With the PBoC showing an inclination to slow the pace of depreciation in CNY and our forecast of USDCNY rising to 6.80 by year-end, we reiterate our recommendation on buying a four-month USDCNH 1×1 call spread, with strikes at 6.5385 (at-the-money) and 6.80 for the long (lower strike) USD call and short (upper strike) USD call options, respectively (see original idea in Buy USDCNH call spread, 19 August 2015). The option structure costs 0.818%, with a potential maximum profit of 3.181% (equal to 4.0% from spot gains less cost of structure of 0.818%) should the structure expire with spot USDCNH at or above 6.80. Should spot USDCNH fall below the ATM strike, the maximum loss is the cost of the option structure of 0.818%. This implies a max-profit to max-loss ratio of 3.9 (note that prices here are indicative). A USD call spread also offers better value compared with buying USDCNH forwards, as the cost of carry of a four-month outright forward is 1.34% (not annualized) given the outright level at 6.5385 versus spot at 6.4519.
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