A Case Analysis On Forward Of Commercial Banks In China

Forward can be divided into narrow forward exchange trading and broad forward exchange trading. In narrow sense, Forward means Forward contract or outright forward trading, which is a basic derivative instrument, and according which the clients buy or sell a certain amount of currencies from commercial banks at the fixed exchange rate on a stipulated future date. In broad sense, Forward covers all kinds of the exchange trading on a forward basis, including Forward contract, swap, options, and other foreign derivatives products and the combinations of them. Since China initiated its new exchange rate reform in July 2005, the demand on Forward has been gradually expanding. In order to open up a new business growth point and enlarge the market shares in foreign exchange market, domestic commercial banks are all actively starting the research and sales promotion of the forward products.The development and application of Forward in domestic commercial banks is systematically expounded in this thesis. Compared with the international foreign exchange market, the development of domestic forward market is still in a primary stage, and Forward, as a newly-developed financial instrument in China, has not been widely accepted and used. And outright forward trading is still mostly used by domestic enterprises as a foreign exchange hedge instrument. This thesis focuses on the two manifestations of the outright forward trading in our country --- Forward RMB Forex Conversion and forward trading between two foreign currencies. The basic theories, operation process and the rated system of them will be introduced in detail. In practical application, outright forward trading is not always singly used, however, it is often combined to be a more functional and more attracting product with swap, option and other derivative instruments. So other derivative instruments—especially option will be referred in the thesis too.The purpose of the Forward is to cover the foreign exchange risk, while the Forward itself has risk in nature. Meanwhile, because the supervision mechanism on Chinese forward Forex market has not been perfectly incorporated and the control system of exchange rate risks in commercial banks is still not widely and efficiently applied. In the movement of the deep reform of RMB exchanged rate system, how to use the marketable and executive measures to extend market supervision and risks prevention, also is the difficulty needed to be solved in this thesis.In addition, a real case will also be introduced in this thesis. Through this case, the writer illustrates in the new conditions how commercial banks apply the forward instruments flexibly to help their clients to avoid exchange rate risks and reduce the optional cost, and satisfy their need for diversification, specialization and individuation. By doing this, the commercial banks can also get a lot of medium business income. Both commercial banks and clients will benefit.