Exposure Analysis of RMB Exchange Rate in Business

The objective of the paper is to estimate the impact of asymmetric RMB exchange rate volatility on investment. Since the new policy of RMB exchange rate was executed in 2005, the exchange rate of RMB is more fluctuant than before and difficult to forecast. The methods of real options and binomial decision trees are introduced in the paper to test the nonlinearity of RMB/USD exchange rate. Monthly data of exchange rate between RMB and US dollar during past 6 years are analyzed as an example. Finally, a real options approach is used to evaluate the exchange rate influence under the hypothetical situation that most of the firms can change the currency composition after a certain adjustment period or with the adjustment costs. The result indicates that options theory can provide useful financial hedges for the economic exposure management by bringing out the adjustment costs.