Yuan Forwards Hit Critical Levels – Risk Major Sell Off

The slide in the yuan to near one-year lows has left it at critical levels for holders of an offshore derivatives product, exposing them to heavy losses that may fuel a further slide in the currency.

The yuan’s 0.8 percent drop in the three days since the central bank widened its daily trading band has rippled into the offshore market where billions of dollars of leveraged bets were sold to Chinese companies.

The derivatives – target-redemption forwards – offer regular income to the holders as long as the yuan does not weaken sharply. Deutsche Bank and Morgan Stanley estimate a total of $350 billion of the products have been sold since last year.

Originally sold as a currency hedge, they morphed into a product providing modest income if the yuan stayed above a specific price against the dollar.

CNBC

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