Must-read for Zhejiang foreign trade enterprises! Three typical cases of exchange rate risk management and subsidy policies | Overseas practice camp
At the 2025 Lujiazui Forum, Pan Gongsheng, the governor of the People's Bank of China, announced eight major financial opening-up measures. One of them is to "work with the China Securities Regulatory Commission to promote RMB foreign exchange futures trading, improve the product portfolio of the foreign exchange market, and facilitate financial institutions and foreign trade enterprises to better manage exchange rate risks."
The two-way fluctuation of the RMB exchange rate has become the norm, and the exchange rate fluctuation risks faced by foreign trade enterprises have become increasingly prominent. How can enterprises maintain stable operations in the wave of exchange rate fluctuations? This article will analyze the core principles and practical methods of corporate exchange rate risk management, elaborate on practical cases of mainstream hedging tools, and take the new policy of exchange rate hedging option subsidies in Zhejiang Province as an example to introduce feasible ways for foreign trade enterprises to strengthen their exchange rate risk defense lines.
01 Exchange Rate Risk Neutrality and Risk Management Methods
Since 2015, the annual fluctuation range of the RMB exchange rate has generally been in the range of 5% - 10%. In 2022 and 2024, there were special situations where the exchange rate fluctuations exceeded 15% and were less than 5% respectively. The RMB exchange rate against the US dollar fluctuated greatly, the exchange rate risk exposure faced by enterprises increased significantly, and the importance of exchange rate hedging increased significantly.
Exchange rate fluctuations may bring exchange rate risks to enterprises that keep accounts in their local currency, mainly including transaction risks, accounting risks, and economic risks. Therefore, enterprises need to recognize the importance of exchange rate risk neutrality. Instead of speculating about the so-called "new exchange rate cycle," it is better to actively adapt to the new normal of two-way exchange rate fluctuations.
Exchange rate risk neutrality means that enterprises incorporate exchange rate fluctuations into their daily financial decisions, focus on their main business, and minimize the negative impact of exchange rate fluctuations on their main business and corporate finances as much as possible. By adopting appropriate hedging strategies, they can reduce risk exposure and volatility, lock in costs, and thus reduce risks.
More and more enterprises have also recognized the importance of exchange rate risk neutrality and started to use exchange rate derivatives for hedging. According to data from the Hedging Network, in 2024, a total of 1,503 non-financial A-share listed companies issued announcements related to hedging. Among them, 1,241 listed companies issued content related to foreign exchange hedging, accounting for as high as 82.6%.
Currently, there are various methods for exchange rate risk management:
(1) Natural Hedging: Enterprises engaged in both import and export business can offset exchange rate risk exposure by choosing the same settlement currency for import and export business, matching the currency structure and term of assets and liabilities.
(2) Trade Strategy: Foreign trade enterprises in a dominant position can negotiate settlement currencies, prices, etc. with their trading partners, or include exchange rate clauses in trade contracts to prevent exchange rate risks.
(3) Foreign Exchange Derivatives Hedging: Use derivatives such as RMB foreign exchange forwards, swaps, and options to hedge exchange rate risks.
When enterprises conduct exchange rate risk management, they need to follow three basic principles: passivity, cost, and offset.
Passivity means that enterprises should not overactively manage exchange rate risk exposure. However, this does not mean that enterprises should do nothing. Instead, they should try not to make artificial judgments on the high and low points of the exchange rate in the short term for foreign exchange purchase and settlement transactions. From a longer-term perspective, corporate foreign exchange trading behaviors often have a very obvious herd effect. Enterprises should learn from the idea of fund fixed investment for foreign exchange management.
Cost means that enterprises should recognize that exchange rate risk management business is a cost center, not a profit center. The purpose of enterprises' derivatives transactions should not be to earn profits from exchange rate fluctuations, but to lock in risks.
Offset means to minimize risk exposure.
02 RMB Foreign Exchange Derivatives Hedging Products
(1) Case of Forward Foreign Exchange Settlement and Sale
Background The enterprise has a monthly demand for US dollar purchase and is worried about future exchange rate fluctuation risks. It hopes to lock in an exchange rate better than the current spot foreign exchange purchase price (the spot exchange rate is 7.2).
Solution Enter into a 1 - 12 month at - the - money forward product, with an amount of US$5 million for each term, and fix the foreign exchange purchase price for each term at 7.15.
Effect Utilize the relatively large interest rate differential between China and the US in the current domestic market to lock in the enterprise's foreign exchange purchase cost in advance at a price better than the spot foreign exchange purchase price (500 BP better), thus hedging the adverse impact of the risk reserve on the forward foreign exchange purchase price.
(2) Case of Risk Reversal Option Portfolio
Background The enterprise has a demand for US dollar settlement and is worried about future exchange rate fluctuation risks. Financially, it can accept limiting the US dollar settlement price within a certain range and does not want to pay an option premium. (The spot exchange rate is 7.2, and the forward foreign exchange settlement price for the same term is 7.17).
Solution Enter into a 1 - month foreign exchange settlement range option from 7.15 to 7.27 with zero option premium.
Effect If the RMB appreciates against the US dollar and the spot exchange rate is 7.1 after one month, the customer settles foreign exchange at 7.15 (to minimize the impact on the main business profit); if the RMB depreciates against the US dollar and the spot exchange rate is 7.3 after one month, the customer settles foreign exchange at 7.27 (to take profit).
(3) Case of RMB Foreign Exchange Swap and RMB Currency Swap
Background The enterprise has a foreign exchange receipt of US$1 million and plans to settle foreign exchange to purchase production materials in the domestic market. However, it needs to pay US$1 million for importing raw materials three months later.
Solution Conduct a US dollar - RMB foreign exchange swap transaction of near - term foreign exchange settlement/forward foreign exchange purchase, agreeing to settle US$1 million on the same day and purchase US$1 million three months later at prices of 7.2 and 7.15 respectively.
Effect The foreign exchange swap is quoted in "swap points," which is simple and easy to operate (- 500 BP); the currency swap is quoted in interest rates, which is intuitive and easy for enterprise personnel to understand and record (2.78%).
(4) The Impossible Trinity
In the process of exchange rate management, the opportunities, risks, and hedging costs brought by exchange rate fluctuations cannot be optimized simultaneously.
Forwards have low costs and can control exchange rate fluctuation risks, but it means giving up opportunities.
Options retain opportunities and avoid exchange rate risks, but require paying a cost.
No Hedging has no cost and retains opportunities, but has to face risks.
03 Policy of Exchange Rate Hedging Option Subsidies
In November 2024, the State Administration of Foreign Exchange in Zhejiang Province, together with the Provincial Department of Commerce and the Provincial Department of Finance, introduced a policy of exchange rate hedging option subsidies, which is an important measure for the coordinated efforts of foreign exchange, commerce, and finance departments. This policy encourages enterprises to use exchange rate hedging option tools through financial subsidies to reduce the impact of exchange rate fluctuations and improve their risk - resistance capabilities.
Subsidy Target Small and medium - sized foreign trade enterprises (including individual industrial and commercial households with current account receipts and payments of no more than US$10 million in 2024) that meet the conditions and have conducted exchange rate hedging option business at banks within the jurisdiction of Zhejiang Province (excluding Ningbo).
Subsidy Method Provide subsidies for the handling fees incurred by eligible enterprises in purchasing option business (excluding selling options and option combinations).
Subsidy Process When eligible enterprises conduct option - buying business, banks will first reduce 70% of the option handling fees for small and medium - sized foreign trade enterprises in a "immediate handling and immediate exemption" manner to reduce the burden on enterprises.
This article is from the WeChat official account "Hangzhou Qiantang Enterprise Going - Global Service Base." Author: Zhejiang Enterprises Going Global. Published with permission from Qiantang.
