A Study On Chinese Commercial Bank Foreign Exchange Rate Risk Management

For a long time, the RMB exchange rate basically fixed, Chinese commercial banks did not attach great importance to the possible changes of the exchange rate risk, and their exchange rate risk management is nearly out of date. On July 21, 2005, China began to implement managed floating exchange rate system, which is on the basis of market supply and demand with reference to a basket of currencies. For commercial banks, the reform of the exchange rate system not only creates a more relaxed environment for their development, but also put their risk prevention capabilities in a higher demand because they will face enormous exchange rate risk. Also, the financial crisis has made commercial banks realize that they are closely connected with the world and the foreign exchange rate risk has really become a big problem. Thus, commercial banks have the necessity and feasibility to strengthen the ability of managing foreign exchange risk. In this case, the exchange rate risk management study of Chinese commercial banks makes sense.Commercial banks are the center of foreign exchange business, and the reform of exchange rate system will affect capital adequacy of commercial banks, asset-liability business, and foreign exchange product sales to some extent. In this respect the risks arising from complex service structure, high uncertainty, extensive involvement and frequent price fluctuation should be highlighted. Hence, commercial banks should take measures to increase management awareness of foreign exchange risk, regulate currency structure of foreign exchange asset and liability, optimize loan and customer structure, actively avoid foreign exchange rate risk, and develop financial products of foreign exchange rate to increase the ability of handling foreign exchange rate risk. With the founding and development of foreign exchange rate risk management system, Chinese banks can eventually obtain risk return and set up the modern commercial banks' operating mode.The paper can be divided into four parts. The first part is introduction. This part introduces the study's background and significance, the status quo at home and abroad study, and the research methods used in this paper. ChapterⅠis the general analysis of effective commercial banks foreign exchange rate risk management, including the definition and classification of foreign exchange rate risk and the corresponding management theory. This chapter is the base of the paper. ChapterⅡis the analysis of Chinese commercial banks foreign exchange rate risk management situation, which is the focus of the paper. This chapter especially details on VaR risk measurement methods, and use historical foreign exchange rate data and usual VaR model to make empirical analysis on BOC's foreign exchange rate risk. ChapterⅢis the advice on Chinese commercial banks foreign exchange rate risk management. This chapter introduces solutions to strengthen the foreign exchange rate risk management of commercial banks in China.