Evaluation And Analysys Of Firms' Foreign Exchange Risk Management Methods' Hedging Effectiveness

With the implementation of the reform of the mechanism for setting the Renminbi exchange rate, the fluctuating range of the Renminbi exchange rate has expanded a lot. At the same time, firms in China have started to face more serious foreign exchange risks. According to the performance of firms in China, more than 80% of firms, which are influenced by the exchange rate, have been negatively impacted by the fluctuation of the Renminbi exchange rate. What's worse, many firms have not realized the seriousness of the foreign exchange risk. Even if some firms notice the importance of foreign exchange risk management, the restrictions on knowledge of hedging methods limit the firms'hedging effect. So it is very important to make sure the firms master their foreign exchange risk condition and the utility of different hedging methods in different conditions.In this article, we classify firms in China into ten kinds of industry according to the criteria of Global Industry Classification Standard. The analyses below are based on different industries. Firstly, we analyze the current situation of foreign exchange risk and the implementation of hedging methods in firms of China. Then we build a model of assessing the efficiency of firms'hedging foreign exchange risk and do some empirical analyses using the statistics of Energy Industry. The results of the empirical analyses demonstrate that the model can reflect the efficiency of firm's hedging effectively. In the Energy Industry, the efficiency of hedging reduces with the increase of the foreign exchange exposure, and the differences of the efficiency of hedging between firms lessen as well.After assessing the efficiency of hedging, we build a model to estimate the contribution rate of different hedging methods in different foreign exchange exposure conditions. We estimate the efficiency of the model by empirical analyzing as well. The empirical analyses results prove the model's validity. Based on the statistics of Energy Industry, we find that operational hedges contribute more to the hedging effects than financial hedges. However, with the increase of the foreign exchange exposure, the contribution rate of operational hedges decreases while that of financial hedges increases. In the low foreign exchange exposure condition, the utility of derivatives has some negative impact on the hedging effect. However, in the middle and high exchange exposure condition, the influence becomes positive. The foreign debt has some negative influence on the hedging effect as well. On the other hand, the foreign sales and foreign direct investment can improve the hedging effect. The firms' size and ROA can help improve the effect as well, which means the bigger and the better potential performance of the firms, the better hedging effectiveness they will have.