Application Of The Foreign Exchange Risk Management, Derivatives And Foreign Exchange Derivatives Market Development

The frequent fluctuation of foreign exchange rate makes multinational companies confront huge foreign exchange risk and affects unfavorably the value of the foreign exchange reserve. Currently, financial derivatives have been used broadly to protect companies against losses from the fluctuation of foreign exchange rate abroad, but in China financial derivatives market is undeveloped and the managers of companies think little of the fluctuation of foreign exchange rate, which results in big economic damage to domestic companies. From this prospective, the paper will explore how to protect against losses from fluctuation of foreign exchange rate and how to develop financial derivatives market in China. The paper analyzes how multinational companies use financial derivatives to manage foreign exchange risk through cases study and stresses that the financial derivatives are a kind of two-side sword and the multinational companies should pay more attention to the risks resulting from the financial derivatives by the case of Balin Bank. In addition, the paper discusses the possibility of speculation on RMB through the case that international speculators speculate on Baht, currency of Thailand. Meanwhile, the paper contrasts the advantages and disadvantages of different financial derivatives and makes a summary of adaptability of different derivatives. Based on some case study, the paper analyzes the current situation and existing problems of foreign exchange market and concludes that China should develop foreign exchange derivatives market to provide a favorable outer environment for multinational companies to manage foreign exchange risks. China should build firstly the forward market of foreign exchange and gradually develop other derivatives market of foreign exchange based on the development of dealers system in foreign exchange market.