Studies Of Risk Management For Commercial Bank's Exchange Rate In China

The late 70s of the 20th century, Bretton Woods System collapsed, and floating exchange rate system was generally used, thus bring about greater exchange rate risk which gradually became the main market risk for commercial banks. On July 21, 2005, China began to implement a market-based, with reference to a basket of currencies, managed floating exchange rate system. Implementation of the new mechanism has undoubtedly raised new requirements for commercial banks in exchange rate risk management.Along with the reforming of the exchange rate system and the opening up of the capital market, the exchange rate risk becomes an important topic that China's commercial banks have to deal with. In particular, because of the global financial crisis, exchange rates become more unpredictable, exchange rate risk is also growing.Therefore, strengthen the exchange rate risk management is imperative.Foreign scholars has done a lot of research in the issue of exchange rate risk management. In this paper, a large number of literatures have been referred, and exchange rate risks are categorized and summarized according to basic theoretical concepts, measurement methods and management practices home and abroad. Also, I do some empirical tests, using Foreign Exchange Exposure Management and the popular VaR (Value at Risk) method. Among them, the first method, select eight banks in the current 15 domestic listed banks, according to annual reports of the eight listed banks from 2004 to 2008, using the exchange rate exposure management approach to do the empirical analysis. The second method, this paper employs GARCH model to estimate the foreign exchange rate risk in China, and analyses with examples of Industrial and Commercial Bank of China and Merchant Bank. Based on the empirical study of VaR of RMB/USD exchange rate daily change ratio, we find that the values of VaR estimated by GARCH(1,1) model fit the actual RMB/USD exchange rate data very well, suggesting that there is obvious ARCH effect on RMB /USD exchange rate daily change ratio, thus has high value in the application of commercial bank's exchange rate risk management.This is also the innovation of my paper.Finally, according to the results of empirical analysis, from institutional architecture, we attempts to establish a better exchange rate risk management system for commercial banks in China, which includes four steps. At the end, proposed specific measures to avoid exchange rate risk for commercial banks in China to sum up the whole paper, and propose future development prospects. Hope that, the empirical study can be useful for financial institutions,supervisors and foreign exchange investors to manage their exchange rate risk.