Rmb Exchange Rate Reform And The Choice Of Hedging Instruments

In 2005, July the 21st, The People's bank of China carried out the reform of the Renminbi exchange rate, and there are two aspects concerned with this reform. In the first place, the formation mechanism of the exchange rate is perfected, that is the exchange rate of Renminbi no longer pegs down the US dollar singly, but floats under management according to the supply and demand in the currency market as well as the"currency basket", which is composed of several primary currencies. In the second place, the exchange rate of Renminbi is adjusted reasonably. And that is the exchange rate of Renminbi made an appreciation of 2% to the US dollar, thus, 1 dollar is converted to Renminbi as 8.11 yuan. This reform would be the first step for us to transform our exchange rate system from fixed exchange rate to float exchange rate. However, accompanying the reform, a series of new problems are aroused, among which the increase of exchange rate risk is quite prominent. Consequently, the development of financial derivatives especially the foreign exchange hedging tools is brought to notice. Considering the status quo, not only does this paper analyze the implications of the exchange rate reform using the overshooting model, but also it discusses the development of our domestic foreign exchange market and the choices of hedging tools available to the individuals in the market. What is more is that the reform of the exchange rate and the innovation of hedging tools can largely promote the development of our domestic financial market, and such positive effect is interactive, which means that the development of the domestic financial market can also benefit the other two.The first chapter makes a commentary on the reform. To begin with, there are varieties of types of exchange rate systems; consequently the main...