Firms may begin making arbitrage plays on the various renminbi options markets this year as the Hong Kong-based CNH options market continues to develop. The moves follow China’s plan to allow onshore yuan options trading April 1 (DW, 2/16).
Once the onshore yuan options market opens, there will be three choices for derivatives users: the onshore CNY options market, the CNH options market based in Hong Kong and the non-deliverable forward CNY market, which is tradeable globally. The individual supply and demand of each market will mean volatilities on the currency paired against the U.S. dollar will differ slightly market to market, according to an fx structurer in Hong Kong.
As of press time, one-month implied vol for CNY NDFs was about 2% while three-month implied vol is 2.8%. Those numbers are each about 0.2% lower in the CNH market. The official said the onshore CNY options market will likely have a similar volatility to the CNY NDF market, but that it will depend on market activity.
The ability to make arbitrage plays will depend upon a firm’s capacity to trade freely in the three different markets. Shortly after the onshore yuan options market opens, the official said there will likely only be a small number of firms capable of trading in all three, but that it could grow to the hundreds. The official also said it was too early to make a conjecture on the structure of arbitrage plays.