RMB depreciation may spark derivatives disputes

Author: Ashley Lee | Published: 26 Jun 2014
Its drop in value complicates currency hedges
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.

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...