Research On Financial Derivatives And Firms'Foreign Exchange Exposure Control

In recent years, with the development of world economy integration, scales of our non-financial firms' foreign direct investment and financing show rapid and robust growth. Meanwhile, both the changeable international foreign exchange market and the increase of RMB exchange rate change will definitely impose unprecedented foreign exchange exposure on our large and medium scale firms involving international trade and economic cooperation. In view of the great loss incurred by firms due to unsuitable management of the foreign exchange exposure, study on how to control firms' exchange rate exposure based on application of effective technology and instrument, will be highly valuable in the academic sense and be of practical meaning.The thesis centers around controlling firms' exchange rate risk by means of financial derivatives trade. Firstly, the exchange rate exposure imposed on firms is discussed in terms of theoretical meaning, classification and appurtenant measurement methods; secondly, controlling exchange rate exposure through foreign exchange derivatives (incl. currency futures, forward, options and swaps) is illustrated by means of case analysis which involves several multinational corporations home and abroad. In particular, the author creatively applies the foreign option theory into the foreign exchange exposure control during international bidding period, followed by further sufficient discussion on its feasibility. Determination of optimal hedge ratio is comparatively analyzed, several important and meaningful models are discussed in relation to optimal hedge ratio applied in the foreign futures such as minimum variance model, optimal mean-variance model, expected utility maximum model; theoretic exploration has also been made concerning Delta dynamic hedging strategy in the foreign currency option strategy.In view of the potential and great risks accompanying financial derivatives trade and horrible catastrophes resulted from abuse of derivatives trade, identification, measurement of the related risks and their appurtenant precautionary measures are discussed in the third part of the thesis. Cases of LTCM, Barings and etc. are analyzed in depth, and related theoretic summarization in respect of risk management is made;Finally, the author makes a conclusion to support the efficient use of financial derivatives in firms' control of foreign exchange exposure, and put forth a series of suggestions for firms' active and careful participation in financial derivatives trade, concerned financial and supervisory authorities are encouraged to forcefully develop the derivatives trade market, so that the derivatives will serve the purpose of risk control for firms, create opportunities for firms to make adequate profits so as to enhance our firms' international competitive ability.