International Companies In China's Foreign Exchange Risk Management Study

With the deepening of the economic and financial reform, especially after its formal entry into WTO, China is being connected to the world economy closer and closer. More and more domestic enterprises are facing with international competition. Exchange rate risk management has now become an inevitable question to international enterprises. It is urgent to study the methods used by foreign multinational companies in controlling its exchange rate risk and to learn how to apply these methods in the domestic environment. This article aims at seeking available and suitable methods to manage the exchange rate risk confronting China's international business company effectively. It is based on the basic theory of international corporate finance and exchange rate forecasting. Measure method is emphasized and various exchange rate risk managing techniques are discussed according to accessible conditions. This article contains 4 chapters. Chapter1: Outline of exchange rate risk management of international enterprise This chapter begins with the definition of exchange rate risk, then, the classification of exchange rate risk is introduced. After that, an explanation of the concept of "international enterprise" is given and the characteristics of exchange rate risk confronting international enterprises are discussed. Chapter2: How do international enterprises manage exchange rate risk An effective risk management system includes recognizing, measuring and managing different kinds of risks we are confronted with. We recommend to use "risk tree" to recognize and classify various exchange rate risks for international enterprises. Then, we discuss which kind of management strategies should different businesses choose. Measurement is of great significance to managing exchange rate risk. Two cases are discussed separately in detail to explain how to measure transaction exposure and economic exposure respectively. Also, we give some comments on the use of the new measure method VAR at the end of this chapter and point out that VAR should not be the predominant choice in Chinese enterprises' risk management. Finally several techniques universally used today in managing exchange rate risks are introduced. However, we mainly focus on how to select the best way to manage different exchange rate risk at the accessible conditions for China mainland based international enterprises. Chapter3: Problems existing in the management of exchange rate risk in China The main problems can be analyzed in two aspects : the one concerning outside circumstances and another one concerning factors existing inside companies. These problems are unique as far as Chinese enterprises are concerned, and can give rise to great difficulties to the management of exchange rate risk for Chinese enterprises. They include regime, development of foreign exchange market, supply of talents, and so on. Chapter4: Suggestions to the risk management of Chinese enterprises In the last chapter, Nokia telecom's experiences in managing exchange rate risk are analyzed and then we give some suggestions to solving these problems confronting Chinese enterprises in managing exchange rate risks.