The Swaps Market Risk Management In Lending Foreign Debt

80% of current long-term outstanding foreign currency debt in China is re-issued through Chinese policy banks or Ministry of Finance. These loans are normally originally provided by developed countries or international financial organizations, with lower-than-market interest rates, long tenors and other preferential terms for developing economies. There are potentially foreign exchange risks and interest rate risks for Chinese corporate borrowers if they don't hedge their positions. For example, Chinese corporate normally have revenue in Renminbi, however they finally need to repay these loans in foreign exchange, currency mismatching between asset and liability leaves them exposed to foreign exchange risks.We are trying to analyze the necessity for Chinese corporate to manage their liability risk properly and also the know-how on financial risk management. This thesis includes below 6 sections with the opinion of:Liability risk management has involved three parties: foreign banks, Chinese intermediate banks and also foreign debt borrowers, to participate into the derivatives like swap, option and other exotic OTC product transactions. Foreign banks and Chinese intermediate banks are taking different roles in these transactions though. Foreign banks have the advantage of know-how and also international trading capacity for efficient hedging; therefore they provide customized mainstream risk management products. However, they normally cannot do OTC transactions with Chinese corporate directly due to lack of credit information on the company. Chinese banks have built up good relationship with Chinese corporate from the long-term credit co-operations, while they haven't developed trading capacity to hedge the huge foreign exchange positions. Chinese corporate as the financial risk hedger are getting educated by Chinese banks on how to built up their financial risk management system and how to leverage on the international financial market to hedge those financial risks which they are not familiar with and focus on their daily operations more. These three parties cooperate closely and all are playing important roles in Chinese financial OTC derivatives market.Swap transactions are now the most popular derivatives tools in China, though swaps are not developed enough yet. With appropriate utilization of this tool, corporate cansuccessfully hedge those financial risks and also can benefit from some exotic transactions, while it can also be detrimental if corporate is too speculative on these tools. There will be further thoughts and discussion on this yet developed market and we will also be trying to find more solutions to this.