As we all know, the reason why the US dollar has become the world’s dominant currency is mainly due to the fact that crude oil, an important energy source that is consumed by all countries in the world, must be settled in US dollars.
This was a private agreement signed between the United States and the crude oil organization OPEC (the boss is Saudi Arabia). Therefore, the US dollar is also called the petrodollar. Any country must use oil to develop, and the purchase and sale of oil produced by OPEC members must be settled in U.S. dollars. In other words, if any country wants to develop, it must have US dollar foreign exchange reserves. Since then, dollar hegemony has been established.
If one day a large part of global crude oil transactions can be settled in RMB, the international status of RMB and my country’s financial strength will be greatly enhanced.
Crude oil futures settled in RMB have been formed as early as three years ago in 2018. According to the latest news, crude oil options settled in RMB on June 21, 2021 It will be officially listed on the Shanghai Futures Exchange and open to global investors.
After crude oil options can be settled in RMB, does it mean that the internationalization of RMB has reached a new level? Although I really want to say this, in fact it is not what everyone thinks. Let me first tell you what options are.
1. Crude oil options are just a kind of financial derivatives
The essence of options is to spend money to buy a choice right , the price paid is the option fee. Options are more of a financial transaction and do not involve physical objects, so it is difficult to increase the incremental demand for RMB in global trade.
Compared with futures, options hide higher financial leverage, are speculative, have higher returns, and are more risky. In actual operation, the option holder first pays some fees to purchase a right from the counterparty, and then decides whether to exercise the right based on changes in the market price of the underlying object pointed to by the option contract after a period of time.
The theoretical concept is relatively abstract. I will take the upcoming RMB-settled crude oil options as an example to show you the operation mode of its options.
Assuming that the market price of crude oil on June 1 is 360 yuan per barrel. Investor Xiao Zhang is optimistic about the future price trend of crude oil and believes that the price will rise significantly in 6 months.
Based on this judgment, Xiao Zhang opened 1,000 call options on the Shanghai Futures Exchange. Each call option gives Xiao Zhang the right to purchase a barrel of crude oil at 360 yuan on December 1, 6 months later, regardless of the market price of crude oil. In order to obtain such rights, a crude oil option requires an option fee of 30 yuan to be paid to the counterparty.
For Xiao Zhang, the total investment cost of 1,000 crude oil options is 30 yuan * 1,000 = 30,000 yuan.
Scenario 1: On December 1, the price of crude oil rose to 420 yuan a barrel.
Since Xiao Zhang owns 1,000 call options, he can exercise the right to purchase 1,000 barrels at a price of 360 yuan from the counterparty that issued the option and collected the option fee at that time. crude. Why did Xiao Zhang do this?
Of course! The market price is 420 yuan per barrel, but Xiao Zhang can buy it for 360 yuan, and immediately earns a 60 yuan difference between buying and selling. Of course, options trades are basically settled on a net basis. In other words, it is impossible for Xiao Zhang to really buy 1,000 barrels of crude oil for 360 yuan, and the counterparty will not really hand over 1,000 barrels of crude oil to Xiao Zhang, but will settle the transaction by paying the price difference.
The price difference for a barrel of oil is 60 yuan, and the price difference for 1,000 barrels is 60,000 yuan. For Xiao Zhang, he originally invested 30,000 yuan in crude oil options, but got back 60,000 yuan six months later. In other words, Xiao Zhang’s investment made him earn 30,000 yuan, with a rate of return of 100%.
Some friends may have discovered that the more crude oil prices rise, the more Xiao Zhang will earn. For example, if the price per barrel rises to 450 yuan, the price difference per barrel will be 90 yuan. 1,000 call options can obtain a price difference income of 90,000 yuan, which is a 200% increase compared to the cost of 30,000 yuan.
Scenario 2: The price of crude oil fell sharply. The market price per barrel on December 1 was RMB 320.
At this time, Xiao Zhang no longer exercised his rights.
Because Xiao Zhang originally got the right to buy crude oil from the counterparty at a price of 360 yuan a barrel, and now the price of crude oil on the market is only 320 yuan. . It is impossible for Xiao Zhang to buy from 360 yuan and sell at 320 yuan. If he exercises his right, he will lose 40 yuan per barrel.
Option holder Xiao Zhang can exercise his rights or give up his rights. In this case, Xiao Zhang will give up his rights. The advantage is that he does not need to lose additional money. But the disadvantage is that the 1,000 crude oil call options in Xiao Zhang’s hand became waste paper. He originally bought them for 30,000 yuan. All investment money was lost.
In fact, the price of crude oil does not need to drop from 360 yuan to 320 yuan at all. As long as it drops by 1 cent, it will be impossible for Xiao Zhang to exercise his rights.
Options are such a high-risk, high-yield financial derivative. If you make correct judgments about future prices, you can earn very high returns, which are even higher than stocks and futures.
If you make a wrong judgment, you will lose everything. Under normal circumstances, it is impossible for stocks to lose all their principal, and futures will only lose all their money under extreme circumstances.
2. The launch of RMB-settled crude oil options will not change the international status of RMB
Everyone should understand what options are. The crude oil options listed for trading on June 21 have all the attributes of options, including high risk, high return, derivative financial investment tools, etc.
At the same time, I mentioned above that option settlement does not actually involve physical delivery but is settled through price differences, which is a typical financial contract settlement. What does this mean?
This means that even if RMB-settled crude oil options are listed for trading, it will not have any major impact on the physical trading of the crude oil spot market. Countries around the world still use U.S. dollars to buy and sell crude oil, and most of China’s foreign crude oil trade is still settled in U.S. dollars.
The demand for RMB and the willingness of countries around the world to use RMB as more foreign exchange reserves have not changed.
Of course, there are also crude oil options that are settled in RMB Positive side. This is a major financial breakthrough for our country and brings more choices to global investors. Some foreign institutions that really have demand will increase their demand for RMB. After all, RMB has one more use.
If you want to enhance the international status and frequency of use of the RMB through crude oil trade, you must combine physical crude oil trading with the RMB. From the current point of view, this road is still very long.
The good news is that we and several oil-producing countries such as Russia and Iran have begun to frequently use RMB to settle various commodities. If crude oil trade can be settled in RMB with more major crude oil-producing countries in the future, it will be a truly significant progress in the internationalization of RMB. We look forward to this day coming soon!
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