The Methods Of Chinese Companies To Deal With Currency Mismatch

Since July 21,2005, The People's Bank of China has adjusted the Policies of RMB Exchange Rate. China would adopt a managed float exchange rate mechanism, under which the RMB would no longer be tightly pegged to US dollars. The RMB exchange rate would be determined in reference to a basket of currencies on the basis of market supply and demand. On the date of July 21, 2005, the exchange rate of RMB was set at 8.11 to the US dollar, on approximately 2 percent appreciation of the RMB.The more fluctuating RMB exchange rate will challenge the risk management of the domestic enterprises which has been used to the environments that the RMB exchange rate was tightly pegged to US dollar. This paper will analyze the situations and challenges which will be faced by the domestic enterprises. Then this paper dissertates the ways to deal with these risks.This paper focuses on the management of foreign exchange risk of Chinese companies and those operating internationally in particular. It begins with the explanation of currency mismatch. In the next part of this thesis, the author introduces the definitions of foreign exchange risk and summarizes on procedures and steps in the foreign exchange risk management. Chinese companies should be fully aware of the necessity of foreign exchange risk management and should build up an efficient foreign exchange risk management system, in order to be more competent in avoiding risk and reducing costs. In the last part, the author will analyze the foreign exchange risk of car trade, and try to find a way to deal with the risk in this trade.