Use of euro-renminbi options surges

Rising renminbi trade settlement and a sliding euro are fuelling a surge in hedging between the two currencies both by multinationals and investors.

Daily trading volume in euro-renminbi options has risen from about €100m at the start of the year to at least €300m now, according to estimates from HSBC, as European corporate clients and fund managers increasingly look to manage their exposure to the Chinese currency. On busy days, that figure can rise as high as €600m, the bank said.

While estimates vary on the current size of the market, those involved agree that it has grown significantly this year, driven largely by demand from European companies.

"As more and more corporates have trade settlement in renminbi, they don't necessarily want to go through the dollar. They want the direct conversion," said Andrew Sharkey, head of FX options trading in Asia for HSBC, one of the biggest players in the market. Growing turnover in renminbi options trading this year - particularly against the euro - had been "phenomenal", added Mr Sharkey.

FX options products allow companies to reduce FX risk by buying the right to buy or sell a currency during a fixed period and at an agreed price. These contracts typically run for six to 12 months in the offshore renminbi market.

The pick-up in hedging coincides with an increase in two-way volatility in the renminbi. Earlier this year the renminbi experienced a sharp slide, during which it lost as much as 3.8 per cent against the US dollar in just a few weeks.

Though small compared with other emerging market currency drops, the move was the biggest for the renminbi in years, and caught many investors and companies off-guard following years of a slow but steady climb for the Chinese currency.

More recently the renminbi has been bouncing back, while the euro has been weakening significantly as the European Central Bank took further steps to ease policy in the currency bloc.

The rise of euro-renminbi options trading follows a steady increase the use of the currency to settle goods traded with China, especially within the eurozone.

European companies with large sales in China - such as luxury goods groups and carmakers - have been among those most active in hedging their exposure to the renminbi.

Charles Feng, head of FX, rates and credit trading for Greater China at Standard Chartered, said interest from European companies in using renminbi to settle trade was "growing rapidly", helping fuel activity in the options market.

"The weaker euro has attracted corporate clients to speed up their hedging," said Mr Feng. "As corporates become more aware of the depth and the liquidity in the offshore renminbi market they are using it more frequently and in greater size."

Options trading in other currencies - such as the Japanese yen and sterling - against the renminbi has also been rising, prompted in part by the steep sell-off in the Chinese currency earlier this year but also by the recent strength of the US dollar.

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