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Forex derivatives an important risk control vehicle

By Li Zengxin (chinadaily.com.cn)
Updated: 2006-12-13 08:39

Related publication: Related readings: Forex reserves need effective management Shanghai gets derivatives trading house Banks urged to improve risk control

Renminbi exchange rates have been hitting historic high records for the past month. Along with the continuous rise of the Chinese yuan and prices of raw materials and resources, risks in transactions involving foreign exchange emerged for Chinese export-oriented enterprises. The increased volatility of the renminbi exchange rate movement has made it more difficult to reduce forex risks for these companies.

At the same time, the problem of "covered" foreign debts of some non-State-owned, export-oriented enterprises are more serious. Some of the companies have been under agreements with foreign investors, in which the Chinese company borrows foreign currency from the foreign shareholder at set interest rates, terms and payment methods. Such loans evade the country's supervision and control over foreign debts and results in bigger forex risks for domestic enterprises.

According to the National Futures Association of the United States, the loss from the absence of hedging mechanisms in forex transactions is much greater than that from futures deals in China in the past.

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The full text is available in the December Issue ofChina Banking.