Foreign exchange hedging transactions are based on physical transactions of commodities or capital and carry out foreign currency transactions that are opposite to the currency flow in commodity or physical transactions and have the same amount, term and currency. However, hedging and risk avoidance are not the same concepts. Hedging involves purposefully taking on another risk that is completely negatively related to the physical object that needs to be protected.

Classic case analysis:

Japanese Toyota Motor Company exported and sold 1,000 cars to the United States. In March, it signed a six-month delivery payment contract, with an amount of US$10 million.

The foreign exchange rate of USD/JPY in March is 1:108.00 and the foreign exchange rate in September is 1:107.00

Analysis: If the foreign exchange rate in March is used, Toyota Corporation of Japan can recover: 1,000* 108=1080 million yen

But when the payment is made in September, it can only be recovered: 1000*107=1070 million yen

Estimated loss: 108000-107000=10 million yen

However, Toyota used US$100,000 to hedge in the foreign exchange market. The details are as follows: (ignoring interest and handling fees)

Toyota started hedging in the foreign exchange market from the date the contract was signed in March. Sell ??100 foreign exchange contracts in the market at the exchange rate of

USD/JPY=1:108.00 (sell USD against Japanese yen)

And on the car delivery and payment date in September, press Buy and close the position at the market exchange rate at that time.

The closing price is 1:107.00, then:

(108.00-107.00)/108.00*100000*100=92592.59 US dollars

Converted into 1,000 Japanese yen Ten thousand yuan

Result:

In spot trade: the enterprise lost 10 million yen due to exchange rate fluctuations

In the foreign exchange market: the enterprise made a profit of 10 million yen in hedging Japanese yen

The profit and loss balance successfully avoided the market risks in trade and the hedging was successful