The Management Of Exchange Risk And It's Applying In China

After exchange system reform in 2005, the exchange rate fluctuation of RMB/US dollar has been enlarged, the exchange risk of the enterprises was more obvious, and the research of exchange risk management has been important to theory and practice.The research and practice of enterprises in developed countries guarding against the exchange risk was due to last century 70's Braden forest system's collapse while the floating exchange rate began to become the mainstream. Now, they have developed a set of principle and tool for the management of exchange risk, mainly concentrating in following aspects:First, should the enterprises manage the exchange risk? In earlier literatures which took more focus on practices, they generally supposed enterprises should manage the financial risk positively. But to the M-M theorem:"in an effective market, the enterprise cannot enhance shareholder's value through the financial control", the management of exchange risk is completely unnecessary. The reason supporting exchange risk management mainly comes from that where the condition of the M-M theorem can not be hold in the reality such as non-tax, non-transaction expense and information complete perfect. To their research, the exchange risk management can reduce the tax burden when the tax rate bulge degree is bigger; the exchange control may also reduce the possibility of bankrupt, hedging the risk may reduce the probability of encountering the financial difficulty, so it can reduce the enterprise's value fluctuation; Management of exchange risk is also a effective method to reduce the act cost of superintendent by the debtor.Second, how should an enterprise identify and measure the exchange risk? Generally, the exchange risk can been divide to translation expoure, transaction exposure and economic exposure. The translation exposure refers that in the future determined date, the uncertainty of net accounting position in the local currency. It usually equate in the balance sheet item, its accounting remittance profit and loss remain unrealized. The transaction risk refers to the uncertainty of open position's local currency value priced by the foreign currency (future current capacity priced by foreign currency) related to the known transaction. It frequently refers to the nominal quantity in an accounting period's recording that may be regarded as the remittance profit and loss on payment, and its weighing also relies on accounting standard. The economic risk attempts to make up the first two conception of exchange exposure which neglect the foundation and the long-term influence of exchange rate. It is measured by the enterprise's cash flow influenced by exchange rate change, and then it is defined as the sensitive of enterprise value to the exchange rate fluctuation. The generalized definition of economic risk has contained the first two risks based on the accounting standard. The above risks'origin can be expressed in the chart below.Third, how can an enterprise manage the foreign exchange risk? Now internal management tools such as net position processing, the advanced payment, ahead of time or deferred payment, long-term structure adjustment, price adjustment, the management of assets and liabilities and so on was mainly used. as well as the hedge tools such as foreign currency forward contract, the futures, swap which based on forward contract and the tools based on option contract. Each kind of tool has its own characteristic, needs to choose according to enterprise's own situation. Then we use this framework and technology to analyze the exchange risk problem to the enterprises in China. We discovered:First, after the exchange system reform in 2005 the exchange risk which our country faced is becoming bigger. On the one hand, RMB exchange rate fluctuation is expanding gradually, from the exchange rate reforms began to the end of March, 2007, the accumulative revaluation surpasses 6%, the fluctuation in one date is also close to the upper limits of 3/1000; On the other hand, China's foreign economical activity scale expands continuously , the total volume of trade is 65% of the GDP, the foreign investment scale also expands day by day, the net foreign currency assets of domestic financial institutions expanded day by day. The exchange risk has become a new market risk which Chinese enterprises face.Second, the overall trend of the RMB also tends to be in revaluation. The big balance of trade surplus decides that RMB exchange rate revaluation also has a medium and long-term revaluation process, its margin of fluctuation will also increase gradually. On the short-term tendency of RMB/US dollar, its daily fluctuation has the nature which walks randomly; the general forecast models are very difficult to have the good showing. If we take the overseas forward non-transaction (NDF) exchange rate trends in the forecast, it has certain help to the correct assurance of immediate exchange rate trends. Knowing the exchange rate trends is the foundation when enterprises weigh the exchange rate risk.Third, China's economy exist systematic exchange exposure. According to the new accounting standard, regarding the translation risk we may adopt the single exchange rate method, which takes the net foreign exchange assets to be the exposed part; Regarding to the transaction risk, we may use the currency and the non-currency methods, only regarding the foreign currency net assets as the foreign exchange open position, to carry on analysis on sensitive or value at risk (VAR) to analyze its risk size. Regarding to the economic risk, here I introduced and has used the revised Adler-Dumas model. If take China's listed companies as the sample, after regression we may discover that China economy exist systematic exchange risk. After the exchange rate reforms, the sensitivity of A shares'investment return to the RMB/US dollar exchange rate change is significant. The steel and iron, the electric power, the chemical fiber, the electric appliance, the transportation distribution, the building materials, the medicine, the transportation facility, the textile clothing, the foreign trade, chemical, the agriculture, and forestry, the animal husbandry, the fishing, the electronic information, the signal communication and so on industries exist obvious industry risks exposure. And some enterprises'investment returns also have the significant correlation to the RMB/US dollar exchange rate fluctuation. Yet, restrained by the short time series of data collecting from foreign exchange reforms to now, the RMB/US dollar exchange rate fluctuation overall is also small. This measurement result should be regarded as the qualitative judgment, and still have less quantity persuasive power.Fourth, Chinese Enterprises have already taken some measures to carry on the exchange rate risk management and control. Including, choosing the foreign position which has few preserved settlement of foreign exchange as far as possible to manage of risk, enhancing the export product prices (for example textile price in 2006 rises 10%) to make up the exchange rate fluctuation loss; using import and export negotiation, forfeiting and so on financing of trades tools to avoid foreign exchange risks; using the financial tools to make up the loses of foreign exchange open position and the loses brought by the higher part of the foreign currency fund average returns ratio than the RMB fund average returns ratio, and using financial derivation products such as the forward sale and purchase of foreign exchange, the option and swap and so on to hedge the exchange risk. Yet, because certainly enterprise's consciousness insufficiency as well as foreign exchange market's tool lacking, China's business exchange risk management practice are in a low level.Fifth, when enterprises use the forward sale and purchase of foreign exchange to hedge the exchange rate exposure, the optimal hedge rate is less than 1, is 0.76-0.88, if use the 1 as the hedge rate ,it will be some basic risk.Above the research, we suggest, the forward Chinese enterprise should improve the management work of exchange risk. On the one hand, the enterprises must strengthen consciousness and raise the level, strengthen the exchange risk recognition and the weight, and carry on the management and the control using the available tools to it, to meet to the larger scale exchange rate fluctuation risk; On the other hand, the government should develop the foreign exchange market positively, encourages the financial innovation, helps the market development new risk-guarding tools. This article's main task and the contribution manifests in following several aspects:First, I have comprehensively and systematically given a summary to former literature research, evaluated some viewpoints, cleared off these researches'logic and it's frame;Second, I make the attempt to the exchange rate trends after exchange reforms using econometrics empirical evidence. And I analyze the relationship between external NDF rate and the spot exchange rate of RMB.Third, I summarize the methods on measure China's foreign exchange risk。I analyze the sensitivity of China's economy to RMB/US dollar after exchange rate reforms using the listed companies'data.Fourth, I have carried on the analysis to China's financial and non-finance enterprise's exchange management practice, and calculate the optimal hedge rate to the forward buy and sale of exchange.