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DCE to trial options trading

By Wang Fei’er (Global Times)

08:14, May 08, 2012

The Dalian Commodities Exchange (DCE), which mostly trades in agriculture commodities, has launched a simulated options trading program covering all of the contracts trading on the bourse as a first step toward introducing options trading across the country, the exchange announced yesterday.

As futures contract trading volume grows, regulators have given their nod to this simulated option program as a way to show the government's determination to minimize the economic plight of farmers following several recent slumps in the prices of agricultural goods, experts told the Global Times.

The DCE, one of China's three futures exchanges, saw an annual growth rate of 43.35 percent in futures contract trading volume last year, according to figures from the US-based Futures Industry Association.

The expansion of the futures market in China has encouraged regulators to begin developing the market for options, an important financial derivatives product, Xu Liang, an agriculture commodities analyst from Shanghai East Asia Futures, told the Global Times.

Once testing ends, farmers will be able to buy options to hedge against fluctuating prices of agricultural commodities, Liu Xingqiang, CEO of the DCE, said at the Chinese People's Political Consultative Conference on March 6.

A farmer who purchases an option acquires the right, but not the obligation, to sell a commodity at a set price if he predicts the price will fall in the future, or he can simply forfeit the premium he paid to the option seller if he wants to hold on to his commodity to sell at a later date if expectations of a price hike emerge, said Xu.

Wang Na, a senior agriculture commodities futures analyst from Everbright Futures Co, voiced skepticism though that option trading would benefit farmers in China, many of whom, as opposed to government-supported farmers in the US, may have limited abilities to anticipated price changes in the commodities they produce.

"With a lack of price disclosure, farmers in China can hardly be expected to decide whether to exercise or give up their options, leaving them even more vulnerable to financial risks," Wang explained to the Global Times.

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