Establishing a Foreign Exchange Futures Market in China

November 12, 2021

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Format: Chicago

Zhongxia Jin, Yue Zhao, and Haobin Wang. Establishing a Foreign Exchange Futures Market in China, (USA: International Monetary Fund, 2021) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

During China’s transition toward a more flexible exchange rate, it is essential to further develop its foreign exchange (FX) derivatives markets to meet the growing hedging needs associated with greater exchange rate fluctuations. Although over-the-counter (OTC) FX derivatives markets already exist in China, it lacks a FX futures market that offers critical complementarities. With standardized products, greater transparency and centralized oversight, a FX futures market can better satisfy the hedging needs of small and medium-sized enterprises and enhance regulatory efficiency. To address concerns regarding whether FX futures market will amplify the volatility of spot exchange rates, this paper analyzes the impact of establishing FX futures markets on spot market volatility using data from major emerging market economies. The result shows that FX futures market is not empirically associated with an increase in spot market volatility; in some cases, it is even associated with a decrease in spot market volatility. This paper further suggests that for a well-functioning FX futures market to be established, it is essential for China to substitute the inefficient documentation requirement of underlying exposures with a new set of market-oriented measures for the purpose of prudent regulation.

Subject: Currency markets, Derivative markets, Financial crises, Financial markets, Futures markets, Over-the-counter markets

Keywords: ADF test statistics, Africa, Currency markets, Derivative markets, Derivatives coverage ratio, Exchange rate, Futures markets, FX derivative, FX futures market, FX futures market, Global, Hedging needs, Market-based regulation, Over-the-counter markets

Publication Details

Pages:

22
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/268
Stock No:

WPIEA2021268
ISBN:

9781513584843
ISSN:

1018-5941

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