Han Hui Shi: How Does The Depreciation Of RMB Make Speculators Burst Positions?

< p > recently, affected by the devaluation of RMB, investors who held many RMB derivatives at home and abroad suffered losses and even burst positions.

The most notable concern is the "target redemption forward contract". Morgan Stanley estimates that the market size of such contracts may be around $350 billion, and some public opinion even thinks that losses caused by such products may lead to capital outflows, thereby jeopardizing mainland bank credit, real estate and stock markets.

The author believes that such views are exaggerated.

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< p > a typical "callable" a href= "http://www.91se91.com/news/index_c.asp" > forward contract < /a > operation procedure is as follows.

The investment bank signed a 24 month effective contract with the customer, assuming that the nominal amount is $1 million, the current market rate of US dollar to RMB is 6.12, the contract execution price is 6.15, and the contract protection price is 6.25.

The contract stipulates that in the next 24 months, the market < a href= "http://www.91se91.com/news/index_c.asp" > spot exchange rate < /a will be compared with the execution price 6.15 at a specific time in a month. If the market exchange rate is below 6.15 (6.05), the customer has the right to sell 1 million US dollars at 6.15 price. If the market exchange rate is above 6.25 (6.30), the customer must sell the 2 million dollar at a 6.15 price; if the market price is higher than 6.15, but less than (or equal to) 6.15, the customer does not need to make any delivery.

As the delivery currency, the US dollar takes a different delivery way.

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There are two attractions in the above clause P.

First, customers have the right to sell US dollars at the price of 6.15 in the next 24 months.

As the contract execution price is generally better than the market price at the time of signing the contract, if the execution price of 6.15 in the above example is better than the market price of 6.12, such contracts will be attractive when the appreciation of the renminbi is stronger than expected and the two way fluctuation is smaller.

Two, in case of a phased devaluation of the renminbi and a price cut, the company will not necessarily lose money.

In the above example, if the RMB falls to 6.15 above, as long as it does not fall through 6.25, then the enterprise has no delivery obligation to the investment bank, and the enterprise can trade with any counterparty at the market price.

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< p > of course, there is no free lunch in the world. The potential risk for enterprises to get such favorable terms is that when the extreme situation occurs in the market, it must be delivered according to the "double" of the nominal amount and the investment bank in accordance with the execution price.

In the above example, if the RMB market price is reduced to 6.30, the company's losses will be 2 million x (6.30-6.15) =30 million yuan.

The greater the depreciation rate of RMB, the greater the loss of enterprises. If the RMB stays at a lower price for a longer time, the company will lose money every month.

This kind of contract usually requires a company to make a deposit. If the enterprise guarantees the deficit, the investment bank will force the liquidation, that is, the so-called "burst warehouse".

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< p > this is not the whole story. On the gambling table, it is understandable to win the game, but the fair game should be equal, but in the terms of the target redemption forward contract, a protective clause for the investment bank will be set up, that is, the contract terminating clause.

In the above example, the contract can stipulate that the contract will terminate automatically when the profit of the enterprise accumulates to 8000.

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< p > assuming that the renminbi rose to 5.95 in the first month after the signing of the contract, rising to 5.85 in February and third in the third month. As the monthly business is delivered according to 6.15 deliveries, the three month actual profit point of the enterprise has reached 8000 points (6.15 x 3-5.95-5.85-5.85), when the contract terminates automatically.

It is not difficult to find that the existence of the termination clause actually capped the profits of enterprises, but in extreme cases, there is no upper limit for the loss of enterprises.

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< p > due to the implementation of < a href= "http://www.91se91.com/news/index_c.asp > > difference delivery > /a >," target redemption forward contract "can be completely divorced from the real trade background, and only used as a tool to bet on the appreciation of the renminbi. The higher the nominal amount of such a contract in the market, the stronger the market atmosphere for more RMB.

However, such pactions are more prevalent in overseas markets, and the loss of speculators is also mainly a margin. The direct impact of their profit and loss on domestic market is very limited.

The negative impact of some foreign institutions on the depreciation of the renminbi may be related to the holding of larger Renminbi derivatives.

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