The Lack Of Liquidity Constraints Rmb Interest Rate Swap Entered Into Force

The most common explanation for recent financial crisis is subprime mortgage. However with this reason, it is difficult to explain why the crisis has lasted for such a long time. US government has spent several thousand billions of US dollars while the total amount of subprime mortgage was just several hundred billions. Some experts believe that the actual reason for the crisis is the leverage used in trading by the financial institutions. There are other experts that point out the Credit Default Swap (CDS) worthy 620 thousand billions of US dollars is the ultimate reason. The common understanding is that this crisis resulted from the over-levered trading of derivatives. But can China halt the development of our own derivatives market due to the crisis in those more developed markets? I think that it is important for all of us to have more in-depth understanding and knowledge of derivatives to better handle to possible risks in the future.Derivatives trading emerged since 1970s and it benefited investors in avoiding market crisis and credit crisis. Among all the derivative products, the interest rate swap (IRS) has gained the most popularity. Although the interest rate swap is still quite new in China, it is expected to have a big potential in China according to the IRS historical development pattern in those more development markets.Chinese RMB interest rate swap market opened on 2006, however the market is still regarded as at the initial development stage. Moving forward, it will meet all kinds of problems, which is similar to other more developed markets. The insufficiency of liquidity is one of the biggest challenges to this market. This insufficiency has resulted in dysfunction of this market. Therefore it is very import to understand the reason of the insufficiency of liquidity and develop approaches accordinglyThis thesis consists of six chapters. Chapter One and Two are the preface and fundamental theories. These two chapters introduce the overall research topic of this thesis and also concept, structure and features interest rate swap. Chapter Three and Four define the research focus of this study, i.e. the IRS market is in short of liquidity and therefore dysfunctional. Chapter Five analyze the reasons for the insufficiency of liquidity. Chapter Six introduced the recommendations on approaches to address this issue.