Companies will face various financial risks in their daily operation, in which interest rate risk and exchange rate risk have the biggest influence. Companies in the growth phase usually have large quantities of interest bearing loans at floating rate and uncertain cash outflow will occur to them in the future, bringing about interest rate risk. As for companies engaged in export and import trades, there exists a large amount of cash flows in foreign currency in their operation and the changes of exchange rates will have certain influence on their profits, giving rise to exchange rate risks. With abundant experience in risk management, HSBC China has been customizing various risk management solutions for companies in order to fulfil their needs to manage financial risks and lower financial costs.

Example 1: Company C is mainly engaged in export and import trades. It sold USD 2 million of merchandise in the past two months but just received payment recently. RMB appreciated by 1% in the two months and the profit of the company was offset by the devaluation of USD.

Solution: The company could enter into a forward exchange transaction, i.e. to lock the exchange rate for future delivery time at present. Thus the company's income can be fixed.

Structured forward transaction adds certain derivative product such as options on the basis of generic forward transactions. Under the right market projection, the derivative product within the product will reduce the cost of forward transactions.

Example 2: Company D needs to purchase Euro for their imports every month and face the similar issue of uncertain exchange rate.

Solution: It's commonly believed that RMB will keep the appreciation against USD. Therefore, the company could choose some structured forward transactions to obtain more favorable exchange rate than common forward exchange rate. For example, forward transaction within certain range of exchange rate. It only ensures that when the exchange rate of Euro doesn't exceed certain threshold, the company could sell USD and buy Euro in three months at the pre-agreed favorable exchange rate. But when the exchange rate exceeds the threshold, i.e. when the appreciation range of Euro exceeds expectation, the transaction will be terminated automatically and the company could only sell the USD at the spot exchange rate in the current market. If the exchange rate fluctuates in certain scope as expected by the company, it could effectively reduce the company's cost and achieve the objective of managing exchange rate risks.

In addition, the company could also consider target redemption forward transaction. It allows the company to purchase certain amount of Euro at the pre-agreed favorable delivery exchange rate every month. But the product will record the company's revenue for every month, which is the difference between the delivery exchange rate and spot exchange rate. If the revenue of the company reaches certain amount, the forward transaction will be
terminated automatically.

At present, currency swap is the commonly-used long-term risk management tool in the market. The companies could select, in certain pre-set time period, to convert one currency to another currency with the bank at a pre-agreed exchange rate, and after the expiration of conversion period, exchange the currency converted for the original foreign currency from the bank at a pre-agreed exchange rate. The business could adjust the unmatched currencies and time of the companies' cash flow. At present, the swap currencies provided by HSBC China include USD, RMB, HKD, JPY, EUR and all freely-traded currencies.

Example 3: Company B has a ten-year JPY 15 billion loan, while its daily production and operation activities don't generate JPY income. Therefore, the company could only repay the principal and the interests by using USD to buy JPY. The changes in exchange rate certainly
become an issue to be considered by the company.

Solution: The company could enter into a currency swap, i.e. the bank converts its JPY loan into USD debts. For example, the company's 15 billion JPY loan will be converted into USD 141 million debts at the spot exchange rate. The bank will repay the interests of the loan for the company periodically, provided that the company pays USD interest to the bank. The interests of the two currencies are both fixed, for example, with the USD interest of 4% and the JPY interest 2%, and there will be no exchange rate risks. The company could effectively manage exchange rate risks through currency swap.

(The above are all simulation examples and the solutions are provided by HSBC China)