The Exchange Rate Risk Management Of Commercial Bank Under The Rmb Exchange Rate Reform

People's Bank of China issued a notice on the exchange rate reform, which declared that China began to implement floating exchange rate system under the management based on a market-based supply and demand with reference to a basket of currencies. The rate of RMB is no longer pegged to single U.S. dollar, and to format more flexible exchange rate mechanism. This makes RMB exchange rate fluctuations increase. The exchange rate of RMB on July 21,2006 had been raised of about 2.88% to July 21,2005. The central parity of RMB exchange rate against the U.S. dollar was 8.0380:1. It could be founded that there were about 40 billion U.S. dollar in listed banks from annual report of these banks. This forms an exposure which could bring more than 20 billion Yuan. The Annual report showed that Industrial and Commercial Bank of China alone in 2007 had more than 137.688 billion, equivalent to 18.849 billion U.S. dollars. Till 12,2007, the summary of the loss has reached 6.881 billion Yuan. During the subsequent years, the RMB exchange rate's fluctuating makes China's commercial banks raise awareness to exchange rate risk. For commercial banks, risk management is an eternal subject. The conversion of exchange rate system brings the changes to the capital adequacy ratio of commercial banks, foreign currency assets and liabilities and the products reference to foreign exchange rate and many other impacts, how to carry out the exchange rate risk management to enhance the stability of the financial environment and improve the economic efficiency of enterprises, this problem is getting more attention for the study of exchange risk management. The study on this question has a very real sense. Before the conversion of exchange rate China's commercial banks is almost not bear exchange rate risk, therefore out country's financial institutions are lack of awareness on the exchange rate risk and is also very lack of experience of exchange rate risk management. The data of foreign exchange rate after the conversation shows two characteristics:the amplitude increases and fluctuations increasing frequently. As a key player in the foreign exchange market of commercial banks face huge exchange rate risk exposure, which gives out country the lack of exchange rate risk management techniques and experience in the foreign exchange risk management of commercial banks has brought about tremendous challenges.This paper is divided into five parts. The first part is an overview of exchange rate risk. In this part, the writer analyzes the theoretical exchange rate risks faced by commercial banks, the concept, characteristics, types and causes of the analysis, and exchange rate risk management theory, and overview of an effort to exchange rate risks faced by commercial banks and foreign exchange risk management a comprehensive introduction. Foreign exchange risk management has five steps:strategic objectives, risk identification, risk measurement, risk management, risk monitoring. Strategic goals through the formulation of commercial banks will be able to achieve clear objectives, is able to withstand the risk range. In the second part, the writer reviews the course of China's foreign exchange system conversion. Based on the reviewing, the writer studies the five impacts which are capital adequacy ratio for commercial banks, the impact of business assets and liabilities to commercial banks, the impact of foreign exchange financing products to commercial banks, the impact of foreign exchange financing products to commercial banks the impact of credit risk increasing, the impact of liquidity risk increasing, the impact of transaction risk increasing. After the analysis, the writer point out that the conversion of foreign exchange rate brought commercial banks both challenges and opportunities. The exchange rate reform is a gradual process; it should be step by step. after several years of development has been achieved fruitful results, but at the present stage of China's foreign exchange market, there are still many problems related to the RMB exchange rate reform in supporting the work of the remaining defects, inadequate foreign exchange market, the RMB inadequate regulatory mechanisms, the availability of the exchange rate risk aversion tool for species not abundant, extreme lack of financial derivatives, cross-border capital flows on China's huge impact on effective supervision is not enough. The conduct of the exchange rate of China's gradual reform, so that the pressure of RMB appreciation realized to achieve the RMB exchange rate fluctuations within a certain range, but because of our lack of an effective foreign exchange market, foreign developed capitalist countries have adopted market-maker system, the vast foreign exchange market Most of the above are dispersed and invisible in our country are concentrated, very little foreign exchange forward transactions, almost all spot transactions, almost all of China's foreign exchange transactions are conducted between financial institutions, other institutions and individuals involved relatively small, China's foreign exchange market, this situation led to the exchange rate system reform to certain effects. Cross-border capital flows are increasingly convenient, but China's financial supervision capacity is relatively weak, cross-border capital flows can cause enormous impact on China. There are also many problems about Exchange rate risk management of commercial banks. China's commercial banking industry has formed an initial exchange rate risk management concept, but the risk management tool which could be used is rather scarce on the derivative financial products, China's commercial banks are currently using Forward foreign exchange contracts. The main reason is China's development does not sound foreign exchange market, without an efficient, improve the foreign exchange market, foreign exchange can not provide a platform for derivatives trading, even if there is a wealth of foreign exchange derivative products, its active nature is also being questioned, nor means that China's foreign exchange market, foreign exchange derivative products do not have the active conditions. The third part is measured on the exchange rate risk. The accuracy of measurement of the exchange rate risk is a commercial bank a prerequisite for effective risk management and protection. In this section the authors of several risk exposure and VaR risk measurement models are introduced, the writer gives a measure of an example. Through the use of variance-covariance method were measured 1%,5% and 10% of these three different confidence levels of VaR, and to compare the results of its measurement. In the fourth part of China's commercial banks exchange rate risk management research, analysis at this stage of China's commercial banks to exchange rate risk management, and China's commercial banks have to face exchange rate risk management problem:the lack of effective exchange rate risk management methods and tools for in the application of VaR and other more advanced risk measurement tools, problems abound. Then several common foreign exchange rate risk management, financial derivatives were introduced, and the predictability of the proposed China's exchange rate formation mechanism based on market supply and demand, managed floating exchange rate case, in our application of the exchange rate derivative products exchange rate risk management has its necessity also has an extremely important meaning. In the above-mentioned four parts based on the analysis, this author is given in the fifth part of the Commercial Bank of China's exchange rate risk management proposals. China's commercial banks in the foreign exchange risk management process to explore appropriate exchange-rate risk management in developed countries learn from the experience. China's commercial banks can draw on an appropriate risk-measurement tool for the mainstream VaR model and to build on VaR based on the exchange rate risk measurement system, the RMB exchange rate risk to achieve an effective, real-time monitoring and management is the face of this ever increasing a large exchange-rate risk that must be taken. To adapt to the pace of exchange rate reform a gradual and progressive development, and gradually improve the foreign exchange market, so that the face of growing stronger and stronger in the future exchange rate volatility and the increasing volatility of foreign exchange, the China's commercial banks will be able to effectively manage exchange rate risks, whom gained valuable experience to prepare.