A Study On The Interest Rate Risk Management Of Commercial Banks Based On Optimization Approach

Since the early seventies, the breakdown of the Bretton Woods Agreement, coupled with a liberalization of the financial markets and the inflation and oil crisis of the same time, led to increased volatility of interest rates offixed-income securities. The international banking witnessed operationalplight stemming from interest rate risk. Under this background, the significance of the measurement andmanagement of interest rate risk both in theory and practice is distinct forcommercial backs. This paper is just motivated by the outstanding problems existent in the measurement of interest rate risk management of commercial banks. With the purpose of further meeting its interest rate risk management, the existent models are expanded and revised mainly from the measurement of interest rate risk of special assets in the balance sheet and some certain shiftsin the interest rate term structure. First, the measurement and management of interest rate risk of bondswith default risk is studied, its necessity pointed out, and its general duration formula is given. An interest rate risk management model related to default risk is established for commercial banks. Various effects of default risk on the asset and liability management of commercial banks are discussed after anumerical example is given. Secondly, the measurement and management of interest rate risk ofconvertible bonds is put forward, and its characteristics as well as thenecessity of investigation are formulated. According to the formulae ofduration and convexity of convertible bonds, a multi-objective programming model of the interest rate riskmanagement of commercial banks withconvertible bonds is established and its various results obtained are analyzed. Thirdly, In view of Duration Model.s failing to handle the non-parallel movement of the term structure of interest rate, the concept of direction derivative is proposed to tackle arbitrary shifts in the term structure and a formula is presented to compute the direction derivative of fixed-income portfolio. Based on the concept of direction 3 第一章 绪 论 derivative, an immunization strategy is constructed to manage the most interest rate risk exposure of a given portfolio and the immunization strategy is applied to the management of interest rate risk for a commercial bank. The numerical example indicates that Direction Derivative Model is superior to Duration Model as far as the results of interest rate risk management. Fourth, motivated by the limitation of Duration Model suitable only to parallel shifts of the term structure of interest rate, a single-risk measurement A approachM approach is put forward, especially for non-parallel shifts. The A fitness of Duration Model and M Model are discussed. An interest rate risk A management model for commercial banks based on M approach isestablished, and a comparison is conducted with the Fish-Weil duration model.