The Interest Rate Risk Management Of China's Foreign Exchange Reserves

Since the reform and opening up,with the soar of Chinese economy and the development of foreign trade,Chinese foreign exchange reserves is in the state of high-speed accumulating.Besides,as of December 2016,Chinese foreign exchange reserves has reached 3.011 trillion dollars,ranking first in the world.It is the core issue for foreign exchange management authorities to concern about that how to manage such a large amount of foreign exchange reserves,control its risk,let it play its functions better,make contributions to China's foreign exchange market stability and economic development.At present,China's foreign exchange reserves are facing many complex problems:the not well-diversified currency structure,single asset form,and the imperfect management system and regulations,resulting in inefficient management of foreign exchange reserves,inadequate level of return on assets and facing much potential risk of loss,leading to a great limitation on the role of foreign exchange reserves.In this paper,the interest rate risk of foreign exchange reserves is taken as the research direction.Through the method of combining the theories and empirical studies,the appropriate measurement model is established to measure the interest rate risk of Chinese foreign exchange reserve.Finally,integrating with the empirical results,the relevant suggestions of foreign exchange reserve risk management would be given.This paper consists of six parts.In the first part,I define the foreign exchange reserve,the risk of the foreign exchange reserve,the interest rate risk and the Copula function;The second part is the definition of the foreign exchange reserve and its risk;The third part mainly combs and summarizes the development history,present characteristics and potential risks of China's foreign exchange reserve,which is the realistic basis of this paper;The fourth part would be the analysis and descriptions of interest rate risk,VaR method and Copula function,which is the theoretical basis of this paper;The fifth part is the empirical part of this paper.By using the GARCH-Copula-VaR model,the interest rate risk of China's foreign exchange reserve is measured and finally come to the results;the final part is the summary and suggestions,by combining the results of empirical analysis,the improvement program is proposed on China's foreign exchange reserve management.