The Impact Of COVID-19 On Foreign Exchange Risk Management Of Multinational Companies

The formation mechanism of RMB exchange rate is influenced by internationalization.Especially since the "exchange rate reform" on August 11,2015,the fluctuation range of RMB exchange rate has been increasing continuously.Its expectation is not one-way change before,but two-way fluctuation.Transnational corporations are in the continuous global economic integration,and they will face great foreign exchange risks when engaged in overseas business.At present,as a major public health emergency,COVID-19 has had a severe impact on the global economy and the RMB exchange rate.As the epidemic lasts for a long time,its impact on China’s foreign exchange market will also last for a long time,which will produce more drag on China’s economic growth,affect investors’ expectations,increase volatility in the foreign exchange market,and further increase the risks and challenges of domestic multinational enterprises.For domestic multinational enterprises,it is of great importance for their operation and development to do a good job in exchange rate risk management,make good use of foreign exchange derivatives,lock financial costs and smooth cash flow.This paper focuses on the application of foreign exchange derivatives to manage foreign exchange risks in the face of foreign exchange fluctuations.Based on the management characteristics of transnational corporations,this paper takes the risk of foreign exchange and the application theory of foreign exchange derivatives as the foundation.First,by studying the current situation of the foreign exchange market,the impact mechanism of exchange rate fluctuations on the use of foreign exchange derivatives by multinational companies,and the impact effect of the COVID-19 pandemic on the use of foreign exchange derivatives for foreign exchange risk management,and using such theoretical hypotheses as economies of scale,financial distress,liquidity,growth opportunities and risk exposure,This paper analyzes and predicts the relationship between the decision of multinational corporation using foreign exchange financial derivatives for risk management and the change of related variables.Secondly,the differences in factors affecting the use of foreign exchange derivatives by multinational companies in foreign exchange risk management under the background of COVID-19 are discussed according to different industries and scales.In this paper,111 multinational companies listed before 2017 were selected for analysis.Semi-annual data were used to make a comparative analysis of the three years before the COVID-19 outbreak and during the COVID-19 outbreak.From the perspective of enterprises’ risk avoidance,this paper discusses micro-factors that influence enterprises’ use of foreign exchange derivatives to hedge and manage foreign exchange risks,and explores how the COVID-19 pandemic impacts multinational companies’ use of foreign exchange derivatives to manage foreign exchange risks.The following conclusions were drawn through the mixed regression of the segments before and after the outbreak of COVID-19,adding the impact of COVID-19 and the interaction terms,and the heterogeneity analysis:First of all,before the outbreak of COVID-19,the factors affecting the use of foreign exchange derivatives for foreign exchange risk management of multinational corporations were only enterprise size,overseas business volume and growth status,while during the outbreak of COVID-19,there were company size,capital structure,overseas business volume,profitability,liquidity,growth status,operating efficiency and value creation ability.Second,the COVID-19 pandemic has had a positive impact on the use of foreign exchange derivatives by multinational companies.Secondly,the influence of company size on the use of foreign exchange financial derivatives weakens with the outbreak of COVID-19.The influence of the ratio of overseas sales to total sales and R&D expenditure to total business income on the use of foreign exchange financial derivatives increased with the outbreak of COVID-19.Finally,for multinational companies in the manufacturing industry,the factors that affect the foreign exchange risk management of foreign exchange derivatives of multinational companies include the impact of COVID-19,asset scale,the proportion of overseas sales in the total sales,the growth rate of operating revenue,the growth rate of operating profit and the return on invested capital.For multinational companies in the wholesale and retail sectors,the only factor affecting their use of FX derivatives for FX risk management is the impact of COVID-19.For other industries,COVID-19 is not the main factor affecting the use of FX derivatives by multinationals,and companies will focus more on changes in internal metrics such as asset size,overseas sales as a percentage of total sales,R&D expenditure as a percentage of total operating revenue and return on invested capital.Compared with small and medium-sized MNCS,large MNCS pay more attention to the proportion of total operating revenue spent on R&D and the growth rate of operating profit,while small and medium-sized MNCS pay more attention to the growth rate of operating revenue.Through these conclusions,it further summarizes the major aspects that multinational companies should consider when using foreign exchange derivatives to carry out foreign exchange risks during the period of the novel coronavirus outbreak and puts forward suggestions.In this way,transnational corporations can predict the trend of RMB exchange rate to a certain extent,and further consider the factors of using foreign exchange derivatives to consider foreign exchange risks.In this way,transnational corporations can effectively avoid the negative effects of exchange rate fluctuations on business operation and development.