Options On Chinese Currency ETFs Enhance Returns and Hedge Against A Bubble (CNY, CYB)

Jonathan Yates: Chinese currency exchange-traded funds such as Market Vectors Chinese Renminbi (NYSEARCA: CNY) and Wisdom Tree Dreyfus Chinese Yuan (NYSEARCA: CYB) are excellent investment vehicles to profit from a fundamental misconception in foreign currency valuations.

It is widely accepted that a nation does not want a strong currency as it raises the price of exports. This much is true. But for everyone but the United States, a strong currency also lowers the cost of imports.

As China is the world’s largest consumer of energy, copper, iron ore and other commodities — many of which must be imported — a stronger yuan greatly reduces the costs of foreign goods and services. For an inflation-wary Beijing, this is a good thing.

In addition, a stronger currency makes foreign companies cheaper to buy, too. As reported in a recent Wall Street Journal article, China is on a massive international business investment spree supercharged by the higher value of the yuan.

A recent article in The New York Times by Kirk Semple, “As Investors, Chinese Turn to New York,” reported that more than $1 billion in real estate in Manhattan was acquired by the Chinese last year. That is another good thing — this time, for the New York housing market — that, again, results from the yuan’s rise.

Throw in the looming possibility that Beijing will eventually let the yuan rise to its natural value — perhaps 30% above where it trades today — and the Wisdom Tree Dreyfus Chinese Yuan exchange-traded fund seems loaded with upside.

In this kind of environment, CYB making it ideal for writing covered call options and hedging with put options. Writing covered call options will allow for individual investors to profit from the diversity of investing in foreign currency exchange-traded funds.

Put options are a low-cost hedge for protecting against any drops in value of the yuan if the purported Chinese bubble actuates.

Written By Jonathan Yates From Emerging Money

Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.

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