Unexpected depreciation of the renminbi this year could
unfavourably affect derivatives used to hedge exposures to the
currency. A further currency fall could lead to disputes.
|Its drop in
value complicates currency hedges
Currency derivatives were extremely problematic for emerging
markets in the global financial crisis. According to a 2009
IMF paper, non-financial firms in developing markets lost
over $530 billion, with China’s state-owned Citic
Pacific alone losing $2.4 billion.
Nevertheless, the business has taken off in China. A February Morgan Stanley report notes that $350
billion in target redemption forwards (TRFs) had been sold
– largely to Chinese corporates – during the
first two months of the year. It’s estimated that
$150 billion of these contracts are still in effect.
Companies that believed...