of the internationalization of RMB are accelerating gradually. To adapt to the new market environment and improve the foreign exchange market participants’ innovation ability and risk management levels, China’s foreign regulatory authorities allowed the RMB against foreign exchange option trading in the onshore foreign exchange market in2011.Although as a currency option, there is no essential difference in principle and functionality between the RMB options and the other popular instruments of currency option which is in the international financial market. Owing to the particularity of the market, the use of the RMB options is different from other currency options.Starting with the characteristics of RMB against foreign exchange markets, through a special analysis of China’s current exchange rate arrangements, the regulatory policy about foreign exchange, the trading rules and practices of the domestic foreign exchange market as well as the analysis of the trend of the RMB spot rate, this paper establishes the analysis framework about the RMB FX option portfolio strategies in the current market environment. In the framework, using the Black-Scholes-Merton pricing model as analytical instruments of various market variables, this paper analyzes many kinds of the RMB FX market variables since2005. Analysis results show that volatility of RMB option has the characteristics of two aspects:First, compared with other major commodity currencies, the overall level of the volatility of RMB is low; Second, compared with the realised volatility, the implied volatility of the RMB option is too high, in which the required risk premium of market makers takes a large proportion.Based on the above analysis, this paper uses the historical simulation method and Monte Carlo simulation method to analyze the profitability and hedging effectiveness of the practical RMB FX option portfolio strategies in the current market environment.The main conclusions are as follows:First, the volatility is one of the most important parameters affecting the option portfolio strategy’s performance; Second, compared with the widely used forward contract of RMB and other hedging instruments, the RMB option can not only provide similar hedging efficiency, but also have a higher profitability, Third, the construction and optimization of the portfolio of RMB option are the two most important factors that influence the performance of the portfolio’s performance. Fourth, based on the mathematical analyses and using appropriate computer aided decision support system, commercial banks can customize the portfolio of RMB option according to the customer’s specific demands in the actual marketing work.