observers expect the yuan's gradual appreciation against the dollar to
continue in the next few years. But predicting how much the yuan is
going to move over a particular time-frame is a mug's game best left to
To sleep more soundly at night, businesses that do significant
foreign trade can protect themselves against FX risk with hedging
instruments. But how do you hedge the yuan?
Until recently there was no need. Before 2005, the yuan was pegged
to the dollar, so for dollar-denominated businesses there was no FX
risk involved in trading with China. While for the rest of the world,
the risk was handled by existing US dollar hedging mechanisms — if
they were felt necessary.
Due to the current stability of the yuan relative to the US dollar,
few corporate treasurers are concerned with protecting themselves from
the specific risk of a sudden yuan revaluation. But as any FX trader
knows, the FX markets are notoriously volatile and businesses that do
not hedge the yuan may be running an unnecessary risk.
According to a survey published by Travelex, 80% of respondents said
they had “significant exposures” to FX risk yet only 42% hedge their FX
risk, even though 25% of respondents say that FX has had an adverse
impact on their earnings in the past year.
The same survey also revealed that only 22% of respondents were
concerned with the volatility of the Chinese yuan, compared to 73%
concerned with the euro volatility.
David Galhardo, market analyst with Travelex , makes the point in this
gtnews article, that China's futures market is inaccessible for
non-Chinese residents and non-Chinese firms, leaving few payment
options and even fewer hedging instruments available outside of the PRC.
Nevertheless, US firms looking to hedge their FX exposure with China
can make use of non-deliverable forwards (NDF) and non-deliverable
options (NDO). These instruments eliminate risks when transacting with
the Chinese yuan as well as with other exotic currencies that don't
offer a futures market.
The rest of the article explains how these instruments work and the
author argues that the more widespread use of hedging strategies not
will benefit both small and large companies in the US that have
significant trade links with China.