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Why INE crude oil futures can be priced in Chinese currency?

Fang submitted 2018-03-30 04:57:28

In terms of API degree and Sulphur content, the kind of underlying assets of crude oil future that is traded by INE (Shanghai International Energy Exchange) is significantly different from the kind of underlying assets trading by intercontinental and Chicago Exchanges. Due to the differences, INE is able to avoid the direct competition of the right of pricing with intercontinental and Chicago Exchanges. The crude oil that INE settled is mainly produced in mid-east area and primarily priced in dollar units by Dubai Mercantile Exchange(DME). It is easy to foresee that, in the future, the correlation of the prices of crude oil between INE and DME will become quite remarkable.

The Exchange rate formation mechanism of RMB does not change dramatically during intermedium-term, also its daily floating range is limited into up-and-down 3%. For a long while, the prices that INE offered is actually calculated by using RMB/USD exchange rate times the USD price of the crude oil with same quality level on international market. If the limitation of floating range of exchange rate of RMB has been canceled, INE is defiantly going to adjust their trading rules, either abolish some trading regulations or enlarge some correlated ratios. Otherwise, a large number of non-risk arbitrage opportunities will be created between INE and DME within crude oil pricing and its RMB price.


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