Risk of exchange rate fluctuation.
2. Changes in the difference between floating interest rates and fixed interest rates
Imagine that the interest rate in Britain (0.5%) is lower than RMB (6.65% a year). Now you have borrowed 6,543.8+0,000 pounds, and you only need to pay 0.5% interest after one year. When the time comes, if you use RMB for financing, your financing cost will rise greatly. So even if your company is in China, you will be happy to use pounds to raise funds. But now there is another problem. That is, the exchange rate between the pound and the renminbi will change. For simplicity, we assume that the exchange rate between British pound and RMB is 10: 1, and there is no charge for currency exchange and international remittance. If RMB depreciation exceeds 6.15% after one year (6.15%+0.5% = 6.65%). In order to limit the risk of this exchange rate change, the company will use interest rate swap options. Companies that purchase interest rate swap options have the right to decide whether to implement interest rate swaps. If it chooses to execute, it will pay interest according to the fixed or floating RMB amount agreed in the agreement. If it chooses not to implement it, it will still pay interest in pounds. If you are a China company with sterling financing, when the RMB depreciates by more than 6.05% (the option fee of interest rate swap option is set to 0, which actually needs to be considered), you will choose to implement the interest rate swap agreement. On the contrary, if the RMB depreciates below 6.05% or even appreciates, then you will not choose the conditions for implementing the option interest rate swap option: extra interest generated by the appreciation of the borrowed currency against the local currency+currency exchange cost >; The profit condition of purchasing interest rate swap options: extra interest generated by the appreciation of borrowed currency against local currency+currency exchange cost >; The same is true of the difference between floating interest rate and fixed interest rate when buying interest rate swap options. In order to prevent the interest rate of floating rate bills issued by the buyer from being too high, the buyer will buy fixed rate swap options to limit the risk. The earliest interest rate swap options and interest rate swap contracts were signed when both parties had loans in different currencies, but they could actually be issued without any loans and still be purchased. This kind of behavior is no longer to limit risks, but just a kind of speculation. In this case, the cross-currency interest rate swap option is similar to a simple foreign exchange option. Let me answer any financial questions.