Forex Investment and Currency Trading

Questions:

How can I take advantage of an expected currency move without having to bother about exchange controls?
How can I hedge my risk without having to take delivery of currency?

Answer:

Non-delivery forwards or options

A theoretical example:

You think the Korean won will appreciate – current spot 1506.50 bid, 1513.50 offer
You buy KRW 1000 million one-year forward – forward points –40 / -20 = forward outright 1466.5 – 1493.5 – cost = USD 681,895.67
At maturity, spot is 1300-1310
You sell the won spot for dollars and receive USD 763,358.88
Net gain = USD 81,463.11 = net settlement

Since I don’t want to take delivery of [...]

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Spot

Non-convertible. Need a document asset transaction to be able to trade spot. Managed float vs undisclosed basket by CB, band width of +/- 0.5%, to last closing.

NDFS

NDFs typically trade up to one year, but longer NDFs possible up to five years, reasonably liquid and tenors stretch out to 10 years but infrequently traded. Standard size is up to USD 10 million.
Fixing time – 9:15 am – 9:30 am local time (Beijing), two days prior to maturity/value date.
Publication Site – Reuters SAEC. Bloomberg NDFF.
Publication Time – Fixing two days prior to maturity/value date.
Additional Comments – Fixing by PBOC with participation [...]

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Despite the rebound and stabilization of USD earlier in the year, the CNY has strengthened ahead of the fourth round of US China Strategic Economic Dialogue (SED). In the last week, the USD/CNY fell 0.38%. Meanwhile, the market is building a deeper expectation of a more rapid CNY appreciation. The spread between 1Y USD/CNY NDF and spot rate fell to -415bps on June 17 from its most narrow reading in the last week of 278bps. The view is, CNY’s strength will likely continue as the May economic releases reinforce the need for more monetary tightening. Despite the expected slower May [...]

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Since early-April, the CNY/USD appreciation rate has slowed significantly to around 6.7% annualized rate in April-May, down from 17% in the first three months of the year. As a result, the non-deliverable forwards (NDF) market’s expectation for 12-month CNY/USD appreciation has also been scaled back to 6.6% from 11.7%. Is the slower CNY appreciation rate a change of course? Or is it just a normal China-style “stop” before the “go” again?
It is more likely to be the latter, and the current USD/CNY forecasts are 6.76, 6.60 and 6.30 on 3, 6 and 12-month horizons, implying 10% appreciation in 12 months’ [...]

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