Exchange Rate Fluctuations

Posted: August 26th, 2021

Exchange Rate Fluctuations

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Exchange Rate Fluctuations

Currencies and their respective exchange rates are not just a matter of business alone. Changes in currency also affect individuals, even when they are not aware. For instance, the recent Brexit vote in the United Kingdom drastically affected individuals and small businesses that are involved in cross border trading. Hence, as a Chinese international student, worrying about the changes in exchange rates is inevitable. In this case, I will have to take action to ensure that the risks involved in the exchange rate between Chinese Yuan and US Dollar do not affect my transaction.

Since I will be paying school fees in US Dollars, it is essential to protect expenses against fluctuations of the Chinese Yuan against the dollar. My best option to hedge theamount against the risks of loss using derivatives. Hedging is an investment whose aim is to offset the losses from financial exchange rate fluctuations. Currently, 1 Chinese Yuan is trading at 0.14 US dollars.  For instance, the required tuition fee for this term is the US $ 14000. The amount is equivalent to CNY 100,000. The changing economic environment between the US and China is likely to hurt the exchange rate. Hence, I will buy derivatives of an equivalent amount in the US dollar, worth CNY 100,000.

The reason for preferring a simple forward contract from the US market is to lock my school fees in the current exchange rate. As such, this will ensure that regardless of the changes in the exchange rate between now and the time I am required to make the payment, the amount remains the US $ 14,000. In this way, therefore, I will have reduced the risks that could have cost me more than the anticipated amount if I held the amount in Chinese Yuan for until then.