Foreign Exchange Risk Management In Corporate Financial Risk

Under the Background of Fully Opening-up, exchange rate risk become the primary international financial risk confronting China, as the foreign exchange rate becomes much more volatile than before. Excessive foreign exchange rate fluctuation will result in a number of unfavorable impacts on international trade, international investment, and world economic development. With the realization of complete free convertibility of RMB and establishment of a floating exchange rate system as the ultimate goal of China’s exchange regime reform, China put forward the reform of the formation mechanism of RMB exchange rate on21st, July,2005, releasing the long-term cumulated or hidden exchange rate risk. In July,2005, China began to implement a regulated and managed floating exchange rate system based on market supply and demand, with reference to a basket of currencies exchange rate system, with RMB no longer stick to USD as a single currency, forming a more flexible RMB exchange rate mechanism. Since then, the RMB to USD exchange rate continued to rise from8.18in July,2005, to6.97in May,2008, with the cumulated increase rate reaching15%. In May,2008, with the aim of increasing the flexibility of the exchange rate, China further improved the formation mechanism of RMB exchange rate, and as a result, the appreciation rate of RMB slightly deceased, but still maintained a strong growth momentum. By the end of Mar,2011, the RMB to USD exchange rate has again grown5.7%in cumulative terms. The increase of RMB exchange rate flexibility and fluctuation range has brought rather huge challenge to the development of China’s enterprises, and export-oriented enterprises in particular. Therefore, it is of vital importance to for export-oriented enterprises to correctly analyze and predict foreign exchange rate fluctuation so as to avoid foreign exchange rate risk.So far, most domestic enterprises adopt such nonfinancial methods as alteration of foreign exchange settlement mode, currency, and price to avoid foreign exchange rate risk, while utilization of financial instruments and in particular derivatives on international market is already quite mature. It is feasible and effective for enterprises to use financial derivatives to guard against foreign exchange rate risk, and thus it boasts capacious development space, and indicates the trend of foreign exchange rate risk management by global export-oriented enterprises. This paper mainly focuses on how OMEY, an export-oriented enterprise, rely on financial derivative instruments to manage foreign exchange rate risk, meanwhile this paper also establishes a model to analyze the trend of RMB against euro exchange rate, which will be beneficial for OMEY to avoid exchange rate risk in the following ways:provide guidance for the company to establish a mechanism of controlling foreign exchange rate risk, avoid the risk of turning the financial department into a profit center, effectively cut down the procurement cost, so as to improve the operating efficiency. This paper uses financial derivative instruments, financial engineering theory, methodology and techniques to guard against foreign exchange rate risk, and integrates the practical experience of OMEY in its foreign exchange rate risk management. During the research, this paper pays attention to the combination of quantatitive analysis and qualitative analysis and. Based on the theories, this paper starts from the export-oriented activities of the enterprises, takes into consideration the available financial products provided by the banks, and conducts a research on the use of financial instruments in practical risk management from the perspective OMEY, an export-oriented enterprise.