Research On Foreign Exchange Risk Exposure Of Multinational Corporations In China

Chinese exchange rate system has been constantly improving since 2005 and RMB exchange rate has gradually changed from one-way fluctuation to two-way fluctuation.As the accelerated fluctuation of exchange rate,it is highly significant for multinational corporations with frequent international trade business to manage foreign exchange risk beacause they have to face foreign exchange risk inevitably.Exchange rate fluctuation affect not only the foreign currency income and cost of transnational corporations,but also the value of them.Therefore,there is no doubt that studying how to quantify foreign exchange risk exposure for Chinese transnational corporations is quite helpful,as they can adopt corresponding hedging tools to manage foreign exchange risk.Exchange rate exposures can be quantified by Cash Flow method and Capital Market method.Early studies from the perspective of corporate finance,the sensitivity of the company's operating cash flow to exchange rate changes is called the foreign exchange risk exposure under the cash flow method.However,because the cash flow method requires a large amount of internal information,and internal transaction information is usually not announced,the cash flow method is difficult to be widely used.Adler and Dumas(1984)based on the company's future cash flow discounted value is the company's present value assumptions,the company value as the company's cash flow proxy variable,using the listed company's stock return rate to represent the company's value,the company The sensitivity of stock returns to exchange rate movements is called foreign exchange risk exposure under the capital market approach.Since the company's stock return rate is an estimate of the company's corporate value,the real exchange rate exposure estimated by the capital market method is the actual foreign exchange risk exposure for multinational companies using foreign exchange risk hedging instruments.As Bodnar and Marston(2002),Bartram(2010)pointed out that when multinational corporations conduct trade business,the overseas income and overseas expenditure of multinational corporations will be affected to some extent by the exchange rate,while the foreignexchange risk exposure coefficient only has three factors.Relevant: overseas income,overseas costs,company profits.Therefore,when quantifying the exposure of foreign exchange risk of a multinational company,it should also consider the exposure level of the nominal exchange rate exposure before the foreign exchange risk hedging instrument is used by the multinational company.This paper summarizes the relevant literatures on foreign exchange risk exposure and foreign exchange risk management.Our sample contains 370 Chinese multinational corporations from different industries of A-share from 2015 to 2017.Considering the specific problem in China,we use the overseas revenue cost model to estimate the nominal exchange rate exposure(ERA)for multinational corporations.which is measured without using hedging tools.On the other hand,the Fama four-factor model is used to estimate the real exchange rate exposure(ERB)of multinational corporations,which is measured after using hedging tools.Defining the differences of these two methods as EDIF.EDIF measures the effectiveness of the implementation of hedging methods.Taking EDIF as the explanatory variable,this paper constructs a multivariate regression model to discuss the impact of different types of hedging tools used by multinational corporations on foreign exchange risk exposure by EDIF and its level of influence.We also discuss the impact of corporate financial characteristics on foreign exchange risk management of multinational corporations.Finally,this paper concludes that exchange rate changes have a significant impact on 370 Chinese multinational corporations value of multinational corporations.According to Fama's four-factor model,103 multinational corporations have foreign exchange exposure.There are differences in the level of influence and direction of exposure among multinational corporations from different industries in China.The most important proportion for manufacturing MNCs' exposure is ERB,followed by construction MNCs including wholesale and retail.From the perspective of foreign exchange risk exposure,ERA of nominal exchange rate exposure obtained by overseas income cost model is positive;ERB of real exchange rate exposure obtained by Fama four-factor model is positive and negative.Additonally,firm value of 49 transnational corporations is significantly influenced by foreign exchange risk,while54 multinational corporations is significantly influenced by foreign exchange risk.Multinational corporations can effectively reduce foreign exchange risk by using operational hedging tools.Debt solvency is positively correlated with EDIF,which indicates that the multinational corporations with higher the asset-liability ratio is more likely affected by foreign exchange risk.They should use more hedging tools to reduce the foreign exchange risk and increase the value of EDIF,which make hedging effect more obvious;profitability is negatively correlated with EDIF,which indicates that multinational corporations are affected by foreign exchange risk.If the corporations are more profitable,more balanced the proportion of its foreign exchange earnings and foreign exchange costs,and the lower its foreign exchange exposure,they use less hedging tools to manage foreign exchange risk,which reducing the EDIF value of the foreign exchange risk exposure difference.