The Study On Exchange Rate Exposure And The Use Of Foreign Currency Derivatives In Chinese Listed Firms

Since July 2005,when China initiated a managed floating exchange rate regime,the volatility of RMB exchange rate has been increasing.With the deepening of China's economic opening up,the foreign exchange exposure faced by Chinese firms are particularly prominent.How to improve the foreign exchange risk management ability is an important issue for the managers,researchers and policy makers.Foreign currency derivatives are important instruments for managing foreign exchange risk.More and more Chinese firms start using foreign exchange derivatives,but what are the motives and results?This paper tends to study the foreign exchange exposure of Chinese firms and the use of foreign currency derivatives,aiming to answer the following three questions:how is the foreign exchange exposure of Chinese firms?What factors may affect the use of foreign currency derivatives?Can foreign currency derivatives effectively reduce foreign exchange exposure of Chinese firms?Targeting at the non-financial firms listed in Shanghai and Shenzhen stock exchange for the period 2008-2015,this paper firstly measures the foreign exchange exposure of these listed firms.Then,it explores what factors can affect the use of foreign currency derivatives.Finally,it investigates whether foreign currency derivatives effectively reduce their foreign exchange exposure.The results suggest that 12.35%of Chinese firms are significantly exposure to exchange rate movements,which is much higher than the rate found in relevant researches on developed markets.The use of foreign exchange derivatives significantly reduces the level of foreign exchange exposure,indicating that,in general,foreign currency derivatives has been effectively used by Chinese firms to hedge risk.Exchange rate regime can significantly affect the use of derivatives.Specifically,firms tend to use more foreign currency derivatives under pegged regimes.But the impacts of exchange rate regime on the risk-reducing effects of derivatives are statistically insignificant.Based on these findings,this paper put forward some policy suggestions from the perspectives of promoting the development of foreign currency derivatives market and regularize the use of foreign currency derivatives.