SEOUL - First currency option deal between currencies of China and South Korea was reached on Tuesday by a South Korean commercial bank to help a local manufacturer hedge against volatility of the won/yuan exchange rate, the bank said Wednesday.

Korea Exchange Bank, the country's fifth-largest bank, reached the won/yuan currency option deal worth 6 million yuan ($980,000) with an unidentified South Korean auto parts maker, which exports products mainly to China.

The currency option is a contract that provides the right, not obligation, to buy or sell a currency at a set price within a set period. The option buyer can hedge against volatile foreign-exchange movement.

The contract was anticipated to help the manufacturer reduce hedging costs as the South Korean exporter needs not to convert the yuan proceeds into the US dollar to swap the dollar for the local currency by using the option linked to the won/yuan direct trading.

South Korea's central bank picked seven local banks and five Seoul branches of foreign banks Monday as market makers for the direct trading between the won and the yuan to boost transactions in the won/yuan market that is scheduled to be launched in December.

The Korean Exchange Bank, which was picked as one of the market makers, said that derivatives trading related with the Chinese yuan is expected to continue to grow after the launch of the won/yuan market.

S. Korea picks 12 banks for won-yuan direct trading	Beijing, Seoul agree to directly trade currencies