FxWirePro: Knowise what-abouts and how-abouts of CNH selloffs and place options trades to mitigate risks

The continuous flurry of bearish of streaks in USDCNH in the past two days has finally come into a pause this morning – while USDCNY fixing rate was lowered by almost 1%, USDCNH spiked up by about 0.5%, narrowing CNY-CNH spread to around 700pips.

The extensive spread between CNY and CNH was more than 1200 pips observed in yesterday evening trading session. More evidently, the overshooting of USDCNH is basically due to massive stop-loss flows.

However, the liquidity conditions are still tight in CNH market, with overnight HIBOR staying above 60%, suggesting that the Chinese authorities maintain a high cost of funding for shorting CNH. The painful short covering will take a while, implying that the market will remain volatile.

Any concerning CNY appreciation is only deemed as the effects of the selling FX reserves to prevent severe CNY weakness and we have hedging vehicles ready for such risks.

CNH Option strategies on hedging grounds:

Buy USDCNH 1y topside seagull, strikes 6.90/7.20/7.50, zero cost (indicative, spot ref: 6.8314), the structure is a standard 1y call spread strikes 7.20/7.50 fully financed by selling a put strike 6.90, exposed to a maximum USDCNH appreciation of 4.2% at expiry.

Buy USDCNH 1y call spread strikes 6.90/7.80, (spot ref: 6.8314) This longer-term trade positions for further CNH depreciation, generating a maximum leverage close to 6 times beyond 8.00 in one years.