Pricing RMB Policy Risk: Evidence From Onshore and Offshore FX Option Markets

This paper examines how onshore and offshore RMB option markets price potential shifts in China's RMB exchange rate regime. We calibrate a regime‐switching option pricing model to USD/CNY and USD/CNH options to recover daily risk‐neutral parameters summarizing the pricing of regime‐switching risk, including the risk‐neutral switching probability, the size of a possible RMB realignment, and exchange‐rate volatility under a possible new regime. This allows us to quantify and compare policy‐related tail‐risk pricing embedded in option prices over the past decade. The results show that CNH options price larger potential RMB devaluations and higher exchange‐rate volatility under a possible new regime than CNY options, especially during stress periods, whereas CNY options imply higher risk‐neutral switching probabilities. An event study around the introduction of the countercyclical factor further shows that CNY and CNH option‐implied risk‐neutral distributions evolved differently before and after the policy announcement. These findings point to segmented risk‐neutral pricing of RMB policy‐related risk across onshore and offshore option markets.