One Currency, Two Forward Prices: The Onshore-Offshore Renminbi Puzzle

Battle Count: 78

Highly relevant for FX desk trading, cross-currency basis trading, and CNH/CNY forward arbitrage strategies. The model provides a structural interpretation of the persistent ~4.4% annualized forward wedge, enabling traders to decompose it into stress probability and severity components. Directly applicable to: (1) pricing and hedging CNH forwards, (2) cross-venue basis trading, (3) liquidity risk management in offshore RMB markets, (4) understanding when forward deviations signal stress. However, the model is primarily theoretical/equilibrium-based rather than providing direct trading signals or ML-based predictions.

Very high complexity. Requires solving coupled FBSDE systems with quadratic generators, Riccati equations, and jump-diffusion processes. The no-risk-aversion case has semi-explicit solutions but still requires numerical integration of stochastic ODEs and BSDEs. The small-risk-aversion extension requires fixed-point iteration with contraction mapping arguments. Calibration involves solving an inverse problem mapping forward differentials to (lambda, cH) pairs. Implementation would require advanced numerical methods for FBSDEs (e.g., deep BSDE solvers, Picard iteration) and careful handling of the Poisson jump component.

The paper provides full mathematical derivations, explicit FBSDE systems, Riccati representations, and calibration tables (Table 2). However, no code or data repository is mentioned. The empirical data (CNY/CNH spot and forward rates 2010-2021) would need to be sourced independently. The theoretical framework is fully specified with proofs, making the analytical results reproducible, but numerical calibration details (parameter choices for m, cY, cH) are partially specified.