- 14 Nov 2019
- By CME Group
COMEX has launched two futures contracts based on the Shanghai Gold Exchange’s Shanghai Gold Benchmark Price. One contract has prices quoted in U.S. dollars per troy ounce (herein “SGU Futures”), and the other has prices quoted in Chinese renminbi per gram (herein “SGC Futures”).
Trading across these two contracts will create an exposure to the exchange rate between the U.S. dollar and Chinese renminbi. The final settlement price of the SGC Futures contract will be the Shanghai Gold Exchange’s Shanghai Gold Benchmark Price quoted in Chinese renminbi. The final settlement price for the SGU Futures contract will be the Shanghai Gold Benchmark Price converted to U.S. dollars using the EBS CNH Benchmark reference rate for the USD/CNH published at 15:00 Beijing time. The final settlement price for the SGU Futures contract is further converted to a value per troy ounce using a conversion factor of 32.15 troy ounces per kilogram.
This exchange rate exposure can be managed using the USD/CNH Futures contract (“CNH Futures”) listed on CME. All three contracts are cleared by CME Clearing. Margin credits for offsetting positions made available by CME Clearing make using CNH Futures an efficient way to manage risk. The amount of margin credit will vary with time and can be checked on the CME Group website. At the time of launch, the margin credit was 35% between CNH Futures and SGU Futures, and 40% between CNH Futures and SGC Futures..
In addition, the global benchmark COMEX Gold Futures contract (“GC Futures”) provides a means to manage exposure to U.S. dollar gold prices. Margin offsets against GC Futures are also provided by CME Clearing. Summary specifications for all these contracts are described below.
There are a number of points to reflect on when considering using CNH Futures to manage currency exposure.
The contract size of the CNH Futures is $100,000. In contrast, the currency exposure of the gold contracts depends on the futures price. For example, with a gold price of $1500 per troy ounce, the value of one SGU Futures contract, which has a contract size of 32.15 troy ounces, is $48,225, whilst with a price of RMB 354.00 per gram, the value of one SGC Futures contract, which has a contract size of 1,000 grams, is RMB 354,000.
As the currency value of the gold contracts varies with the price of gold, the hedge ratio required for the CNH Futures contract will change. Holders of the SGC Futures contract wishing to hedge their exposure to movements in the USD/CNH exchange rate can calculate the number of CNH Futures contracts required to accomplish this as follows:
For example, with an SGC Futures price of RMB 340 per gram, and a CNH Futures price of RMB 7.15 per USD, a position of 40 lots in SGC Futures would require 19.02 CNH Futures to hedge the full amount of currency exposure.
Holders of the SGU Futures contract wishing to hedge their exposure to movements in the USD/CNH exchange rate can calculate the number of CNH Futures contracts required to accomplish this as follows:
As can be seen, the hedge ratio is also affected by the CNH Futures price, and therefore hedging positions should be assessed continuously based on current market values.
These formulae are based on the assumption that prices for the gold futures and prices for CNH Futures are independent over the period the hedge. If, alternatively, it is assumed that there is a correlation between the price of SGC Futures or SGU Futures and the price of CNH Futures, then the hedge ratio will need to be adjusted.
A hedging transaction is intended to reduce the net exposure, therefore the direction of a transaction (i.e. buying or selling) in CNH Futures will depend on the position held in the gold futures contract and the FX exposure that this creates.
Take for example an investor who holds a long position in SGC Futures, which are priced in CNH per gram of gold. If the value of the USD/CNH exchange rate (i.e. U.S. dollars priced in CNH) increases, and the SGC Futures price remains unchanged, then the value of the gold exposure - measured in U.S. dollars - will decrease. If the investor values her overall portfolio in U.S. dollars, then the long SGC Futures position represents a short exposure to USD/CNH. This exposure can be hedged by buying CNH Futures.
As another example, take an investor who holds a short position in SGU Futures, which are prices in U.S. dollars per ounce of gold. If the value of the USD/CNH exchange rate increases, then the value of the gold exposure - measured in CNH - will increase, which is a negative outcome for the short position holder. If the investor values her overall portfolio in CNH, then the short SGU Futures position represents a short exposure to USD/CNH. This exposure can be hedged by buying CNH Futures.
Position in |
Transaction to hedge U.S. dollar portfolio value |
|
Position in |
Transaction to hedge renminbi portfolio value |
|---|---|---|---|---|
Long |
Buy CNH Futures |
|
Long |
Sell CNH Futures |
Short |
Sell CNH Futures |
|
Short |
Buy CNH Futures |
Consideration should also be given to the appropriate contract month of the CNH Futures contract to use to transact the hedge. CNH Futures are listed for all calendar months, but liquidity is focussed on the nearest listed calendar month and the months of March, June, September and December. Trading activity is typically most active in the nearest one of these quarterly months. The lasting trading day for CNH Futures is normally the Monday prior to the third Wednesday of the contract month, with each contract month being active until the week prior to this date. The calendar spread market provides a straightforward mechanism to roll CNH Futures positions between contract months where desired.
SGU Futures and SGC Futures are made available with similar listing rules to the COMEX Gold Futures contract, with the nearest three calendar months plus the nearest February, April, June, August, October, and December months being made available, with the last trading day towards the end of the contract month.
As the liquidity profile for the CNH Futures does not align with the listing cycle and last trading day for the SGU Futures and SGC Futures contracts, the choice of CNH Futures contract month to affect a hedge position should be considered. This will be dependent on the intended trading strategy.
For example, if an investor intends to hold a far dated SGU Futures contract through to expiry, it may be appropriate to hold a similarly far dated CNH Futures position as a currency hedge. Far dated contract months tend to have less on-screen liquidity, but the exchange’s block trade facility may be used to facilitate a transaction. An alternative strategy may be to hedge using the liquid CNH Futures contract, and subsequently roll this position prior to expiry to ensure the hedge is maintained.
The introduction of the two futures contracts based on the Shanghai Gold Exchange’s Shanghai Gold Benchmark Price brings a number of new trading opportunities to the market. Understanding and managing the currency exposure implicit in these contracts will be an important aspect of trading in these contracts.
More information can be found online at:
- https://www.cmegroup.com/trading/metals/china-gold-futures.html
- https://www.cmegroup.com/markets/fx/cross-rates/usd-cnh.html
- https://www.cmegroup.com/margin
Features of Futures contracts discussed in this article.
Contract |
Shanghai Gold (USD) Futures |
Shanghai Gold (CNH) Futures |
Gold Futures |
USD/CNH Futures |
|---|---|---|---|---|
Exchange Listing |
COMEX |
COMEX |
COMEX |
CME |
Commodity Code |
SGU |
SGC |
GC |
CNH |
Contract Size |
1 kg (32.15 troy ounces) |
1 kg (1000 grams) |
100 troy ounces |
USD 100,000 |
Quotation |
USD per troy ounce |
CNH per gram |
USD per troy ounce |
CNH per USD 1 |
Tick Size |
USD 0.10 |
CNH 0.05 |
USD 0.10 |
CNH 0.0001 |
Listed Months |
Monthly contracts listed for 3 consecutive months and all February, April, June, August, October, and December contracts within a 12-month period |
Monthly contracts listed for 3 consecutive months and all February, April, June, August, October, and December contracts within a 12-month period |
Monthly contracts listed for 3 consecutive months and any February, April, August, and October in the nearest 23 months and any June and December in the nearest 72 months |
13 Consecutive calendar months plus 8 quarterly months |
Last Trading Day |
Third last business day of the contract month. If this is not a Chinese business day, trading terminates the previous U.S. and China business day. |
Third last business day of the contract month. If this is not a Chinese business day, trading terminates the previous U.S. and China business day. |
Third last business day of the contract month |
Second Hong Kong business day prior to 3rd Wednesday of the contract month |
Settlement Method |
Financially settled |
Financially settled |
Deliverable |
Financially settled |
Final Settlement Price |
The Shanghai Gold Benchmark Price PM on the last trading day, converted to U.S. dollars per troy ounce using EBS CNH Benchmark published at 3:00pm China time and using a conversion factor of 32.15 troy ounces per kilogram and rounded to the nearest $0.05. |
The Shanghai Gold Benchmark Price PM on the last trading day. |
Delivery at the contract settlement price on the day on which the seller provides a notice of intention to deliver. |
The “Offshore Chinese renminbi per U.S. Dollar” spot exchange rate, for settlement in two business days, reported by the Treasury Markets Association, Hong Kong. |
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