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Onshore versus Offshore RMB Pricing

China is the world’s second largest economy and the largest trade nation. With the rapid growth of trade between Mainland China and the rest of the world in the past decade, China started to gradually promote the internationalization of RMB in order to reduce the transaction costs and exchange rate risks faced by enterprises in international trade, facilitating the cross-border financial transactions between Mainland China and other countries. Against this background, the main objective of this study is to compare the market expectations and information contained in the onshore and offshore RMB markets based on the market transaction data of RMB foreign exchange options. Specifically, the study aims to investigate the formation mechanism of the onshore and offshore exchange rates. Specifically, the research currently focus on the following questions: Are offshore participants more risk-averse than onshore participants, given that the implied volatility of options on the offshore RMB exchange rate is significantly higher than that on the onshore RMB exchange rate despite the small pricing deviation between the onshore and offshore exchange rates? In other words, is the risk-neutral measure of the offshore RMB exchange rate really different from that of the onshore RMB exchange rate? What is the difference in information between the two RMB markets?

1. Onshore versus Offshore RMB Pricing: a Test Based on Information Content, by Nan He and Tan Wang, 2021.