Abstract
In the background where the domestic enterprises commonly have a weak protection consciousness against the exchange rate risk, this article makes a deep analysis based on the definition of exchange rate risk and its cause. By comparison of the traditional management method of exchange rate risk with another one based on financial engineering tools, it also deeply analyzes the method to use the financial engineering technology in the management of exchange rate risk, and concludes the primary purpose of exchange rate risk management is for hedging. This article proposes an optimal analysis method in two aspects, namely the minimum risk and maximum efficiency, for the forward-based optimal hedging, and proposes an optimal analysis method of dynamic hedging for the optimal hedging of option-based tools. Based on the description of the application of financial tools in foreign exchange futures, forward contract, currency exchange and foreign exchange option, it makes an empirical analysis on the management of foreign exchange risk by taking an assumed T company as the carrier and based on the trading tools of forward foreign exchange and currency option, which describes the operation procedure of financial tools in a more direct way and proves the efficiency of the optimal analysis method of this article.
Highlights
In April 2013, there’s a strong turbulence in the global exchange rate market due to the release of “double easing” policy announced by Japan, which was happening in the background where Chinese currency supply exceeded 10 billion for the first time
While there’s a certain scope of security when using the method of purchasing call option, but the option fee shall be paid, and the costs are high. The core of those two financial tools that deal with the foreign exchange risk is “hedging”, and it is key for the foreign trade enterprises and some economic entities to efficiently use the financial engineering concept to reasonably select one or more financial tools when facing a special and inevitable risk, which directly determines whether a decision maker is able to avoid the fixed risk for the enterprise
This article provides a brief description about the definition of financial engineering, theoretically analyzes the option analysis method for the financial tools of futures-based contract law and option-based contract law based on the advantages of financial engineering in the management of exchange rate risk, and proves the reasonableness and efficiency of that theoretical analysis in an empirical perspective
Summary
In April 2013, there’s a strong turbulence in the global exchange rate market due to the release of “double easing” policy announced by Japan, which was happening in the background where Chinese currency supply exceeded 10 billion for the first time. This article describes the advantages of using the financial engineering method to manage the exchange rate risk, discusses the method to apply the financial tools in futures, forward, exchange and option, and analyzes the efficiency of optimal analysis of futuresbased and option-based tools in mechanism and theory, expecting to provide a theoretical basis for the management of Chinese exchange rate risk. The basic principle of using non-symmetrical tool to manage the exchange rate risk is to flexibly determine whether to implement the option according to the detailed conditions of the fluctuation of foreign exchange market. In Formula (8), the C0 represents the call option costs, S0 the current stock price, N d the probability of d in the standard normal distribution, X actual purchase price, r interest rate without risk, T due time of option, G standard deviation of annual yield rate due to continuous compounding of stock, Rf interest rate of foreign currency without risk, and q the dividend rate. 4 Method to manage the exchange rate risk based on financial engineering and the empirical analysis
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
