Research On Currency Allocation Of Foreign Exchange Reserve Based On Category Management

As the fast rise of China's foreign exchange reserve in recent years, the total amount of foreign exchange reserve has exceeded the optimal foreign exchange reserve by more. The holding cost of foreign exchange has increased year by year. The tremendous foreign exchange reserve has affected the independency of monetary policy of the central bank. The yield of China's foreign exchange reserve is low. Besides, the currency structure mainly composed of Dollar cannot meet the needs of import, repayment of debts, and keeping mechanism that sets the exchange rate on a basket of world currency.The management of currency structure needs to satisfy the requirement yield after the fulfillment of liquidity and safety. Therefore, we should implement category management. The exchange reserves which are used to pay import, principal and interest of debt, intervene the exchange rates of RMB are called functional foreign exchange reserve, which should be implemented management of safety and liquidity. The total foreign exchange reserve subtracts the functional part is profitable foreign exchange reserve, which should be used to make profit.This paper introduces the Agarwal Model which researches into the optimal foreign exchange reserve and the models on foreign exchange reserve's currency structure: Heller-Knight Model, Dooley Model, and Asset Portfolio Model. This paper analyzes the optimal foreign exchange reserve from the year of 2001 to 2008 based on Agarwal Model, then analyze the currency structure of functional foreign exchange reserve based on Heller-Knight Model and Dooley Model, thereafter, analyze the currency structure of profitable foreign exchange reserve in the year 2000,2002,2005 and 2008 based on Asset Portfolio Model with the help of MATLAB. The comparison of the different currency structures in different years leads to the conclusion of dynamic management.At last, to aim at the demonstration result, we propose on the management of currency structure of foreign exchange reserve. The monetary authority should pay more attention to the profitability, adjust the currency structure dynamically and progressively, intensify the reform of management of foreign exchange reserves.