A Study Of Cross-Hedging On RMB Exchange Rate Risk

China has initiated a series of reforms on exchange rate mechanism since July21,2005.As the consequence of the reforms，the volatility of the RMB exchange rate has beensignificantly intensified and the appreciation of RMB has been noticeably accelerated, whichincreased the hedging demand of the transnational companies and financial institutes.Unfortunately, the present domestic exchange derivatives are far from the enterprises’ needseither in designing or in hedging. Moreover, the domestic enterprises are not allowed to tradethe NDFs and CME RMB futures according to the regulations of the State Administration ofForeign Exchange. Currency cross hedging is a probable way to solve this problem.The hedging efficiency of the traditional currency cross hedging is generally inefficientand unstable, because it ignored the difference between the cross hedging and the directhedging. This article will discuss the difference on three respects, the correlation, the basisrisk and the hedging timing. Based on the triangle parity, introducing the VaR method undert-distribution and estimated by the ECM-VCC-MGARCH model, this article will design acurrency cross hedging model using only one relative currency futures to hedge two spotforeign exchange rate risks at the same time. This model is supposed to measure thenon-linear hedging risks more accurately and decrease the risks more effectively. Theempirical results show that a single futures to two spot exchanges cross hedging based onVaR under t-distribution is an available way to reduce RMB exchange rate risk.