What are the ways to avoid interest rate risk by using financial derivatives?

Financial derivatives (also known as derivative financial assets or FinancialDerivatives, English translation: financial derivatives) refer to derivative financial products produced according to the value changes of basic financial products or basic financial variables. Financial derivatives are contracts that depend on changes in the value of the underlying financial products. The basic variables of financial derivatives include interest rate, exchange rate, various price indices and even weather or temperature indices.

Financial derivative risk

(1) Market risk (2) Credit risk (3) Liquidity risk (4) Operational risk (5) Legal risk

Financial derivatives can avoid interest rate and exchange rate risks, and can also chase profits for speculation.

The methods of using financial derivatives to avoid risks are:

1. Rational utilization of forward foreign exchange transactions. A foreign exchange business in which a buyer and a seller sign a contract and agree to deliver at a predetermined exchange rate, currency, amount and date in a certain period of time in the future. This can lock in the actual cost of foreign exchange, but if the trend of foreign exchange is not accurately predicted, the cost of foreign exchange hedging may be higher than the cost of not hedging.

2. Rational utilization of selective foreign exchange transactions. After the transaction is completed, the customer can choose a date for delivery at a certain exchange rate and amount within a certain period of time, and the delivery date can be selected as a selective foreign exchange transaction.

3. Reasonable utilization of swap transactions. Buying transactions can be divided into currency swap and interest rate swap. Currency swap refers to the machine currency swap between two companies in different countries, and then the currency swap in the opposite direction at a future date, which can minimize the cost and maximize the income. Interest rate swap refers to the exchange of fixed interest rate and floating interest rate between two funds with the same currency, the same debt amount (principal) and the same term.