(1) Conversion risk.
Due to the internationalization of production and operating activities of multinational companies, the operating results and assets and liabilities of their foreign subsidiaries are measured in local currencies. However, multinational corporations' shareholders and financial markets require measurement not in local currency but in local currency. Therefore, when multinational companies prepare consolidated accounting statements, they need to convert foreign currencies into local currency. Due to the volatile changes in exchange rates, the exchange rate used in conversion may be different from the exchange rate at the time of recording, which results in exchange gains and losses. Assets and liabilities that are subject to conversion risk are called exposed assets and exposed liabilities. In foreign exchange risk management (Risk Control Network), since the risks of exposed assets and exposed liabilities can offset each other, the company's total conversion risk depends on the difference between exposed assets and exposed liabilities. Conversion risk, also known as accounting risk, refers to the fact that when the domestic currency (or reporting currency, the same below) appreciates and the host country currency depreciates due to changes in the relevant currency exchange rate, the amount of the company's existing assets and liabilities expressed in the domestic currency will decrease. ; When the domestic currency depreciates and the host country's currency appreciates, the amount of the enterprise's existing assets and liabilities converted into the domestic currency will increase; when the enterprise is a net lender, the value of the net existing assets expressed in the domestic currency will increase with the value of the domestic currency. The depreciation of the host country's currency increases or decreases; in the case where the enterprise is a net borrower, the net assets expressed in the domestic currency increase or decrease as the ratio of the domestic currency to the host country's currency increases or decreases.
(2) Transaction risks.
Transaction risk refers to the impact of exchange rate changes on the agreed contract, resulting in the possibility of foreign exchange gains and losses on assets or liabilities denominated in foreign currencies that will be settled in the near future. It includes the following basic situations:
1. Closed transaction risk. That is, the risk of settled foreign currency receivables and payables with deferred payment on a credit basis due to changes in the exchange rate between the transaction and the actual settlement.
2. Risks arising from possible changes in exchange rates when loans denominated in foreign currencies mature.
3. A party to a forward foreign exchange contract to be fulfilled may experience risks due to changes in the foreign exchange rate when the contract expires.
Strictly speaking, there is a certain degree of overlap between transaction risk and translation risk because,Some accounts on a company's balance sheet, such as borrowings and receivables and payables, already include a portion of translation risk.
(3) Business risks.
Operating risk The degree of impact of exchange rate changes on the company's "future" international operating profitability refers to the impact of comprehensive changes in exchange rates and prices on the future product prices and costs of multinational companies. and quantitative impact, ultimately causing changes in the future cash flows of multinational companies.
Operational risk is not limited to the impact of actual exchange rate changes on the value of a specific foreign currency transaction, but the impact of exchange rate changes on the company's entire operating activities. Since exchange rate changes and price changes are closely linked, their impacts on the operating activities of multinational companies also offset each other to a certain extent. For example, a company's export revenue increases due to the currency appreciation of the exporting country. However, the price decline in the importing country that is accompanied by currency appreciation may depress the company's export prices, thus partially offsetting the increased earnings due to exchange rate changes. Therefore, changes in exchange rates and prices must be combined to examine the impact of exchange rate changes on the company's operating activities. Another feature of business risk is that it not only pays attention to the temporary gains and losses caused by exchange rate fluctuations, but more importantly, it must examine the long-term dynamic effects of exchange rate changes. .
The main methods of foreign exchange risk management are:
(1) Adopt currency hedging measures.
When negotiating a transaction, the buyer and the seller negotiate and enter into appropriate hedging clauses in the transaction contract to prevent the risk of exchange rate changes. In foreign exchange risk management, currency hedging measures mainly include gold hedging clauses, hard currency hedging clauses and currency basket hedging clauses.
(2) Choose a favorable pricing currency.
The following principles should be followed: First, when a single currency is used for pricing, soft currency is used for payment and hard currency is used for collection. A soft currency is a currency that tends to depreciate or is under greater pressure to depreciate. A hard currency is a currency that tends to appreciate or have a stable value. Second, in import and export trade, multiple currencies are used as pricing and settlement currencies, so that the risks of exchange rate changes in various currencies offset each other. Third, in trade practice, payment should be made in local currency as much as possible through consultation, negotiation, etc. That is, the exporter obtains funds in local currency and the importer pays in local currency.
(3) Advance or postponement of foreign exchange settlement.
In the balance of payments, enterprises achieve the purpose of offsetting foreign exchange risk management by predicting the trend of payment currency exchange rates and collecting and paying foreign exchange payments in advance or delaying them.
(4) Combination of import and export trade.
The first is the counter trade law, which links import trade and export trade for the exchange of goods. The second is The automatic sell-and-cover method involves an importer and exporter carrying out export trade at the same time as import trade, and tries to use the same currency for denomination and settlement, and tries to adjust the time of foreign exchange collection and payment so that the import foreign exchange position offsets the export foreign exchange position. To implement automatic selling and covering of foreign exchange risk management.
(5) Use foreign exchange derivatives tools.
If a forward foreign exchange transaction contract is signed, that is, after the contract is signed, the import and export enterprise will enter into a forward purchase or sale of foreign exchange payment contract with the bank for the payables or receivables settled using foreign exchange pricing, and lock in exchange rate fluctuations. Carry out foreign exchange risk management and eliminate foreign exchange risks.
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