Designing the contract based on features of options product and serving the global real economy
After the RBD palm olein futures have been approved as the specific product, RBD palm olein options, as China's first options contract introducing overseas investors, is about to come into the market. The representative at DCE said in an interview with reporters that for the parameter design of RBD palm olein options contract, DCE had fully referred to the development experience of the international futures market, followed DCE's design concept of listed options products, and carried out the targeted design according to the operation conditions and features of underlying futures. DCE will create synergy within RBD palm olein futures to serve the global oils and oilseeds industries.
According to this DCE representative, DCE successfully launched China's first commodity options, namely, soybean meal options in March 2017. After four years of steady operation, the rules, technical system and other aspects of the options contract are now fully and effectively verified, laying a solid foundation for the R&D of RBD palm olein options. The design concept of the RBD palm olein option is consistent with the listed options products of DCE. To be specific, the trading unit is one lot (10 MT) of RBD palm olein futures contract; contract type includes call option and put option; daily price limit range, contract month, trading hours and price quote unit are the same as those of futures contracts; minimum tick size is 1/4 of that of underlying futures; and last trading date and expiration date are the same as those of soybean meal options. In addition, the prevailing American-style exercise for the international commodity option will be its exercise style, and contract symbol consists of the ticker symbol of the underlying futures contract, contract month, call (put) option code and exercise price.
The DCE representative also noted that, in the design of the contract month, in order to give better play to the hedging function of options products, the contract month of RBD palm olein options is consistent with that of RBD palm olein futures, namely, January, February, March, April, May, June, July, August, September, October, November and December. This is mainly due to the consideration that options contracts are available for every futures contract to carry out hedging and strategic portfolios, which may give full play to the price discovery and risk management functions of the options on the price of underlying products.
In the design of last trading date and expiration date, RBD palm olein options follows the design of listed options products where the last trading date is the fifth trading date of the month immediately preceding the delivery month of the underlying futures contract, and the expiration date is the same as the last trading date, according to the representative at DCE. This mainly considers the reality of China's futures market. First, RBD palm olein options’ last trading date tries to be close to the expiration month of futures contracts, to cover the underlying futures contracts with regard to the trading hours, so as to give full play to the hedging and risk management functions. Second, after exercise and fulfillment, investors who trade options contracts will hold the underlying futures position. Considering this, if the investor is unwilling to carry out physical delivery, the due time is required to close out futures position. Therefore, the design of the expiration date shall ensure that adequate time is provided for closing out the futures position after the options are exercised.
In the design of exercise price, in order to ensure that the options’ exercise price will cover the underlying price fluctuation, even if the options price reaches the trading limit, it is still possible to provide the appropriate at-the-money, in-the-money and out-of-the-money contract. The exercise price designed by DCE covers the price range corresponding to daily price limits of RBD palm olein futures contracts, under which the settlement price on the last trading date was upward and downward by 1.5 times. At the same time, according to the underlying option price range and fluctuation conditions, DCE took 5,000 CNY/MT and 10,000 CNY/MT as the segmentation points and separately set up the exercise price interval of 50 CNY/MT, 100 CNY/MT and 200 CNY/MT. On one hand, this may facilitate the customers to select the contracts with different exercise prices according to their own demands, reduce the trading costs and satisfy the diversified demands; on the other hand, this may help to maintain the appropriate exercise price intervals and contract quantity, reduce the liquidity risk, and improve the market efficiency.
Besides, given that options on futures in a mature international market is generally American-style, RBD palm olein options' exercise style is American, which is consistent with that of DCE’s listed options products.
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