RMB Target Redemption Forward Contract Burst

< p > even if the RMB exchange rate rose to 0.65% against the US dollar last week, Chen Gang, who is the trader of a domestic private equity fund, still has a lingering fear of 500 basis points for the RMB exchange rate in February 28th.

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The spot exchange rate of RMB against the US dollar dropped to a minimum of 6.1808 in the early morning of the day, and Chen Gang's bet on the RMB appreciation of the financial derivatives was 1 million US dollars in an instant, which is 2 times the sum of the total profits he invested in RMB appreciation in the past six months.

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< p > triggering Chen Gang's derivative of all profits in a day is the target redemption forward, which became popular last year.

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Geoff Kendrick, the director of the foreign exchange department of Morgan Stanley, has revealed that different "target redeemable forward contracts" vary widely in terms of duration and terms, but the size of the option market for RMB against the US dollar is second only to the euro against the US dollar.

In the past year, the "target redeemable forward contract" sold by each investment bank was close to $350 billion.

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< p > the essence of this derivative is to bet on the profit of RMB appreciation, that is, to set a "strike price" which is slightly lower than the current RMB exchange rate and a "protective price" which is far below the current RMB exchange rate during the agreed period of contract life.

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< p > for example, a target redemption forward contract will set the strike price and the protection price separately to 6.12 and 6.18. If the RMB exchange rate is 6.08, which is slightly higher than the execution price on a certain day, the investor can get the proceeds. The source of the income is that the investor can sell the US dollar at the 6.12 execution price for the RMB, and then sell the RMB for 6.08 yuan to buy the US dollar to earn the foreign exchange earnings.

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< p > however, if the RMB exchange rate falls below the protective price 6.18 a day, investors will have to pay 2 times the investment amount in the name of the derivative, and make settlement with the investment bank in accordance with the execution price.

Suppose that investors bought a $50 million target redemption forward contract. When the RMB exchange rate fell below the protective price 6.18, he had to sell the equivalent value of $100 million at 6.12 execution price, but because the RMB exchange rate fell below 6.18 against the US dollar, the exchange rate would only be worth 99 million 20 thousand US dollars.

For investors, the loss of $50 million is at least 2%.

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< p > "before the bizarre fall of the RMB exchange rate in February 28th, almost no one believed that the redemption of the investment target would be a loss."

Chen Gang said, because this is a bet on RMB appreciation gains derivatives, and the appreciation of the renminbi is a consensus of the financial market.

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< p > however, the black swan event has always left investors unprepared.

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< p > Chen Gang said that in February 28th, the RMB exchange rate dropped sharply, to some extent, because many investment institutions were afraid that the RMB exchange rate would fall below the protective price and trigger their own "double" losses, and quickly bought and lowered the risk of RMB hedging. Finally, the spot exchange rate of the renminbi broke even six integer points (6.13-6.18), which once dropped 500 basis points.

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According to Chen Gang P, almost all the investment institutions whose protection price is located at the front line of 6.13-6.18 are all paid out, while the investment banks collect the "double" nominal delivery settlement fees at the execution price, but they earn a lot of money.

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< p > but in the eyes of many investment bankers, the real profiteers seem to have someone else.

Due to the Volcker Rule issued by European and US regulators, which significantly limits the scale of proprietary trading and derivative investment of Wall Street investment banks, investment banks can only share the betting profits of target redeemable forward contracts in a more covert way.

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< p > < strong > no risk arbitrage under the aura of gambling trade < /strong > /p >

6 months ago, when Chen Gang first came into contact with the "target redemption forward contract" from a major international investment bank, he once believed it was a risk-free arbitrage product.

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< p > the target redemption forward price he purchased was 6.13, when the RMB exchange rate was close to 6.12.

This means that even if the renminbi does not appreciate or depreciate, he will gain monthly income.

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< p > the protection price is set at 6.18. He believes that because the global financial institutions believe that the RMB will continue to appreciate, the exchange rate below 6.18 is only a small probability event.

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< p > when the RMB exchange rate reached its highest value of 6.0406 in the middle of January, Chen Gang received the latest report from several investment banks, predicting that the RMB exchange rate will reach a record high of 5.98 at the end of the year.

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< p > "to be honest, I am more conservative."

He said frankly that there were many private fund traders who had spent $10 million on the target redemption contracts of 6.10 and 6.15 respectively.

The reason is that these radical traders believe that the yuan will appreciate quickly.

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< p > Chen Gang always believed that the risk of such a practice is rather high.

Most of the "target redemption forward contracts" set an additional clause, that is, if the investor gains a certain amount during the duration of the contract, the contract will terminate automatically.

On the contrary, when the RMB exchange rate falls below the protective price, investors should pay 2 times the nominal investment amount of the derivative, and make settlement with the investment bank in accordance with the execution price. This means that the higher the depreciation rate of the RMB, the higher the investor's losses will be, and the upper limit of the deficit will not be exceeded.

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< p > Chen Gang admits that perhaps there is too much confidence in the appreciation of the renminbi. Most people will ignore the risk of loss hidden in the additional terms.

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< p > however, when the RMB spot exchange rate broke even the six integer pass (6.13-6.18) in February 28th, and once dropped 500 basis points, this originally profitable investment has become the nightmare of many investors.

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< p > Chen Gang said that shortly after the a href= "http://www.91se91.com/news/index_cj.asp" > RMB > /a > spot exchange rate fell below 6.18, he received a telephone call from the investment bank to carry out additional provisions.

Preliminary calculations showed that his book lost nearly $1 million on the day.

And his loss of 1 million dollars may turn into investment bank profits.

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At P, Chen Gang began to realize that this so-called risk-free arbitrage product, "target redemption forward contract", is essentially a highly competitive financial derivative, but it is not necessarily equal to both sides.

Because investors who buy this derivative have a cap on their profits, but there is no upper limit on losses, and investment banks are just the opposite.

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< p > < strong > match opponent disc > a href= "http://www.91se91.com/news/index_cj.asp" > trading interest < /a > chain < /strong > /p >

< p > how much money invested by the investment bank during the February 28th RMB devaluation? "/p >

< p > for this, many investment bankers speak cautiously.

They pointed out that the role of investment banks is only to match counterparty pactions.

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< p > the reason is that the Volcker rule greatly limits the scale of investment derivatives in the investment banking sector, so that investment banks can not establish rival discs with investors. Instead, they sell the depreciated positions corresponding to the "target redemption forward contracts" and resell them to international hedge funds, and finally pass on the risk of rival banks.

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P, a source of investment banking, revealed that many hedge funds were bearish. Some were pessimistic about China's economic growth rate, some were hedging their large number of Renminbi bullish positions, and others were purely speculative.

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< p > "sometimes we will develop the target redemption contract products for sale according to the requirements of the" a href= "http://www.91se91.com/news/index_cj.asp" hedge fund < /a >, so as to find them match pactions.

The above investment bank derivatives Department said.

At the end of last year, he helped a hedge fund design a target redemption forward contract, setting the strike price and the protection price separately to 6.08 and 6.16, when the renminbi was close to 6.06 against the US dollar.

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< p > the reason for designing the above terms is that the Hedge Fund believes that the RMB will fall below 6.16 and is willing to sacrifice small exchange losses every month to attract investors to make "rival dishes".

If the RMB exchange rate is below 6.16, the hedge fund will require investors to invest 5 times the nominal amount through the additional terms of this product, and settle the settlement price according to the execution price.

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< p > according to the above investment bankers, the essence of hedge funds is "small and broad". Once the RMB exchange rate falls below 6.16, the actual yield of hedge funds will exceed 10%.

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The advantage of this approach is that the investment bank can not only meet the regulatory requirements of Volcker rules, but also share the extra bonus of the sudden sharp depreciation of the RMB.

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< p > however, many investors who are able to redeem forward contracts are not necessarily aware of the interest chain behind their counterpart, thus encountering Waterloo when the RMB exchange rate plummeted.

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