Study On Structured Financial Products’ Risk Management Of Commercial Banks Based On VaR Method

Since financial services had been carried out by domestic commercial banks in2000, financial products attached more and more attention from investors. Amongthose, there’s one kind of financial products which called "structured financialproducts" has gradually been recognized by investors because of its flexibility andhigher yield. From2008to2013, the total amount of structured financialproducts issued by domestic commercial banks increased from528modelsto1850models. With the good momentum of its development, this product isalso exposed to greater market risk, investors’ lack of knowledge of risk andbanks deliberately weakening risk etc. Based on the above situation, thisarticle describes how to apply Value-at-Risk method in bank structured financialproducts’ risk management and the fanal result is expected to give a scientific andreasonable reference to investors, issuers and regulators.This paper, including market research and the quo of risk management ofChinese commercial banks’ structured financial products, the theoretical basis of theusing of Value-at-Risk method and VaR empirical application examples,studiedthe risk management of domestic commercial banks’ structured financial products byusing qualitative and quantitative analysis. Among them, the first two parts are thetheoretical basis of the article. It makes a systematic exposition of the specific usingof VaR model applied to the structured finance products’ risk management on thebasis of the analysis of the domestic status of structured products, related risk factors,its structure and pricing model and the basic theory of VaR model. It mainlyincludes the concept of structured finance products’ VaR, the advantages of thismethod among numbers of risk measurement methods, the selection and application ofVaR in structured finance products. Empirical part, which is the core of this article,chooses the equity linked and foreign exchange linked structure products for examplebased on the above analysis. Then after they have been subdivided into six categoriesaccording to the structure it was designed, methods for computing each of thedifferent VaR have been developed.The empirical results show that:Firstly,VaR model can help measuringstructured financial products’ market risk, and different product categories,term, design structure, the nature of the issuer and other factors will affect the Value-at-Risk of the product and the level of risk.Investors cancompare and select products according to the results of calculations; Sencondly,in thisway,VaR model can help identify whether there’re risk conseal issues;Thirdly,recommendations can be given based on three different perspectives ofinvestors, banks and regulatory authorities by using this method.