Application Of Financial Derivatives In Interest Rate Risk Management

Our country became the formal member of WTO on Feb.13th 2001. According to the requirements of Finance Service Agreement (FSA) of WTO. AS the five-year protective period ends, our financial market will completely open to the outside world. Our country's monetary policy is increasingly influenced by international monetary policy. And interest fluctuation tends to converge with the fluctuation in the international market. In addition, the legal rigid interest is changing into flexible interest steadily which is determined by market. Therefore, the market entities in our country especially commercial banks inevitably face bigger interest risk. In order to manage interest risk, it is imperative to explore the application of financial derivatives as the primary risk-avoiding instruments in international financial market in the interest risk management.Due to the idea, this dissertation researches the application of informational characteristics and hedging functions of financial derivatives in interest rate risk management and proposes that China should renew the treasury bonds futures transaction as soon as possible. This dissertation consists of five chapters. The first chapter defines the conception and explains contributing factors, and the forms of interest rate risk, as well as the two main methods of measuring interest rate risk: sensitive gap analysis and duration gap analysis. The secondchapter defines the conception of financial derivatives and analyses information-providing characteristics of the financial derivatives and its importance in predicting the tendency of interest rate variation. The third chapter analyses the basic thought of hedging as well as the effect in the risk management on interest rate by the financial derivatives. These financial derivatives are: Forward Rate Agreements, Interest Rate Futures, Interest Rate Swaps, and Interest Rate Options. The fourth chapter, through empirical analysis the advantages of financial derivatives outweigh disadvantages in risk management. And the author thinks that for an investor or debtor who needs to insure value, it' s not sufficient to know what kind of financial instrument should be employed in different conditions. An optimal formula should be selected which involves quantitative analysis to various value insured formulas. Two quantitative analysis methods are expounded in this dissertation. One is called formula analysis method or scenario analysis method, the other is Monte carlo method. The fifth chapter, as the interest marketization of our country accelerates, the interest risk is increasing. By means of brief analysis to the developing process of financial derivatives linked with the reality of our country, the author suggests that our country introduce interest futures and its ideal carrier should be T-bond future. The author holds that there are various favorable conditions for our country to launch T-bond futures and it is imperative and urgent. Therefore the author proposes that our country should resume T-bond futures as soon as possible in order to guard against increasing interest risks.