Research On The Motives And Effects Of Using Foreign Exchange Derivatives In Exchange Risk Management

With the advent of global economic integration, import and export business and the scale of China’s overseas investment and financing business are steadily growing fast, at the same time, the reform of China’s exchange rate regime makes the RMB exchange rate floating range increase, the foreign exchange risk associated with this situation makes foreign exchange risk management not be ignored. However, due to the long-term foreign exchange control policies of China, the majority of non-financial enterprises lacks the experience of foreign exchange risk management, and therefore suffered huge losses for exchange rate volatility in the past years. In this context, the increasing number of listed companies began to take advantage of the interest rate, foreign exchange and other financial derivatives to manage foreign exchange risk, but the effect is different. So, how to apply effective means in China’s foreign exchange risk management becomes a hot topic among academics and theorists. Can the derivative financial instruments which are widely used in the international market help Chinese enterprises to manage foreign exchange risk? What are the factors affecting the listed company to apply foreign exchange derivatives? What is the status of the application of foreign exchange derivatives in China? The article does the related research about using foreign exchange derivatives to manage foreign exchange risk of non-financial corporate.This paper makes theoretical and empirical analysis about the motivation and management effectiveness of using foreign exchange derivatives to manage foreign exchange risk with the related data of2011-2013Main Board A-shares non-financial corporate. And combined with the theory of risk management, the author will make reasonable recommendations about foreign exchange risk management framework designing.The paper is divided into six chapters. The first chapter describes the background and significance of this research, and proposes research methods, the whole idea of the framework and the innovation point. Combined with our country’s institutional background, the second chapter discusses the specific application situation and scope of foreign exchange financial derivatives:firstly, introduce China’s foreign exchange market and foreign exchange derivatives market; secondly, analyze the scale and the kinds used by China’s listed companies and analyze the industries which the listed companies are belong to; lastly, analyze the development of China’s foreign exchange derivatives as the basis of the following theory analysis. The third chapter clarifies the research emphasis of this paper by organizing the relevant literature at home and abroad about using derivative financial instruments in the foreign exchange risk management in the enterprise. Starting with introducing the related theory of foreign exchange risk, the fourth chapter analyses the methods and measures of foreign exchange risk management, deduces the determinants of using foreign exchange derivatives and the path that how foreign exchange derivatives impact on corporate value, thereby puts forward the hypothesis of this paper. Based on the hypotheses deduced in the forth chapter, the fifth chapter designs, conducts and analyzes the results of the empirical test. The sixth chapter draws the conclusion of empirical, and makes reasonable suggestions.The main conclusions of this paper are as follows:(1) a small number of listed companies in China use foreign exchange derivatives and most of them are with single variety. The foreign exchange forward contracts are the. most normal species, while minority enterprise use currency swaps and very few enterprises adopt foreign exchange options. However, with more attention paid to foreign exchange risk in enterprises and the rapid development of foreign exchange market, a steady increase has maintained in the number of the enterprises which participate in foreign exchange derivatives trading and in the volume of the transactions, while the varieties are gradually enriched.(2) The empirical testing shows that the foreign exchange risk exposure of listed companies is a key reason for the use of foreign exchange derivatives to avoid foreign exchange risk, while utility maximization is the main motivation for managers of listed companies to choose foreign exchange derivatives for risk aversion. And we do not confirm the factors to make the decision in the Western theory of managing risks, however, the motivation to benefit managers themselves does.(3) The correlation coefficient between foreign exchange derivatives and corporate value of listed companies in China is positive, but the degree of correlation is weak and not significant. Although the results did not reach the expected level, but still has positive trend, indicating that foreign exchange derivatives has the ability to enhance corporate value. Combined with the reasons why China’s listed companies use foreign exchange derivatives, we know that there is a certain degree of deviation when using this tool; therefore the means did not achieve the desired effect of managing risks.Based on the related literature at home and abroad, combining with the key points of this article, the author expects to make some innovation and contribution from the following aspects:(1) Adjust part of the explanation variable in the empirical research. Before doing the correlation research between foreign exchange derivatives and the value of the company, the paper does the research on the motives of listed companies to use foreign exchange derivatives. The former research can provide explanation for the latter, in turn, the latter one can confirm that the former analysis. The two researches mutually penetrate, and enrich the theory of foreign exchange risk management together.(2) Use2011-2013listed companies with foreign exchange exposure as the paired samples to do the empirical analysis so as to eliminate the heterogeneity between samples. Considering the endogenous at the same time, when building the motivation theory model, the paper makes use of lag variable which can more accurately find the motivations of the listed company to use foreign exchange derivatives.