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Foreign exchange risk measurement

Foreign Forex rebate for you getforexrebate measurement (Measur ForexrebateforyougForeignExchangeR cashback forexk)What is highestrebateforex exchange risk measurement Foreign exchange risk measurement is the amount of loss (or gain) that may be incurred by the enterprise due to changes in foreign exchange rates according to the enterprises production rebateforexindonesia operation and foreign exchange rate forecast information Foreign exchange risk measurement premise The development of a scientific foreign exchange risk management strategy must be based on The necessary information about foreign exchange risk, the first need to measure the foreign exchange risk, in order to develop the corresponding risk prevention plan according to the size of the risk, the impact on the enterprise or the overall economy, the target different kinds of foreign exchange risk, the measurement of each standard before discussing the measurement of foreign exchange risk, but also need to clarify the following four issues: 1. The basic attitude of different parties to foreign exchange risk in economic activities The parties, because of the different links, foreign exchange risk on their impact also presents differences, so they measure foreign exchange risk starting point and standards are not consistent for example, the foreign exchange risk is also very concerned about the economists, investors and business managers on the basic attitude of foreign exchange risk is a big difference (1) economists to measure foreign exchange risk based mainly on the second chapter of the purchasing power parity and no throwback interest rate (2) Investors measure foreign exchange risk mainly based on modern asset portfolio theory, that is, under a certain level of risk, the investors exposure to foreign exchange risk will be higher. That is, in a certain level of risk to maximize the return on the investors assets, the investors risk and return is positively correlated, the greater the risk, the greater the return investors are generally concerned about the overall risk to return ratio of its assets, and not too concerned about the risk or return of its assets in a specific asset investors of this mentality will prompt enterprises to measure the risk of each currency a return relationship, and in the asset portfolio at the same time to accommodate several Therefore, the investor is generally a foreign exchange risk averter, and the foreign exchange risk he measures is always relative to his return (3) Business managers pay more attention to the potential loss from foreign exchange risk when measuring foreign exchange risk, rather than focusing on the potential gain Business managers are usually foreign exchange risk averters, and they are good at managing the supply, production and sales of the enterprise effectively, and are more concerned about the value movement caused by exchange rate fluctuations. The value movement caused by exchange rate fluctuations is relatively unfamiliar, so they always tend to limit or eliminate foreign exchange risk, even if the retention of foreign exchange risk can bring more potential gains, they are unwilling to do something in this area accounting translation risk is the most direct and most commonly used tool for managers to measure foreign exchange risk, because it reflects the effectiveness of business operations, is one of the important signs to evaluate the managers management ability It is difficult to say Economists, investors or business managers on foreign exchange risk measurement methods, the attitude of who is right and who is wrong, but understand their basic views on the grasp of foreign exchange risk measurement has a great help 2. domestic business and foreign-related business to bear the similarities and differences of foreign exchange risk exchange rate fluctuations to foreign-related business risk is direct, often at a glance, can be measured with the help of some tools and indicators, while the domestic business on the surface In fact, this view leads people astray, domestic business and foreign-related business are foreign exchange risk problems, but different business to bear the foreign exchange risk of the way, the scope, the degree of different (1) domestic investors domestic investors are divided into two categories: one is purely domestic investors, they invest in the country The bonds, stocks or deposits in the bank, investment income all for the city Another category is a mixture of domestic investors, in the domestic market, both in the countrys securities, but also in foreign securities, for example, our investors simultaneously invested in A stocks and B stocks, its capital gains part of the performance of the local currency, part of the performance of foreign currency for the first category of domestic investors, there is basically no foreign exchange risk, but when When their consumption structure includes foreign goods, they are actually in a short position of foreign exchange risk exposure, if the foreign currency appreciation, the foreign currency value of imported goods correspondingly rise, to buy the same foreign goods, this type of domestic investors have to pay more local currency, their real income depreciated accordingly For the second type of domestic investors, because of the time factor involved in currency exchange, from the accounting point of view there must be foreign exchange For example, investor A has 900 RMB per month and the equivalent of 100 RMB of foreign currency income, if the foreign currency depreciates by l0% against the RMB, then As monthly investment income will drop from the original 1000 RMB to 990 RMB A must bear 10% of the foreign exchange risk? If the ratio of domestic products to foreign products in As consumption structure is exactly equal to the ratio of domestic currency to foreign currency in his investment income, i.e. 9:1, then A actually does not bear the foreign exchange risk because the foreign currency depreciates 10% against RMB, the price of imported products from foreign countries in RMB market also drops 10%, thus As real income does not depreciate. However, when the ratio of domestic and foreign products in As consumption structure is not equal to the ratio of local and foreign currency in its investment income, A will undoubtedly bear the foreign exchange risk, the size of the risk depends on the difference between the two ratios (2) purely domestic enterprises a supply, production and marketing, credit activities are occurring in the domestic, not involving a little foreign currency domestic enterprises, on the surface no foreign exchange risk, but its foreign exchange risk is relatively hidden, usually indirectly For example, Chinas car manufacturers, color TV manufacturers (assuming they are purely domestic enterprises), their economic efficiency to be affected by the price of imported similar products, when exchange rate fluctuations affect the price of imported cars, imported color TV, Chinas car manufacturers, color TV manufacturers, the competitive position of the corresponding changes in the appreciation of the RMB, imported cars and color TV prices are relatively cheap, domestic cars and Color TV sales are likely to decline, and vice versa therefore RMB appreciation will worsen the competitive position of purely domestic enterprises and affect the credibility of these enterprises, causing risks to their future earnings These enterprises do not reflect any foreign exchange risk from accounting when the exchange rate fluctuates, in fact they have to bear part of the foreign exchange risk, the size of the risk depends on the import of similar products and the production of similar products of raw materials and spare parts Quantity, the rate of change in the price of imported products and their competitive position rise and fall (3) importers and exporters usually it is widely believed that the appreciation of a countrys currency will be detrimental to exporters and producers of export products, because the price of domestic goods translated in foreign currency rises, the share of export goods in foreign markets will be reduced on the contrary, the price of imported goods translated in local currency falls, stimulating the increase in consumer demand for imported goods However, exchange rate changes do not necessarily make importers and exporters bear foreign exchange risks, because imports and exports are not only affected by the exchange rate, but also by the impact of the economic cycle of the importing and exporting countries, for example, in May and June 1993, the RMB market transfer price has risen from 7.8 RMB to 12 RMB per US dollar at the beginning of the year, and the dollar rose by as much as 54%. However, under the support of a new round of investment fever in China, imports not only did not decrease, but also went up, especially steel, timber and other raw materials imports increased rapidly, the importers foreign exchange risk is all offset by domestic economic cycle factors, the result is no foreign exchange risk if the importing countrys national income growth at a high rate, the increase in import demand is sufficient to offset the adverse impact of exchange rate fluctuations, importers and will not bear the foreign exchange risk in measuring Importers and exporters of foreign exchange risk, must be combined with exchange rate fluctuations and import and export country economic cycle for a comprehensive analysis, the economic cycle can not offset the part of the exchange rate fluctuations to constitute the risk of importers and exporters part (4) multinational corporations (MultinationalCorporation, abbreviated as MNC) multinational corporations are at least in two countries for the production of enterprises, that is, its assets, liabilities, revenues, expenses involved at least Liabilities, revenues, expenses involving at least one foreign currency, and the operating conditions of multinational corporations to be reflected through the parent country currency-denominated consolidated statements to measure the foreign exchange risk of multinational corporations, can not ignore the following important factors: product type, market position, the elasticity of demand for products, the flexibility of cross-border production transfer For example, a multinational corporation in China to not easy to move the real estate business, it has a branch in Australia has a branch, the exchange rate fluctuations in the companys domestic and in Australias income are not affected, but the company in RMB said fishing Australian branch income to be affected, the appreciation of the RMB will reduce its Australian branch converted to RMB income, and vice versa If a multinational company in China operates crude oil, also has an Australian branch, crude oil and Real estate is very flexible compared to real estate and can be transferred, bought and sold across borders In the case of RMB appreciation, if the demand for oil in Australia is inelastic, i.e. demand does not fall due to price increases, then the revenue of the Australian branch expressed in Australian dollars will increase more than the appreciation of RMB therefore the revenue of the foreign branch of the multinational company expressed in RMB will also increase if the Australian The elasticity of demand is large, then the revenue of the foreign branch of the company expressed in RMB will decrease Similarly, it can be deduced that the foreign exchange risk of the multinational company in the case of RMB depreciation 3. known foreign exchange risk and real foreign exchange risk to develop a foreign exchange risk management strategy, the first thing to find out how much foreign exchange risk the enterprise actually has, this risk should not be reflected in the books, visible and superficial risk, as mentioned above, in Exchange rate fluctuations, different enterprises, different parties to the scope of the risk, the risk part is very complex, the purpose of foreign exchange risk management is to eliminate the real risk faced by enterprises to measure the real risk, must be the appearance of exchange rate fluctuations and the real reasons for the generation of risk to distinguish, however, the real reasons for the generation of risk and its degree of impact on the enterprise is difficult to accurately define, which requires scientific forecasting, requires In general, measuring foreign exchange risk is to measure the magnitude of changes in some important indicators caused by changes in foreign exchange risk, and the indicators used for foreign exchange risk measurement are: net assets and liabilities, income level, income variability, market value and competitive position net, income level, income variability is the core of accounting, corporate financial management, they reflect the enterprises past Net value, income level and income variability are used to measure changes in accounting risks, which are of legal, managerial, tax and cash flow distribution importance. Net value and income variability are also important indicators for measuring foreign exchange trading risks and foreign exchange settlement risks. Although the measurement of economic risk involves many difficulties and uncertainties, the shareholders, lenders, employees and managers of the enterprise will never disregard the two indicators of foreign exchange risk measurement The measurement of translation risk There are four basic methods of measuring translation risk, namely, the current exchange rate method, the current and non-current items method, the currency and non-currency items method and the time method When foreign currency pooling statements are translated, the translation difference arises because each item is translated at a different exchange rate. The size of the translation difference depends on the translation method chosen, the direction and process of exchange rate changes, the ratio of foreign currency assets to foreign currency liabilities, etc. For the translation difference, there are two accounting treatments: one is deferred treatment, and the other is included in current profit and loss. However, the shortcoming is that reflecting the translation in the income statement, that is, including the unrealized gain or loss in current profit or loss, may cause misunderstanding of the accounting statement Therefore, it is a more common practice to list the translation difference separately under the ownership interest and accumulate it year by year Example 1 A U.S. multinational companys subsidiary in the United Kingdom earns £10 million in the first year and £10 million in the second year When these profits are consolidated with those of the other subsidiaries, they are calculated at the weighted average exchange rate for the year assuming a weighted average exchange rate of $1.90 in the first year and $1.50 in the second year Table 1 reflects the earnings of the multinational company translated into U.S. dollars for the two preceding and following reporting periods Table 1 Translation risk of the multinational company Local earnings of the U.K. subsidiary for the reporting period Weighted average exchange rate for pounds sterling for the reporting period U.S. dollar earnings of the U.K. subsidiary after translation Year 1 10,000,000 £1.90 $19,000,000 Year 2 10,000,000 £1.50 $15,000,000 As can be seen from the above table, the amount of the U.K. subsidiarys profit in pounds sterling is the same in Year 1 and Year 2, but the consolidated U.S. dollar profit translated by the U.K. subsidiary in Year 2 is reduced by $4 million The reason for the companys translation risk is that the weighted average exchange rate of pound sterling fell by 21% in the second year Financial analysts and investors are likely to give the multinational company a lower evaluation of transaction risk because of the decrease in the dollar profits of the subsidiary in the second year Measurement of foreign exchange risk borne by banks 1. Repeatedly exchange the process of measuring foreign exchange trading risk, to clarify the net position of each currency, on the basis of measuring the size of foreign exchange trading risk will generally take limit management, mainly the gap limit method to control foreign exchange trading risk In order to clarify the size of the foreign exchange gap position, the bank to establish foreign exchange trading records table, in accordance with each currency contract expiration date to record the foreign exchange flow of each transaction, these positions by Ratio and term listed foreign exchange transaction record table is an important tool for measuring foreign exchange risk, in this table can not judge the current foreign exchange position profit and loss, it is difficult to reflect the overall situation of exchange rate risk In order to control the exchange rate fluctuations caused by the position profit and loss, the bank should apply the market exchange rate revaluation of foreign exchange positions, analysis of foreign exchange positions profit and loss, see Table 2 Table 2 bank sterling transaction record table (unit: million yuan) term Buy (+) Sell (a) Total spot 20+201 months 100-1002 months 80+803 months 150-1506 months 200+20012 months 250+25024 months 200-200 Total 550450+100 In Table 2, the banks sterling positions are unbalanced in each period, and when the exchange rate fluctuates, these positions will bear the risk For example, the spot rate of GBP/CNY falls from 12.12 to 12.10, and the spot long position loses RMB 4,000 In order to control the exchange rate risk of the gap position, the bank has to set the gap limit corresponding to each currency for each period, and when the gap exceeds the limit, the trader must hedge the excess position in the foreign exchange market 2. Measurement of corporate transaction settlement risk The exchange rate has a Highly volatile, transaction risk is the most common foreign exchange risk of enterprises, and therefore is the focus of foreign exchange management, in general, the steps to measure transaction risk is to first determine each foreign currency with its net cash flow, and then determine the overall risk of these foreign currencies (1) the expected net flow of foreign currency Foreign exchange transaction risk arises from two aspects: changes in the nominal exchange rate under the floating exchange rate system and foreign exchange exposure position is not Therefore, in calculating foreign exchange trading risk, we must first measure the difference between the inflow and outflow of various foreign currencies of the enterprise and specify the net flow of each currency Net cash flow = cash inflow - cash outflow For multinational companies, it is more important to determine the net cash flow of each currency Multinational companies generally focus on short-term trading risk, only in the short term, the cash flow of the currency can be measured with reasonable accuracy Multinational companies Each subsidiarys management plays a decisive role in reporting its inflows and outflows, and the head office then consolidates the subsidiaries financial reports in order to confirm the projected net position of the entire MNC in foreign currencies for the next few months. If the pound depreciates before the individual cash flows occur, it will have an adverse effect on subsidiary M because the value of the pound decreases when it is converted to the corresponding accounting currency, but the pound depreciation will have a favorable effect on subsidiary N. From (2) Determining the overall risk Since enterprises often have multiple foreign currency transactions, it is important to accurately determine the interrelationship and correlation between various exchange rates to measure the enterprises transaction risk. The smaller the standard deviation of a currency, the less the currency fluctuates up or down around its mean value in a given period; the larger the standard deviation of a currency, the more volatile it is therefore, multinational companies should analyze historical data on the exchange rates of the foreign currencies in question and apply the variance Therefore, multinational companies should analyze the historical data of foreign currencies and use the variance or standard deviation to estimate the potential volatility of each currency, and then combine it with the forecasted value of the exchange rate at the end of the period to determine the possible range of the exchange rate. In determining the overall risk, besides specifying the probability of the currency, it is also necessary to pay attention to the relevance of the currency. The impact of economic risk on the enterprise is long-term, complex and multi-faceted, so a holistic and systematic approach should be taken in measuring economic risk, the most common being sensitivity analysis and regression analysis of earnings and costs. By observing how the income statement earnings forecast changes with alternative exchange rate values, enterprises can understand the impact of currency changes on cash flows under earnings and costs. 2. Regression analysis Another sensitivity analysis method more commonly used by enterprises is the regression analysis method, which uses existing company performance variables (generally cash flow and stock prices) and historical data on exchange rates for regression analysis to determine the economic risk of enterprises. Objective, in contrast to revenue and cost sensitivity analysis, which requires a lot of subjective estimation by business managers and relies excessively on their personal judgment, regression analysis can be more objective by numerically processing historical data to derive the magnitude of future, possible economic risks

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