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The West Texas Intermediate (WTI) futures contract has ranged from \$6 to \$20 in the last 48 hours. The May Shanghai International futures contract is 205 Yuan (CNY). At 7 CNY per USD, that comes out to about \$29 per barrel, which is higher than the WTI futures contract.

In this case, why would a supplier choose a USD-denominated contract over a CNY-denominated contract (assuming they would)?

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  • $\begingroup$ Details, please. Physical delivery versus cash settlement, for example. $\endgroup$ – Rodrigo de Azevedo Apr 23 at 5:45
  • $\begingroup$ How easy is it to convert CNY to USD in Mainland China? $\endgroup$ – Rodrigo de Azevedo Apr 23 at 6:35
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This is because for the price comparison it is not relevant what the exchange rate is now but what it will be at the time of delivery. The difference between these corresponds to different expectations of what the USD-Yuan exchange rate will be in the future.

For example consider oil supplier that is incorporated in the US and eventially needs to convert the money to USD to pay its employees/dividends/taxes. Moreover, lets suppose that the future contract specifies that the 1 barrel of oil has to be delivered at the end of next month at the 205 yuan. Well if during the month the exchange rate between USD and yuan changes to 1\$ = 15 yuan the 205 yuan you are going to receive next month are now worth only 13.66\$. Hence in such scenario you would be worse off if you would make the future to be denominated in yuan as opposed to USD (assuming \$20 price). Due to the law of one price the two futures should be priced equivalently which implies that people think that USD will most likely become stronger at the time of delivery relative to yuan.

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