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ong>4.对冲汇率风险的风险管理-4. Risk Management for Hedging Currency Risk

Since currency surprise has been an essentially noise in currency risk management, hedging currency risk is the act of reducing or negating the risks that arise out of changes in the prices of one currency against another. In order to acquire the maximum profit and minimum loss in dealing with foreign firms, there are several methods for a business to defend the 'risky currency'. The first one is called 'Internal Hedging Strategies', it means leading and lagging the receipts and payments of cash to gain a business advantage. It can ensure that the local companies utilize the exchange rate movements to guarantee maximum profit. For example, if a company has to pay $1 million on a specific date for imported fabric and receives an export order for $1 million, it can attempt either to setback the payment for imports or request an early payment to the buyer. Therefore, the cash inflow from exportation is used as the payment for imports. This method can reduce the depreciation risk in import-payment and evade the risk in export-receipt by managing both cash flows.

The second method is called 'Forward Transactions'. It is a relatively easy method to execute currency risk management. In this situation, both companies have to sign a contract which states a specify exchange rate for the payment or receipt in the future, regardless of what the real market exchange rate at that time is. The main idea behind the forward transaction is that while the exchange rate is set on both parties, they do not have to concern about instability of incomes and costs respectively.

The third strategy is 'Currency futures', the same idea as forward contracts except the pre-set date of the transaction in the future is set. It is a transferable futures contract that specifies the exchange rate at which a currency can be bought or sold at a future date. It allows foreign trade companies to hedge against foreign exchange risk. The advantage of currency futures is exchange-traded., counter-party risk is eliminated, and it also facilitates that currency futures are more transparent in their pricing and more accessible to all market participants (Srinivasan & Steve, 2003).

The next method is 'Currency Swaps'. It is a swap that involves the exchange of principal and interest in one currency for the principal and interest payments in another currency. This real time transaction can also be utilized for hedging interest rate risks by exchanging their fixed and floating interest rate contract with each other (Nicolaus, 2000).

The last method for hedging currency risk is 'Currency options', these are financial instruments that give the buyer of the contract the right but not the obligation to either buy or sell a designated quantity of a specific currency at a predetermined exchange rate. While a call option gives the owner the obligation to buy the currency at a contracted price. On the same way, a put option gives the holder the right to sell it at an agreed price, regardless of an unfavorable market price for the same. However, foreign exchange risk can be a significant issue for Chinese enterprises, it changes of future cash flow resulting from the unexpected exchange fluctuation and create risk in corporate profitability, net cash flows and market value. Thus it is necessary to evaluate and generate a suitable hedging method t