Exchange rates are determined by market supply and demand and are very hard to predict. Rather than guessing which way they will move, use tools to turn uncertain exchange rates into certain costs.
Start with a "currency risk neutrality" mindset
The State Administration of Foreign Exchange emphasizes currency risk neutrality: exchange rates are determined by market supply and demand and are very hard to predict.
Companies should focus on their core business and actively manage risk, rather than betting on the direction of exchange rates.
The goal is not to make money from exchange rates, but to keep profits from being eaten away by exchange rate fluctuations.
Companies do not need to chase the "most profitable" exchange rate, but rather an "affordable" one.
Natural hedging: the first move that needs no financial instruments
Match receipt and payment currencies: if you have USD income, try to pay freight and procurement in USD as well.
Match the timing of receipts and payments: align collection dates with payment dates as closely as possible.
Prioritize local currency settlement: if a contract can be switched to RMB pricing and settlement, that eliminates the currency exposure outright.
Forward foreign exchange settlement and sale: lock in a future exchange rate
Agree with a bank to buy or sell foreign exchange on a future date at an agreed rate.
Advantage: the exchange rate is fixed in advance, so costs are calculable.
Cost: you must perform on maturity, and even if the market rate is more favorable, the agreed price applies.
Suited to large payments with clear timing.
Foreign exchange options: pay for a choice
The company pays an option premium to obtain the right, not the obligation, to buy or sell foreign exchange at an agreed rate.
Advantage: you can keep the benefit of favorable market moves while still having a floor rate.
Cost: you pay an option premium, so it costs more than a forward.
Suited to situations where the direction is uncertain but you still want to set a floor.
Common structures include buying a put option to lock in a settlement floor, and buying a call option to lock in a purchase ceiling.
How to choose: three steps to a plan
Step one, calculate the exposure first: how much is the net foreign currency receipts and payments over the coming period.
Step two, set the goal: do you want to lock costs down completely, or set a floor while leaving room.
Step three, compare tools: for small exposure and short tenors, start with natural hedging; for high certainty, use forwards; for unclear direction, use options.
What tools already exist in the market
| Indicator | Data (subject to the latest official announcement) |
|---|---|
| Scale of corporate FX derivatives signed | Close to USD 1.4 trillion as of the first half of 2026, up 40% year on year |
| Corporate FX hedging ratio | 35.3%, up 5.3 percentage points from full-year 2025 |
| Banks offering FX derivatives | 130 major Chinese and foreign banks |
| Foreign trade companies included in the service list | 290,000 |
