I. Description
RMB-foreign exchange option portfolio is a portfolio consisting of customers’ buying and selling a general European RMB-foreign exchange option in the same currency pair, of the same term and with the same contractual principal at the same time. RMB-foreign exchange option portfolio is an exchange risk management product on commission basis, allowing flexible setting of currency, term, delivery exchange rate, amount and other elements according to customers’ needs. At present, ICBC has two kinds of products for customers: risk reversal put option portfolio and risk reversal call option portfolio.
Risk reversal put option portfolio means the customer, in consideration of its actual demands for future exchange sale, buys a foreign exchange put option at a lower exercise price (exercise price is measured by one unit of foreign exchange in RMB, the same below) and sells a foreign exchange call option at a higher exercise price at the same time.
Risk reversal call option portfolio means the customer, in consideration of its actual demands for future exchange purchase, sells a foreign exchange put option at a lower exercise price and buys a foreign exchange call option at a higher exercise price at the same time.

II. Target Customers
It is applicable to companies and enterprises incorporated under the laws of and in the territory of the People’s Republic of China (excluding Hong Kong, Macau and Taiwan) and overseas legal person financial institutions (such as, commercial banks, insurance companies, securities companies and fund management companies) incorporated abroad according to the law, for which ICBC acts as an agency to conduct RMB bond investment in China’s inter-bank market, with their own needs and for the purpose of hedging.

III. Functional Features
1. Compared with purchase of option for hedging, option portfolios may save customers trading costs through compensating option premium paid for option purchase with that gained through option sale. But meanwhile, customers waive part of potential gains from option sale when they set an upper limit and a lower limit on possible exchange settlement proceeds, and exchange purchase expenditure on expiry date.
2. Compared with forward exchange sale or settlement for hedging, customers can lock up exchange sale/settlement costs within a preferable range in advance through option portfolios, instead of a current forward rate point, which is more flexible. Option portfolios give customers more preferential forward exchange sale/settlement prices, thereby lowering their financial costs.

IV. ICBC Advantages
1. Competitive quotations
As the first domestic bank to set up a professional quantitative analysis team, ICBC has made breakthroughs in quantitative analysis technologies for independent pricing and risk management of derivatives. It is capable of independent pricing and highly competitive in the industry. Besides, as ICBC is one of the most influential market makers on the inter-bank RMB-foreign exchange market, it has maintained a leading position in terms of transaction volume for years. Thus, it can offer customers competitive quotations.
2. Customized product design
In consideration of diversified customer needs, ICBC designs individualized RMB-foreign exchange option portfolio schemes tailored to customers’ diversified hedging demands. Meanwhile, given the uncertainty of international trade balance, ICBC allows special treatments including delivery during grace period, in-advance reversed position close in full or partial amount etc.
3. Ongoing quality sales services
ICBC will provide ongoing dynamic management services and timely furnish customers with relevant market information, sending customers market capitalization assessment results of their existing transactions on a monthly basis and prompting them one working day prior to expiry date.
4. An experienced team
ICBC boasts a team of richly experienced foreign exchange traders as well as supportive teams specializing in marketing, system maintenance and development, business management and product R&D, which work jointly to provide efficient and quick services for customers.

V. Qualification
1. RMB-foreign exchange option portfolio business is available to foreign exchange receipt & payment, for which exchange sale and settlement are allowed according to foreign exchange administration provisions.
2. According to foreign exchange administration provisions, RMB-foreign exchange option portfolio available to customers is the general European option, including option portfolios consisting two or more than two options.
3. According to foreign exchange administration provisions, main risk features of the RMB-foreign exchange option portfolio should have a reasonable degree of consistency with the customer’s real demands for its underlying trade. Foreign exchange receipt or payment arising from exercising the option contract shall not exceed the real scale backed by the underlying trade.

VI. Application Process
1. Customer assessment, risk disclosure and confirmation with customer
Before a customer applies for RMB-foreign exchange option portfolio, ICBC’s tier-1 or tier-2 branch with authority to run the business will conduct an assessment on derivative product transaction suitability. Meanwhile, ICBC furnishes the customer with a written risk warning, which, in duplicate, shall be signed by the customer for confirmation, with each copy held by each side. Based on the assessment on the customer’s overall conditions, ICBC will get written confirmations from the customer concerning whether it completely understands the transaction articles, whether it completely understands contents in the risk prompt, whether it has necessary risk tolerance, whether it promises to assume losses that may possibly arise from the transaction, whether there is any inappropriate marketing behavior misleading the customer, what is the customer’s trading purpose and what are its underlying asset or liability conditions etc. Only after the customer provides complete information concerning these questions will ICBC accept the business. In this way, we ensure RMB-foreign exchange option portfolio is only conducted for customers with authentic underlying trade needs and corresponding risk tolerance.
2. Signing a master agreement
After accepting a customer’s application, ICBC will review its qualification for RMB-foreign exchange option portfolio business. After passing the review, the customer should sign with ICBC the Industrial and Commercial Bank of China Master Agreement on Foreign Exchange Settlement and Sale in duplicate, with each copy held by each side. The branch/sub-branch signing the agreements is responsible for preserving the originals and submitting the copies to the superior bank for filing.
3. Striking a deal
When applying to ICBC for RMB-foreign exchange option portfolio, customers shall provide the basic commercial contract, and fill out an application form after the transaction is approved. After accepting the customer’s entrustment, ICBC will issue a confirmation letter to the customers and collect option premium (if any) in RMB from them.
4. Review and delivery on contractual expiry date
On expiry date of the option portfolio contract, customers may notify ICBC of exercising the option bought. ICBC will review effective vouchers and/or commercial bills submitted by the customers and handle delivery according to SAFE’s relevant provisions governing RMB-foreign exchange option portfolio business.
In case the customer waives the option on the contractual expiry date, ICBC can choose to either exercise the options sold by the customer or waive the right to do so. If ICBC chooses to exercise the right, the customer shall submit effective vouchers and/or commercial bills, and then delivery will be conducted as agreed upon in the contract. If ICBC chooses to waive the right, the customer can sell or settle exchanges at the spot price through presenting relevant vouchers.
5. Special treatments
If cash flow of foreign exchange receipt or payment wholly or partially drains away as a result of changes to the basic commercial contract, customers can present materials certifying such changes and a letter of commitment. ICBC, after verifying the materials submitted, will conduct in-advance reversed position close for the option portfolio in full or partial amount prior to expiry date.

VII. Service Channels and Hours
Customers meeting access conditions can apply to tier-1 branches or tier-2 branches with authority to run RMB-foreign exchange option portfolio for such business during business hours. General counter-based channels: Monday-Friday (except for public holidays): 9:30-18:00 (Beijing time)

VIII. Operation Guide
To apply to ICBC for option portfolio business, customers shall provide relevant materials and assist ICBC with completing the following works:
i. Sign the Industrial and Commercial Bank of China Master Agreement on Foreign Exchange Settlement and Sale and the Industrial and Commercial Bank of China Supplementary Agreement on Foreign Exchange Settlement and Sale with ICBC.
ii. Customers shall carefully read the Risk Warning Letter furnished by ICBC to gain complete understanding of transaction articles and potential risks.
iii. Assist ICBC with due diligence.
iv. Customers submit an official business application form, which will be subsequently forwarded by the branch to the Head Office. After the Head Office confirms the transaction, the branch will issue a confirmation letter as an official transaction voucher returned to the customer. After the Head Office confirms the transaction, the branch will issue a confirmation letter as an official transaction voucher returned to the customer.
Business application form is an important document to derivative trading, that customers shall take seriously. Business application form includes but is not limited to:
1. The customer’s purpose of derivative trading and main information about the proposed derivative transaction, including trading structure, term, currency, amount etc.;
2. Conditions and the authenticity of the customer’s underlying assets or liabilities to be hedged in the proposed derivative trading (including receipt or payment, the same below), and conditions of any other derivative transactions based on such underlying assets or liabilities that have been rolled out but not yet completed (in case of hedging transactions);
3. Whether there is any bad sales behavior of ICBC in the marketing process.
v. On contractual exercise date, if either the customer or ICBC chooses to exercise the option, the two parties will make delivery of foreign exchanges at the agreed exercise price. In duration of the contract, ICBC will regularly furnish the customer with market capitalization assessment results of the exchange option portfolio to facilitate their dynamic management of the transaction.

IX. Business Case
Case 1: Foreign exchange risk reversal put option portfolio
An enterprise is expecting to receive an export payment in one month. To hedge against USD depreciation risk, the customer purchases from ICBC a one-month RMB-USD put option with principle of USD1 million and exercise price at 6.6. Meanwhile, it sells to ICBC a call option in USD with the same currency pair, period and principal, with the exercise price at 6.7. If the sport market exchange rate is 6.5 upon expiry of option, the customer exercises the purchased put option and ICBC waives the call option. Meanwhile, the customer sells USD1 million at the price of 6.6. If the spot market exchange rate is 6.8 when the options expire, the customer waivers its put option, while ICBC exercises the call option. In this case, the customer should perform its obligation to sell to ICBC USD1 million at the price of 6.7. Under the first circumstance, the customer sells exchanges at a price superior to the market price; while under the second circumstance, the customer loses the chance of selling exchanges at a more favorable price. Through conducting an option portfolio, the customer locks up its future exchange sale proceeds within the range of RMB6,600,000-RMB67,000,000 on the day when the contract is signed, thereby reducing future uncertainties.
Case 2: Foreign exchange risk reversal call option portfolio
An enterprise needs to make an import payment in USD in one month. To hedge against USD appreciation risk, the customer sells ICBC a one-month RMB-USD European put option with the principal of USD1 million at the exercise price of 6.6; meanwhile, it buys from ICBC a European call option in the same currency pair, with the same term and in the same amount of principal at the exercise price of 6.7. If the spot RMB-USD exchange rate is 6.8 when the options expire, the customer exercises the call option and purchases from ICBC USD1 million at the price of 6.7, and ICBC waives the USD put option bought. If the spot RMB-USD exchange rate is 6.5 when the options expire, the customer waives its call option bought, while ICBC exercises the put option. Then the customer is obligated to purchase USD1 million at the price of 6.5 from ICBC. Under the first circumstance, the customer purchases exchanges at a price superior to the market price; while under the second circumstance, the customer loses the chance of purchasing exchanges at a more favorable price. Through conducting an option portfolio, the customer locks up its future exchange purchase costs within the range of RMB6,600,000-RMB6,700,000 on the day when the contract is signed, thereby reducing future uncertainties.
Case 3: Call spread option portfolio
An enterprise needs to make an import payment in USD in one month. To hedge against USD appreciation risk, the customer buys from ICBC a one-month RMB-USD put option with principal of USD1 million at the exercise price of 6.6; meanwhile, it sells to ICBC a European call option in the same currency pair, with the same term and in the same amount of principal at the exercise price of 6.7. If the spot RMB-USD exchange rate is 6.55 when the options expire, and neither of the options is exercised, the customer can purchase exchanges at the spot price. If the spot rate is between the two exercise prices upon maturity, say 6.65, the customer exercises its call option bought to purchase exchanges at the price of 6.6. If the spot rate is higher than both exercise prices upon maturity, say 6.75, the two options are exercised. In this case, the customer purchases exchanges at the spot price, and is allowed for spread delivery between the two options to gain some proceeds to compensate part of the spot exchange purchase cost.

X. FAQs
1.ICBC defines three working days following expiry date as grace period for handling delivery of RMB-foreign exchange option portfolio, during which delivery handled will be deemed as due completion of delivery.
2. In an option portfolio, option premium the customer gets from selling the option shall not exceed option premium paid for buying the option.
3. In case a customer suffers from partial losses of cash flow under foreign exchange receipt or payment due to changes to the basic commercial contract, it may submit materials certifying such changes and a letter of commitment. After the materials submitted are reviewed, ICBC will handle partial exercise of the contractual principal for the customer.
4. Upon expiry, a customer shall perform delivery as per the agreement. Prior to expiry, the customer may apply for reversed position squaring for its RMB-foreign exchange option, in case of any changes to cash flow of foreign exchange receipt or payment due to changes to the basic commercial contract. The customer shall fill out the designated power of attorney, and furnish materials certifying such changes and a letter of commitment. After reviewing the materials, ICBC will conduct reversed position squaring in the corresponding amount for the options bought.
5. After the option portfolio expires, if neither the customer nor ICBC chooses to exercise the option, the customer can sell or settle exchanges at the spot price through presenting relevant vouchers.
6. Any operation on an option portfolio (including but not limited to contract signing, agreement amendment, agreement cancellation, reversed position squaring, selection of delivery mode) acts on the whole option portfolio. It is impossible to choose one particular option in a portfolio for specific trading; moreover, option portfolio signing between ICBC and the customer and any changes thereto should be reflected in the same business application form and the same confirmation letter.

XI. Risk Prompt
1. Exchange rate risk
The product is trading of RMB-foreign exchange delivery rights in essence. On option expiry date, if both the customer and ICBC waive their respective option, the customer will have to sell or settle exchanges at spot rate of the expiry date, losing the option premium (if any) paid at the beginning. If ICBC chooses to exercise the option, the customer should make delivery with ICBC at the exercise price of the option bought by ICBC, which must be inferior to the spot price. Loss amount suffered by the customer is positively correlated to the degree of deviation between the exercise price and the spot price as well as the nominal principal
2. Market capitalization assessment risk
When conducting option transactions with ICBC, customers will face risk of market value fluctuations of options. Market capitalization of an RMB-foreign exchange option portfolio mainly depends on spot price, fluctuation ratio, forward price, rate on return of RMB, residual time to maturity etc. Within the duration, the option’s market capitalization may be adversely influenced by changes to any of the above factors.
3. Security deposit risk
ICBC has the right to ask customers to pay in security deposit in an agreed proportion or provide other guarantee means for the option sold prior to the transaction, and furnish additional guarantees when necessary according to market changes within validity. In case of any default on the customer’s side, ICBC is entitled to conduct forced position squaring on the transaction, and deduct an according amount from the customer’s security deposit account or other accounts to compensate losses arisen. In this case, the customer may suffer losses of security deposit.
4. Legal risk
Customers shall completely understand every article in texts and make independent decision based on their own judgment. Customers shall take into account force majeure and possible accidents, losses arisen, which should be borne by customers and have nothing to do with ICBC.

XII. Notes
RMB-foreign exchange option portfolio is highly time-sensitive. Customers need to avoid losses incurred from fluctuating market prices in trading.

XIII. Definitions
European option means option cannot be exercised until the agreed expiry date, and the option buyer cannot exercise the option prior to the contractual expiry date.
Call option means the option buyer, through paying a certain amount of option premium to the option seller, gains the right to purchase a certain quantity of specific assets from the option seller at the agreed price within validity of the option contract, but has no obligation to do so. While the option seller is obligated to, at the option buyer’s request, sell the specific asset at the price as agreed upon in the option contract within the prescribed validity.
Put option means the option buyer, through paying a certain amount of option premium to the option seller, gains the right to sell a certain quantity of specific assets to the option seller at the agreed price within validity of the option contract, but has no obligation to do so. While the option seller is obligated to, at the option buyer’s request, buy the specific asset at the price as agreed upon in the option contract within the prescribed validity.

Note: the information provided on the page is for reference only. Specific businesses are subject to announcements and rules of local outlets.