A Study On Risk Management Of China's Futures Market

Although futures trading has emerged in U.S.A and other European countries for more than 150 years, developed from original agricultural products to financial derivative futures, however, the futures markets experienced a twist and toss process in China. Beginning in 1990s, the futures markets in China have few varieties, yet, basically agricultural products and nonferrous metal varieties, the financial derivative futures have been put off for an unknown period because of risk. Of course, any trading activities may have risk, let alone the complicated financial activities. In traditional planning economy, all prices have been tightly controlled by government, seeming there isn't risk, exactly, all risks have been underwritten by government. What's more, which causes tremendous inconvenience to country and her people. Nowadays, in the course of transforming from planning economy to market-oriented economy, we should keep open eyes and keep paces with time, learn and borrow any good experience from other countries, including finance institutional, we can not refuse futures and other derivatives because worrying risk, the key issue is how to recognize and assess risk, establish efficient risk monitoring system to ease or transfer risk, decrease the risk to a minimum degree, meanwhile, take advantage of futures to facilitate economy development.So, this paper selects the pressing topic of futures markets' risk monitor. Based on the aggregation of theoretical study, a comparative study with developed countries, the synthesis of qualitative analysis and quantitative analysis, historical and as well as the current situation in China's and in developed countries' futures markets, this paper attempt to build up a complete and efficient risk monitor system suit to China according to risk management process.A complete risk management process including five steps, they are recognizing, measuring, handling, implementing, assessing, especially measuring and handling. Reviewing from the literature in China, most of them focus on recognizing and implementing steps, strictly speaking, they are not really risk management analysis, only seeming ideas, don't touch the core problem. Hardly studying from theory, method, technique and model about futures markets' risk measuring and handling effect. The essence of handling financial risk is how to make decision and take measures to control risk base on risk recognizing and measuring, the available choices are acceptance, insurance, decomposition, transfer and relocation. Acceptance means one must consider his or her capacity; insurance is not considered in this paper; relocation can take place in different assets or liability according to different term and structure, or a kind of asset relocate with another kind of asset or liability. So, the left choices are transfer and decomposition.Price discovering and hedging are the two main functions. How to understand, recognize and measure microstructure risk in futures markets, that is to say, the transaction risk, then can we find the real reason which cause tremendous risks and lead to solution, furthermore monitor risk from macro-perspective by devising system and institutions, as well as laws and rules, by innovating activities to facilitate futures markets.This paper includes eight chapters as follows.Chapter 1 is a brief introduction of some basic concepts and situation about futures markets in China, and also explain the significance of risk monitor, retrospect the study process in this domain in other developed countries, followed by brief introduction study thoughts, methods, framework, and innovation.In chapter two, the author reviews the relationship between risk supervision and the functions of price discovering and hedging in futures markets, and also studies the efficiency briefly, support a new perspective from risk to study futures markets functions.Chapter three is about the present situation in China futures markets, especially the problems and bad influences in micro-markets and transaction activities, and also touches on institutions establishing and reforming.Chapter four studies risk recognizing and measuring, mainly theoretical analysis on forming of futures markets from a new view, elaborates some techniques of measuring method and managing risk, by which to control the fluctuation of futures prices. In this chapter, the author also suggests risk rating according to the investors or participants' capacity and capital and other items which can affect investors' risk endurance.Chapter five studies the mechanism of force trading by long position and short position institutional traders speculate or manipulate prices on purpose, some people call it corner events risk, this kind risk is one of the most harmful in futures markets, it's very dangerous to all traders and futures exchange, as well as markets itself, for it is beyond fair and open criterion.Chapter six reviews the risk monitoring system in developed countries, especially in United States, Britain, and Japan, then puts forward a framework for China futures markets risk monitoring, borrow a trinity monitoring system including government, trade union or intermediate assocatiion, and futures exchange, take advantage of system to facilitate innovation.Chapter seven analyzes risk oriented functional monitoring, which keep paces with the trend of finance sector developing, financial innovation and conglomeration.The chief research output and innovations mainly are exhibited as follow.1.Risk recognizing and measuring in futures markets. Recognizing risk and finding out the problems then the solutions, meanwhile, the futures markets in China are developing rapidly with the growth of GDP in a stead pace, although find some superficial problems, one may not adjust recognition, which lead monitoring time lag, so it maybe cause a big risk trouble. In this paper, the author discusses the interior risk exists in futures markets, finds solutions in a further perspective.2. Futures market risk rating. Studies the mechanism of force trading by long position and short position institutional traders speculate or manipulate prices on purpose, and advances a series of indicators of monitoring futures markets, especially intra-day price and volume fluctuation, then give some remedy advices. Suggests rating investors's risk according their capital, capacity and other items can affect risk endurance, avoids risk affairs in irrational conditions.3.The monitoring system in China futures markets. Based on the macro-economy and micro-structure risk in China, devises a system accord with China situation, and stands to the dialectic in regulation and monitoring, puts forward ideas and suggestions on using regulation innovation, monitoring innovation, system innovation to facilitate futures markets in a developing rapidly market such as China. Meanwhile, we analysize the futures market development process with path-dependence theory, then suggest administration how to distinguish good or bad path-dependence, destrory old and bad path-dependence, establish new and good path-dependence, facilitate futures market develops.