How To Avoid Exchange Rate Risk For Import And Export Enterprises?

First, forward contract hedging

When

Most of the long-term hedging contracts are signed by the company with the bank or other banks.

Moreover, the contract period between the company and the bank is not limited to the 1 months, 3 months and 6 months of the quotation.

Although long term hedging for more than 1 years is relatively rare, the two sides can reach any time limit.

Suppose a Chinese multinational company opened a subsidiary in the United States, and a subsidiary of Chinese company in the United States sold $1 million to a Norway importer.

The exchange rate for goods sold on this day is 9 kronor to US $1 (NK9=US$1), so the total amount of goods is 9 million kronor in Norway.

The 180 parties agreed that the importer should pay 9 million kronor to the exporter within the next 9 million days.

Chinese exporters in the US now assume any risk of changes in the US$-NK exchange rate.

If the Norway kronor depreciates, for example, 11 kronor 1 dollars to Norway, then within 180 days, when the exporter receives the 9 million krona, it will only be equivalent to 818181 dollars.

But Chinese exporters expected to receive $1 million, resulting in a loss of US $181819 in exchange rate changes.

In the US, Chinese exporters can use forward contracts to protect themselves from such losses, that is, within 180 days, 9 million Norway kronor will be paid to the other side of the hedging contract, while the other side agrees to pay the Chinese exporter 1 million US dollars as an exchange.

The actual amount paid by the other party to the Chinese exporter is generally less than $1 million, because the Krone may depreciate within 180 days, and the other party will therefore require risk compensation.

Assuming that the other party asks for 1% of the compensation and the Chinese exporter agrees, the 1% means 10 thousand dollars, so the other party pays only 990000 dollars in exchange for the 9 million kronor of the Chinese exporter.

Compared with the above kronor, Chinese exporters received only $818181, compared with a loss of $171819 in the company's losses.

Therefore, the $10 thousand can be regarded as an insurance premium paid by Chinese exporters in the 180 days to ensure that they actually charge the US dollar.

Of course, when making this decision, Chinese exporters should weigh whether the 990000 US dollars are acceptable price for the products they sell.

Like other prices in the free market, there are no laws and regulations that stipulate that 1% or 10 thousand dollars is the cost of the 1 million dollar hedging.

In our case, the competent financial manager of exporters will make comparisons between banks and find cheaper prices for pactions.

Norway kroner did not trade in the international monetary market of the Chicago Mercantile Exchange.

If the currency for payment is one of the 8 trading currencies, namely British pound, Canadian dollar, German Mark, Holland shield, French franc, Japanese yen, Mexico peso and Swiss franc, the financial manager should also get an offer from the international monetary market (IMM) contract.

Two, currency futures hedging

If a financial manager enters a commodity or stock exchange for hedging (such as the use of IMM contract), hedging involves futures contracts instead of forward contracts.

In the international money market, trading currencies are usually regarded as commodities and traded in futures contracts.

The hedging cost of futures contracts is different from that of forward contracts. It is not determined by a certain bank, but by the open and fair bidding of all parties in the trading field.

A futures contract is bought and sold by a broker, and the exporter must open a margin account at his broker's office.

The sum of the futures contract is fixed, such as 25000 pounds, and the standard delivery date is used.

A financial manager can take advantage of the relative value of a currency in the futures market to increase or decrease the risk of foreign exchange risk or even speculation.

This is mainly achieved by buying or selling futures and establishing long positions or short positions.

For the company, the two cases mentioned above have good results, but the company also takes risks.

The fluctuation of short-term monetary value is very uncertain in the direction and scope.

If the value of money goes against the opposite direction, those companies (or financial managers) can only accept bad outcomes.

Those who study money markets or trade in markets are careful to predict short-term trends.

{page_break}

Three, currency options hedging

An option is a power that can be bought and sold in a certain period of time. It is the right to buy or sell a certain amount of specific subject matter to the seller at a predetermined price (i.e. the price of a contract) after a certain amount of money is paid to the seller.

Option trading is actually a paction of such rights.

The buyer has the right to execute and the right not to execute, so he can choose it flexibly.

Options, also known as agreed trading rights, are developed on the basis of the highly developed futures trading.

It is common stock options trading on stock exchanges.

That is, the purchaser will have the right to buy or sell a certain amount of stock at a fixed price at a specified date (3 months, 6 months or 9 months).

For a stock that expects to rise in price, it is necessary to obtain a purchase option, that is, the right to purchase shares at the agreed price (relatively low) when the stock price rises, and for the stock that is expected to fall in price, it is necessary to obtain the option to sell, that is, when the stock price falls, it has the right to sell the stock at the agreed price (relatively high) when the option is purchased.

If the stock price does not change as expected, the option is allowed to void.

In this way, we can achieve hedging and avoid risks.

Currency option is a paction based on money, where both parties purchase or sell some foreign exchange option at a certain time at the agreed rate.

Currency option is an important means to prevent foreign exchange risk. When a currency option contract is executed, it can deliver money in kind or in cash.

The trading principle of currency options is the same as that of other options pactions. Buying a call option and selling a put option at the same trading price can constitute a hypothetical forward purchase.

Currency options are developing rapidly and trading volume is increasing.

The first currency option contract was the Canadian dollar option contract which began in November 1982 in Montreal, Canada.

Subsequently, the exchange successfully introduced the currency options such as sterling, German Mark, Swiss franc and yen. In 1985, Holland also introduced the European monetary unit option, and the foreign exchange option amounted to 20 billion US dollars.

In 1988, there were 18 million currency options contracts traded around the world, which became flexible financial instruments to prevent foreign exchange risks and hedging.

Four, hedging in credit market or money market

Credit market or money market hedging involves credit, that is, borrowing money.

Companies eager to hedge are borrowers.

Assuming that a company will use ten million euros in three months, how can we hedge the value of money market? The first way to operate the strategy: I assume that there are idle funds on hand today. I will convert the local currency into euros today. The second way is to assume that if I have no money on hand, I need to borrow money from the bank, borrow Renminbi today, and change RMB into Euro storage, which will expire in three months and be paid in euros, so that even if the euro appreciates, you won't need to worry.

This is money market hedging.

Before using credit or money market to hedge, exporters must compare interest rates between their countries and importers' countries. If the exporter's interest in the importer country is much higher than that of the money he uses, the cost of such hedging may be too great.

{page_break}

Five, currency swap (SWAP)

What does a swap mean? It means that it was originally a foreign currency asset or liability, and I changed it to another one.

In the United Kingdom, there are also some projects in the United Kingdom, which will receive pounds. British companies are better at British pounds. The US companies have a better dollar, and they have a swap between the two financial intermediaries. According to the agreed exchange rate, today, my American company has made an appointment with the British company. After five years, you exchange your pound for me. I change my dollars to you. This is the so-called swap. Some banks are also doing something for the business to convert the foreign debt of the euro into US dollar debt, then they need to pay in US dollars, while the other enterprise itself wants to pay with the euro, and just can find the two matching enterprises, which will play a role in the end of the financial crisis, and it will lock the risk for both sides. For example, a British company and an American company, a British company has an investment project in the United States, and this investment project will slowly be absorbed into the US dollar in five years.

Six, accelerate payment or postpone payment.

We assume that in accordance with the payment contract, the importer must pay in the currency of the exporter's country.

If the importer predicts that the currency of the domestic currency will appreciate relative to that of the foreign supplier, the delay in payment will be beneficial to the company.

On the contrary, if the importer forecasts that the currency of the domestic currency will depreciate relative to that of the foreign supplier, it will accelerate the payment to the company.

For example, when the exchange rate is 9 kronor converting 1 US dollars, if the importer agrees to pay 1 million dollars, then the cost will be equivalent to 9 million Krona in Norway.

If payment is made, the exchange rate will fall to 10 Norway kronor to US $1.

The cost is 10 million kronor in Norway.

In this case, the importer should pay the loan ahead of time, or, if possible, exchange the foreign currency immediately, and then make payment in foreign currency when the payment date arrives.

Of course, on the contrary, if the importer predicts that Norway Krona will appreciate on the basis of the 9 kronor 1 US dollars when signing the purchase contract, it should postpone payment and postpone the conversion of Norway kronor to us dollar. The Norway dollar will be postponed.