A Study On The Foreign Exchange Risk Management For Chinese Commercial Banks

China switched to a market-based, managed floatable exchange rate regime with reference to a basket of currencies on July 21,2005. Since then, the exchange rate of RMB has violated more frequently than before, and consequently, the foreign exchange risk facing China's commercial banks has increasingly demonstrated its existence. At the same time,. Chinese economy has gradually entered into the world economy, and the reform of China's exchange rate regime and financial system has well been on its path. Such an environment implies that the foreign-exchange-related transactions that China's commercial banks undertake will experience a period of explosive growth and encounter with continually growing foreign exchange risk. The management of foreign exchange risk will become increasingly important for China's commercial banks.Whereas China's commercial banks have improved in its foreign exchange risk management in the last several years, there remain a lot of unsolved problems, such as a weak consciousness of foreign exchange risk, an imperfect foreign exchange risk management system, and less-developed methods of risk identification, measurement and administration. Such problems have been preventing the foreign exchange risk management of China's commercial banks from betterment, and imposing quite a threat upon the stabilization of the financial system of China.To tackle the challenge, China's commercial banks had better to innovate its foreign exchange risk management system and elevate its abilities to administrate foreign exchange risk. Now there have been much literature which probes into the theoretical and practical problems on the measurement and administration of the foreign exchange risk of China's commercial banks. However, no one has studied into the problem of the foreign exchange risk management of China's commercial banks based on a innovation-of-management perspective. Obviously, Such a study has an important theoretical and practical implication. The paper has been divided into six parts. The first part introduces the theme and framework of the paper, and the second makes a general survey of the theme. Then, the third part investigates the practice of four global commercial banks in the management of foreign exchange risk, analyses the experience and lessons therein with reference to the background of the global financial crisis.The fourth part of the paper pinpoints the status quo of the foreign exchange risk facing China's commercial banks by use of the exposure method and the Value-at-Risk methodology.The fifth part divides the foreign exchange risk management of commercial banks into the following three parts:the management framework, the management methods and the environment. And it investigates the status of the foreign exchange risk management of China's commercial banks, and analyses the existing problems.Based on the above discussion, the last part proposes the ways to improve the foreign exchange risk management of China's commercial banks, including the innovation of the management framework, methods and environment.The paper finds that commercial banks may divide foreign exchange risk into transaction risk, accounting risk and economic risk, and administrate the foreign exchange. risk they face by use of matching in the balance sheet and hedging techniques.The paper concludes that a successful foreign exchange risk management of a commercial bank should be coupled with an rigorous, efficient risk management framework, a scientific and reasonable system of risk management and advanced risk management technologies.The paper adopts the exposure method and the Value-at Risk methodology to investigate the status of the foreign exchange risk facing China's commercial banks, and finds that such risk has been gradually increasing as the economic reform proceeded and the export-oriented economy was developed. However, there are a lot of problems in the foreign exchange risk management practice of China's commercial banks.The paper puts forward that in order to improve their foreign exchange risk management, China's commercial banks innovate their foreign exchange risk management framework and methods, while the corresponding environment be bettered.The paper realizes the following innovation. Firstly, it systematically studies the problem of the foreign exchange risk management of China's commercial banks based on an innovation-of-management perspective. Secondly, it pinpoints the status quo of the foreign exchange risk facing China's commercial banks by use of the exposure method and the Value-at-Risk methodology. Thirdly, it performs a case study of four representative global commercial banks, and analyses the lessons to draw from their experiences. Lastly, the paper divides the foreign exchange risk management practice of a commercial bank into three parts, i.e. the foreign risk management framework, the methods and the environment, and then, based on such a division, investigates the status of and the existing problems in the foreign exchange risk management of China's commercial banks and proposes the countermeasure for such problems.