Market Risk Management On Financial Derivatives

This article selects financial derivatives as study objects, presenting definition, classification, feature of derivatives. It discusses the impacts which have been brought to financial system by financial derivatives and highlights the phenomenon of double-edged sword that financial derivatives have high risk in themselves but can be used to control risk as well.Base on the above, this article further discusses how to distinguish financial risks and the methods of risk measurement. In risk measurement sections, it focuses on VaR (Value at Risk), including its basic principle, computation methods and several kinds of prediction models. This article chooses the GARCH (General Autogressive Conditional Heteroskedasticity) model in the VaR computations of fix interest rate loan and LS(Loan plus interest rate swap) portfolio. Monte Carlo Simulation is used during the computations. Compare between the calculated results supports the point of view that the rational use of financial derivatives can reduce and control market risk well. Calculation results are also compared with actual observations which verify the confidence of model and computation. It provides a reference for measurement of using financial derivative to control market risk as well.In example-proofing sections, EVIEWS analysis software is used for the computation and daily yield rate of each product is chosen as the object of study in this article. First, the GARCH(1,1) model is used to forecast 260 daily yield rates corresponding to VaR within confidence of 90%,95% and 99%. Second, the compare between computed results will be done to proof opposite risk exposure of financial derivative can reduce market risk. The computed results and the actual daily yield rates will do compare at last to verify availability of model and rational of the conclusion.