A Study On The Exchange Rate Risk Of China’s Foreign Exchange Reserves:Based On The CVaR Model

By the end of March of2011, Chinese foreign exchange reserves had reached3044.674billion dollars.According to growth of Chinese foreign exchange reserves,Chinese foreign exchange reserves are still growing. As dollar has higher proportion of theassets of Chinese current foreign reserve, according to the current international situationand with the trend of Dollar and RMB exchange rate, the dollar exists the possibility ofdepreciate. It is a serious challenge for China government which has a huge amount ofdollar assets. In order to make effective management of Chinese foreign exchangereserves, we must have a clear direction and goals, propose some effective preventivemeasures, to minimize the risk of foreign exchange reserves under the challenge ofholding huge assets of foreign exchange reserves.The article first reviews the development process of the increased of our country’sforeign exchange reserves, which from19.44billion dollars in late of1992, rose to3044.674billion dollars by the end of March2011. And then through internationalexperience standards to determine the adequacy of Chinese foreign exchange reserves, theresults show that: Chinese foreign exchange reserves are in excessive state. Thoughholding sufficient reserves has obvious advantages in preventing financial risks andpromoting economic development, holding excess reserves should pay a big price. Then,this article describes the main risks of Chinese foreign exchange reserves,such as interestrate risk, exchange rate risk, liquidity risk and opportunity risks. In the third part of thisarticle,it introduces the concepts and methods of VaR calculation methods. Although VaRis very popular in the field of risk measurement, it also has some bad properties, such as:lack of time convexity and sub-additive. Based on it, this paper proposed CvaR model tostudy the exchange of rate risk by empirical study, which is based on the model of Chineseforeign exchange reserves. And according to the results of empirical study, with the helpof Mean-CvaR model to optimization the structure of currency, makes the currency riskminimization. Finally, it gives the conclusions of the article, and put forward someappropriate policy and recommendations.