Feasibility analysis report on derivatives investment
1、 Overview of derivatives investment
In 2022, Zte Corporation(000063) and its holding subsidiaries (hereinafter collectively referred to as “the company”) planned to invest in hedging derivatives to reduce the risk of uncertainty in order to prevent the adverse impact of exchange rate and interest rate fluctuations on the company’s assets, liabilities and profitability.
The company’s hedging derivatives investment is based on normal import and export business and foreign currency loans, and the investment amount and investment period match the actual business needs. The company is prohibited from engaging in any speculative arbitrage of derivatives. This kind of business mainly involves foreign exchange forward contracts, forward interest rate agreements, currency swaps, interest rate swaps, call options and structural forward contracts.
2、 Main terms of Derivative Investment
1. Contract term: match the actual business needs
2. Counterparty: financial institution with transaction qualification
3. Liquidity arrangement: foreign exchange hedging derivatives investment is based on normal foreign exchange revenue and expenditure business, interest rate hedging derivatives investment is based on actual foreign currency borrowings, and the investment amount and investment period are matched with the actual business needs.
4. Other terms: derivatives investment mainly uses the company’s comprehensive credit line in cooperative financial institutions, and is delivered with principal swap or net amount at maturity. The company is not involved in derivatives investment with raised funds.
3、 Risk analysis of derivatives investment
1. Market risk
The difference between the exchange rate or interest rate of the hedging derivative investment contract and the actual exchange rate or interest rate on the maturity date will produce investment profits and losses; During the duration of hedging derivatives, revaluation profits and losses will occur in each accounting period, and the cumulative value of revaluation profits and losses to the maturity date is equal to investment profits and losses.
The company’s derivative investment is a hedging derivative, and the contract profit and loss form a hedging relationship with the value fluctuation of the hedging target. Its purpose is to reduce the uncertainty of the operating performance caused by the exchange rate fluctuation. The company will track the changes of the market situation and the hedging target, and make a sensitivity analysis for the market risk faced by the company, Assess the losses caused by the contract due to the occurrence of risks and the impact on the company’s operating performance; The company has corresponding control mechanism, stop loss process and disclosure system, so the risks faced by derivative investment have limited impact on the company’s operation.
2. Liquidity risk
Hedging derivatives are based on the company’s foreign exchange revenue and expenditure budget and actual foreign currency borrowings, which are matched with the actual business to ensure that there are sufficient funds for clearing at the time of delivery, or choose net delivery of derivatives to reduce the demand for cash flow on the maturity date and avoid liquidity risk.
3. Performance risk
The company’s derivatives investment counterparties are financial institutions with good credit and have established long-term business contacts with the company, and there is basically no performance risk.
4. Other risks
When conducting business, if operators fail to conduct derivatives investment operations according to the specified procedures or do not fully understand derivatives information, operational risks will be brought; If the terms of the transaction contract are not clear, it may face legal risks. 4、 Derivatives investment management and risk control measures
1. The derivative investment carried out by the company aims to reduce the impact of exchange rate and interest rate fluctuations on the company, and any risk speculation is prohibited; The derivative investment amount of the company shall not exceed the upper limit of the authorized amount approved by the board of directors or the general meeting of shareholders; The company shall not invest in derivatives with leverage.
2. The company has formulated the derivative investment risk control and information disclosure system and the derivative investment management specification, which clearly stipulates the risk control, review procedures, follow-up management and information disclosure of the company’s derivative investment, so as to effectively regulate the derivative investment behavior and control the derivative investment risk.
3. The company establishes a derivatives investment decision-making committee and a Derivatives Investment Working Group, equipped with professionals in investment decision-making, business operation, risk control and so on. The personnel involved in the investment fully understand the risks of Derivative Investment and strictly implement the business operation and risk management system of derivative investment.
The derivatives investment decision-making committee shall conduct risk assessment and voting decision on the hedging scheme of derivatives within the specific authorization of the board of directors or the general meeting of shareholders, analyze the feasibility and necessity of derivatives investment, and timely re conduct risk assessment and decision-making according to major market changes and the actual operation of derivatives. For the abnormalities found in tracking derivatives investment, timely report to the audit committee of the company, and prompt the investment working group to stop investment loss and implement emergency measures. Report the changes in the fair value of derivatives and the changes in the risk exposure of investment derivatives to the company’s audit committee every six months.
The Derivatives Investment Working Group is responsible for the operation of derivatives investment, conducting risk analysis and formulating investment plans (including investment varieties, term, amount, etc.) before derivatives investment, submitting them to the company’s derivatives investment decision-making committee for risk review, and finally approved by the chief financial officer.
4. The company signed contracts with cooperative financial institutions with clear terms and strictly implemented the risk management system to prevent legal risks. The company shall open a settlement account or designated settlement account in the derivative cooperative financial institution as required, and deliver the funds according to the transaction instructions on the settlement date of the derivative contract.
5. The internal control and Audit Department of the company is responsible for the process review and performance evaluation of derivatives investment every half year.
5、 Feasibility analysis conclusion of the company’s derivatives investment
The company has formulated the management system of derivatives investment, established the processes and organizations of derivatives investment analysis, decision-making, approval, operation and performance evaluation, and carried out derivatives investment on the basis of actual business, in order to reduce the adverse impact of exchange rate and interest rate fluctuations on the company, enhance the financial stability of the company, and prohibit any derivatives speculation, It is feasible for the company to carry out derivatives investment.
Zte Corporation(000063) March 8, 2022
