Applied Study Of Financial Engineering On Managing Exchange Rate Risk

The total of import and export trade of China is 851.20 billion dollars in 2003. The total amount of foreign exchange transaction is 151.13 billion dollars. The foreign exchange reserve of our country is 403.25 billion dollars by the end of December, 2003. With international trade and international capital flowing expanding increasingly, exchange rate risk will become the primary international financial risk which foreign economic exchange of our country confronts.Financial engineering is a kind of developing study in process of resolving practical problems about risk management. It developed rapidly at the beginning of 1990s. The application of financial engineering is the main field of this study on the aspect of managing exchange rate risk. The thesis tries to theoretically discuss the applied study of financial engineering on exchange rate risk management.The thesis analyzes the origin of exchange rate risk through reviewing the developing history of exchange rate system. Then the thesis compares the traditional managing methods of exchange rate, and analyzes the relative advantage of financial engineering on managing exchange rate risk. There are four basic ways when people apply financial engineering to manage exchange rate risk. They are futures, forward, swap and options. It further disserts that the efficiency of exchange rate risk managed by financial engineering implement can be measured by hedge rate. The application of financial engineering implement in futures can calculate the optimal hedge rate from two different aspects of minimum risk or maximum utility. The application of financial engineering implement in options can realize optimal hedge by delta calculation and dynamic regulation of position. Applying financial engineering to manage exchange rate risk, we should consider the risk of financial engineering implement itself. At last, the thesis discusses the present situation of managing exchange rate risk and financialengineering in China, and poses some constructive suggestions.