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  Home Page > Corporate Banking >Financial market >Corporate Risk Management >RMB-Foreign Exchange Option
RMB-Foreign Exchange Option
 
I. Description
RMB-foreign exchange option is a product offered by ICBC to customers agreeing on the transaction date by both sides that the buyer of a trading contract has the right to, by paying option premium, deal in RMB-foreign exchange options at the agreed price and in the agreed amount with the contractual seller in a certain period in future.
ICBC’s RMB-foreign exchange options can be divided into call option and put option, and the option type is general European option.

II. Target Customers
It is applicable to legal entities including enterprises, public institutions, state organs, social groups, the army, foreign-invested enterprises etc. incorporated in the territory of the People’s Republic of China (excluding Hong Kong, Macau and Taiwan), with their own needs and for the purpose of hedging.

III. Features and Advantages
i. Main characteristics of foreign exchange options
1. RMB-foreign exchange option is an underlying exchange rate derivative with a simple and clear trading structure, allowing individualized design tailored to customers’ needs.
2. RMB-foreign exchange option is a risk control tool for effective risk hedging and value preservation. Purchase of RMB-foreign exchange options is featured by limited risks but unlimited gains, protecting customers from possible losses arising from exchange rate fluctuations.
3. Customers can keep maximum foreign exchange losses below option premium through buying RMB-foreign exchange option for hedging, while retaining the chance of gaining from favorable exchange rate fluctuations.
4. Customers can reduce exchange settlement or sale costs while assuming market fluctuations of certain degree through selling RMB-foreign exchange options to gain option premium.
ii. Main advantages of ICBC’s RMB-foreign exchange option
1. Competitive quotations
As the first domestic bank to set up a professional quantitative analysis team, ICBC has made breakthroughs in quantitative analysis technologies for independent pricing and risk management of derivatives. It is capable of independent pricing and highly competitive in the industry. Besides, as ICBC is one of the most influential market makers on the inter-bank RMB-foreign exchange market, it has maintained a leading position in terms of transaction volume for years. Thus, it can offer customers with competitive quotations.
2. Individualized product design
ICBC designs RMB-foreign exchange option schemes tailored to customers’ individualized demands for risk hedging and value preservation. Meanwhile, customers can apply for special treatments including delivery during grace period and reversed position close to satisfy customers’ individualized business demands.
3. Ongoing quality sales services
ICBC will provide ongoing dynamic management services and timely furnish customers with relevant market information, sending customers market capitalization assessment results of their existing transactions on a monthly basis and notifying them of exercising options the working day prior to expiry date.
4. Experienced team
ICBC boasts a team of richly experienced foreign exchange traders as well as supportive teams specializing in marketing, system maintenance and development, business management and product R&D, which work jointly to provide efficient and quick services for customers.

IV. Case Study
Case 1: Call option
An enterprise needs to pay for imports in USD in one month. To hedge against USD appreciation risk, the customer purchases from ICBC a one-month RMB-USD European option with the principle of USD1 million. Supposing the agreed RMB/USD exchange rate is 6.5745, the company is entitled to purchase from ICBC US dollars in the agreed amount at the exchange rate of 6.5745 upon expiry of the option bought. If the spot RMB/USD exchange rate is 6.4745 when the option expires, the company waives the option, and buys US dollars at the spot rate, which is more preferential. On the contrary, if the spot RMB/USD exchange rate is 6.6745 when the option expires, the company can exercise the option, requiring ICBC to sell them US dollars at the exchange rate of 6.5745. In this way, the customer saves RMB0.1 for each US dollar, lowering the exchange purchase cost.
Case 2: Put option
An enterprise is expecting to receive an export payment in one month. To hedge against USD depreciation risk, the customer purchases from ICBC a one-month RMB-USD European option with the principle of USD1 million. Supposing the agreed RMB/USD exchange rate is 6.5745, the company is entitled to sell ICBC US dollars in the agreed amount at the exchange rate of 6.5745 upon expiry of the option bought. If the spot RMB/USD exchange rate is 6.6745 when the option expires, the company waives the option, and sells US dollars at the spot rate, which is more preferential. On the contrary, if the spot RMB/USD exchange rate is 6.4745 when the option expires, the company can exercise the option, requiring ICBC to buy back USD1 million at the exchange rate of 6.5745. In this way, the customer gains extra RMB0.1 per US dollar sold, increasing the income.
Case 3: Sale of call option
An enterprise is expecting to receive an export payment in USD in one month. To hedge against USD appreciation risk, the customer sells ICBC a one-month RMB-USD European call option with the principle of USD1 million, and receives option premium. Let’s suppose the agreed exchange rate of RMB against USD is 6.5745. If the spot RMB-USD exchange rate is 6.4745 when the option expires, ICBC chooses to exercise the option, and the customer sells the exchange at the rate of 6.4745. Then the customer can use the option premium received in the beginning to improve the settlement price. On the contrary, if the spot RMB-USD exchange rate is 6.6745 when the option expires, ICBC chooses not to exercise the option, and the customer has to sell the exchange at the spot rate.
Case 4: Sale of put option
An enterprise is expecting to make an import payment in USD in one month. To hedge against USD appreciation risk, the customer sells ICBC a one-month RMB-USD European put option with the principle of USD1 million, and receives option premium. Let’s suppose the agreed exchange rate of RMB against USD is 6.5745. If the spot RMB-USD exchange rate is 6.4745 when the option expires, ICBC chooses to exercise the option, and the customer purchases the exchange at the rate of 6.5745. On the contrary, if the spot RMB-USD exchange rate is 6.6745 when the option expires, ICBC chooses not to exercise the option, and the customer purchases the exchange at the spot rate. Then the customer can use the option premium received in the beginning to improve the purchase price.

V. Qualification
1. RMB-foreign exchange option business can be handled for foreign exchange receipt & payment for which exchange sale and settlement are allowed according to foreign exchange administration provisions.
2. As per foreign exchange administration provisions, RMB-foreign exchange options handled for customers are limited to general European option, including purchase of call option, purchase of put option, sale of call option and sale of put option on commission basis.
3. According to foreign exchange administration provisions, main risk features of RMB-foreign exchange option to be handled should have a reasonable degree of consistency with the customer’s real demands for its underlying trade. Foreign exchange receipt or payment arising from exercising the option contract shall not exceed the real scale backed by the customer’s underlying trade.

VI. Application Process
1. Preparations
(1) Customer assessment: The customer should first undergo due diligence and a comprehensive assessment by ICBC, and fills out the Customer Assessment Table. ICBC will decide whether to conduct the transaction with the customer after assessing its risk tolerance.
(2) Sign an agreement: To handle RMB-foreign exchange option business, the customer shall sign the Industrial and Commercial Bank of China Master Agreement on Foreign Exchange Settlement and Sale with ICBC.
2. Application
Before the customer submits an application, ICBC will review materials submitted by the customer including the basic commercial contract. If the customer passes the review, it shall submit an Application Form for RMB-Foreign Exchange Option Transaction after making clear of ICBC’s quotations. Upon completion of the transaction, ICBC issues a Letter of Confirmation on RMB-Foreign Exchange Option Transaction to the customer.
3. Reversed position close prior to expiry date
In need of reversed position close prior to expiry date, the customer shall submit certifying materials and a letter of commitment, which will be reviewed and approved by ICBC before reversed position close is conducted.
4. Option exercising by customer
(1) Exercising option on exercise date: On expiry date, the customer submits an Application for Exercising RMB-Foreign Exchange Option and all materials needed to certify authenticity of the underlying trade. After review and approval, ICBC will conduct delivery for the customer. The customer may waive the option on expiry date.
(2) Processing procedure for other ways to exercise option on exercise date: In case the customer suffers from partial losses of cash flow under foreign exchange receipt or payment due to changes to the basic commercial contract, it may submit materials certifying such changes and a letter of commitment. After reviewing the materials submitted, ICBC will handle partial exercise for the customer. Meanwhile, the customer may also apply prior to expiry date for delivery during grace period. Grace period covers the three working days following expiry date. Delivery within grace period is also deemed as proper performance of contract.

VII. Service Channels and Hours
Customers meeting access conditions can apply to tier-1 branches or tier-2 branches with authority to run RMB-foreign exchange option business for such business during corporate banking business hours.

VIII. Handling Process

IX. FAQs
1. ICBC defines three working days following expiry date as grace period for handling delivery of RMB-foreign exchange option, during which delivery handled will be deemed as due completion of delivery.
2. In case the customer suffers from partial losses of cash flow under foreign exchange receipt or payment due to changes to the basic commercial contract, it may submit materials certifying such changes and a letter of commitment. After reviewing the materials submitted, ICBC will handle partial exercise of the contractual principal for the customer.
3. Upon expiry, the customer shall perform delivery as per the agreement.Prior to expiry, the customer may apply for reversed position close for its RMB-foreign exchange option, in case of changes to cash flow of foreign exchange receipt or payment due to changes to the basic commercial contract.The customer shall fill out the designated power of attorney, and furnish materials certifying such changes and a letter of commitment. After reviewing the materials submitted, ICBC will conduct reversed position close in the corresponding amount for the option bought.

X. Risk Prompt
1. Exchange rate risk
The product is trading of exchange delivery rights in essence.As time passes by, when the delivery exchange rate is inferior to the spot rate, which means exercising the option won’t bring any benefit, the customer will waive the option, losing the option premium paid in the beginning.
2. Market capitalization assessment risk
However market exchange rates change, as for customers, there won’t be loss in the product’s market capitalization assessment result.
3. Margin deposit risk
The customer needn’t pay margin deposit when buying RMB-foreign exchange option, but if it chooses to exercise the option upon expiry and applies for delivery during grace period, it should pay in margin deposit in the agreed proportion.
4. Gain/loss risk in reversed position close
If the customer wants to terminate the product ahead of time, it can apply to ICBC for reversed position close.Reversed position close of foreign exchange option bought by the customer is non-regular operation upon expiry, but it won’t bring any loss.ICBC will provide the customer with a pre-valuation price for reversed position close according to market conditions. The customer shall clearly indicate in the power of attorney on reversed position close, the validity of such power of attorney and the price acceptable. Whether the reversed position close is successful depends on ICBC’s final confirmation.
5. Legal risk
Customers shall completely understand every article in texts and make independent decision based on their own judgment. Customers shall take into account force majeure and possible accidents, losses arising from which should be borne by customers and have nothing to do with ICBC.

XI. Notes
RMB-foreign exchange option requires high timeliness so as to avoid losses incurred from fluctuating market prices in operation.

XII. Definitions
European option means option cannot be exercised until the agreed expiry date, and the option buyer cannot exercise the option prior to the contractual expiry date.
Call option means the option buyer, through paying a certain amount of option premium to the option seller, gains the right to purchase a certain quantity of specific assets from the option seller at the agreed price within validity of the option contract, but has no obligation to do so.While the option seller is obligated to, at the option buyer’s request, sell the specific asset at the price as agreed upon in the option contract within the prescribed validity.
Put option means the option buyer, through paying a certain amount of option premium to the option seller, gains the right to sell a certain quantity of specific assets to the option seller at the agreed price within validity of the option contract, but has no obligation to do so.While the option seller is obligated to, at the option buyer’s request, buy the specific asset at the price as agreed upon in the option contract within the prescribed validity.

Note: The information provided on this page is for reference only. Concrete business shall be subject to the announcement and provisions of the local outlet.


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