Trading Conditions
Products
Tools
Let's ponder upon cross hedging of CNY
Step 1: Selecting the positively correlated currency with CNY
Usually the currency underlying the futures contract would be the same as the currency whose price is being hedged. But here JPY can be utilized as this currency cross has been frequently used in OTC market.
Step 2: Hedge ratio
Normal hedge ratio would be 1. But in case of cross hedging, according the hedgers' requirement and their exposure the proportion should be chosen so as to minimize the variance of the hedged position.
Step 3: Analyze the cross currency with which it has to be hedged
Suppose we are now forecasting JPY to appreciate in its intrinsic value against USD, and then an exporter from China can arrange near month, mid month or far month positions in JPY against USD as per his requirements. In turn once his prediction comes into play, he can convert those Yen into his local currency.