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Chinas Derivatives Market - Research Paper Example

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The paper entitled 'China’s Derivatives Market' presents the use of derivatives which has been the center of extreme controversy ever since the US subprime mortgage crash in 2007. Top-rated exotic derivatives were quickly converted into toxic assets…
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Chinas Derivatives Market
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Download file to see previous pages Strong export growth fuelled a trade surplus amounting to US$170 billion in 2006 alone, prompting the flow of hot money into China’s capital markets in anticipation of an appreciation in the renminbi (Manager-Xu, 20. As a result, foreign exchange reserves rose to more than US$1 trillion by the third quarter of 2006, making it the largest foreign exchange reserve held by any country in the world (Qimeng, & Qian, 2007).
The phenomenal growth of investments in China’s capital markets has prompted financial institutions to seek increased hedging with renminbi derivatives. This has been met by a quick response by regulatory authorities with supporting legislation governing exchange forwards and swaps. While still appreciably distant from meeting international market standards, there are indications that the rules governing constraints on derivatives markets are noticeably changing towards that direction (Qimeng, & Qian, 2007). Hopefully, new laws to clarify key issues in the derivatives and structured products market, such as enforceability of close-out netting and methods of taking collateral are forthcoming (Liew, Soong, & Zhang, 2007).
China’s derivatives market has developed together with the phenomenal growth rate of her economy, as a risk management tool more than a speculative instrument. A discussion of the various financial derivative instruments in the Chinese derivatives market follows:
Acknowledged as the basic foreign exchange hedging, tool, foreign exchange forwards is a widely common offering in all developed markets, as well as countries hardest hit by the Asian financial crisis of 1997. The China Foreign Exchange Trade System (CFETS) commenced with the limited transaction of CNY transactions, largely as an experiment, as of April 1995, one year after the CFETS began forex spot trading in April 1994. With the formulation of tentative guidelines by the PBOC, the Bank of China which was then the only bank authorized began transacting in CNY forwards on April 1, 1997. Presently, all four state-owned banks are permitted to transact CNY forwards businesses.  ...Download file to see next pages Read More
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