Abstract: Based on the unique identity of Foreign Direct Investment(FDI) Options,this paper sets up a systematic model through the application of Real Option Theory's impacts on FDI,and theoretically tests the specific influences of RMB Exchange Rate,Exchange Rate expectations as well as Exchange Rate's volatility on China's absorption of FDI in the following content.On this basis,this paper proceeds with empirical analysis by employing Chinese data to further exam the conclusions generated from the model.Moreover,this paper divides the sample interval into two separate parts in the light of the signif icanteffect engendered by reform of RMB exchange rate formation mechanism on RMB Exchange Rate and Exchange Rate expectations.The empirical research of subsection samples reveals that Exchange Rate expectations have been the major factor affecting China's FDI before 2005 when the reform on RMB Exchange Rate is implemented.However,the impacts of RMB Real Effective Exchange Rate and its volatility on FDI are not obvious at all.In 2005,after the reform on RMB Exchange Rate,the expectations of Exchange Rate's impacts on FDI have become increasingly significant.RMB Real Effective Exchange Rate's impact on FDI has become conspicuous,while the volatility of RMB Real Effective Exchange Rate's influence on FDI in China is still insignificant.Based on these findings,some strategies are put forward.

Key words: RMB, exchange rate, FDI, volatility