Hong Kong Dollar Becomes Yuan Convertibility Bet: China Credit

One-year implied volatility, a measure of exchange rate swings used to price options, climbed to 2.23 percent from 0.55 percent a year ago. The jump is the biggest in Asia even as fluctuations anticipated for the Hong Kong dollar are smaller than for the yuan, whose volatility rose to 4.8 percent from 3.97 percent, and for the South Korean won, which climbed to 18.5 percent from 13.5 percent.

While the Hong Kong Monetary Authority reiterated Sept. 15 that it has "no plan or intention" to end the 28-year peg to the greenback, the yuan is up 30 percent against the dollar since the start of 1999, the fourth-best performance of 25 emerging-market currencies tracked by Bloomberg. China's one- year government bond yields 3.8 percentage points more than similar-maturity Hong Kong debt, the most in at least four years. William Ackman, founder of hedge fund Pershing Square Capital Management LLP., said last week he's using options to bet that Hong Kong will switch its currency link to the yuan.

"We believe the Hong Kong dollar peg will eventually go because of the ongoing appreciation of the Chinese yuan against the U.S. dollar," said Rupert Watson, the Southampton-based head of asset allocation at Skandia Investment Group, which oversees $15 billion. "I would have thought it will come around the same time the Chinese currency moves toward full convertibility, somewhere around 2015."