Derivative financial instruments, also known as derivative financial instruments and financial derivatives, are a concept corresponding to original financial instruments, which are derived from commodity contracts, bonds, stocks, foreign exchange and other original financial instruments. Derivative financial instruments refer to new financial instruments derived from traditional financial instruments. Stock futures contracts, stock index futures contracts, option contracts and bond futures contracts are all derivative financial instruments. Hedging relationship refers to the relationship between hedging instruments and hedged items. According to the hedging relationship, the hedging business carried out by an enterprise to avoid assets, liabilities, firm commitments, transactions that are likely to occur, or foreign exchange risks, interest rate risks, stock price risks and credit risks related to net investment in overseas operations can be divided into three categories: fair value hedging, cash flow hedging and net investment hedging in overseas operations.

(1) fair value hedging-fair value hedging refers to hedging the risk of fair value change of confirmed assets or liabilities and unconfirmed firm commitments (or the identifiable part of the assets, liabilities or firm commitments), which originates from a specific risk and will affect the profit and loss of the enterprise. For example, issuers and holders hedge the risk of changes in the fair value of fixed-rate bonds caused by changes in interest rates; Or a firm commitment to buy and sell assets at a fixed price expressed in the reporting currency of the enterprise is a fair value hedging.

(II) Cash flow hedging-Cash flow hedging refers to hedging the risk of cash flow changes, which comes from specific risks related to confirmed assets or liabilities (such as all or part of future interest payment of floating interest rate debt) and expected transactions that are likely to occur (such as expected purchase or sale), and will affect the profit and loss of the enterprise.

(3) Hedging of net investment in overseas operations-Hedging of net investment in overseas operations refers to hedging the foreign exchange risk of net investment in overseas operations. Net investment in overseas operations refers to the equity share of the reporting enterprise in the net assets of overseas operations. A hedging instrument refers to a derivative instrument designated by an enterprise for hedging, and its fair value or cash flow change is expected to offset the fair value or cash flow change of the hedged item. Non-derivative financial assets or non-derivative financial liabilities can also be used as hedging tools to hedge foreign exchange risks.

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