A Study On The Management For Interest RateRisk Of China's Commercial Bank

The interest rate risk of commercial banks refers to that interest rate fluctuations cause changes in value of asset, liability and off-balance position of commercial, and then lead to the probability of loss of market value and equity value of commercial banks. Since the 1970s, with increase in the level and frequency of interest rate fluctuation caused by the interest rate marketization reform in the many countries, exposure of commercial banks to interest rate risk has increased greatly and the interest rate management has become the main function of commercial banks from the accessory function of commercial banks.The paper will widen and improve the current study on the interest rate risk management of commercial banks in order to meet the needs of the practice of interest rate risk management of commercial banks and offer help in theory for interest rate risk management of commercial banks further.The paper develops a new method called exponential duration to estimate the interest rate risk of fixed-income bond. The traditional duration method estimates the percentage change in value by dividing the absolute change in value by initial value. The exponential duration method estimates the percentage change in value by change in the natural logarithm of value, and this use of the natural logarithm is a more accurate approximation. Compared with the tradition duration method, exponential duration is more accurate. Exponential duration is almost as accurate as estimation using traditional duration plus convexity. However, the method using tradition duration plus convexity underestimates the asset price decline when interest rate increases. Exponential duration slightly overestimates asset price decline when interest rate increases. For risk-averse investors, exponential duration is more attractive. Furthermore, exponential duration has the property of simpleness in computation.Traditional duration and convexity neglect the option embedded in the assets and liabilities so that they can't effectively measure the interest rate risk of financial instruments with embedded option. The paper at first uses the Hull-White option model to compute the value of option embedded in bond and the value of bond with embedded option, and then computes duration and convexity of bonds with embedded option. The result of numerical simulation shows that when call option and put option are embedded in assets and liabilities of commercial banks respectively, convexity between asset and liability mismatches remarkably and the impact of convexity-mismatch exceeds usually the impact of duration-mismatch. In this case, only matching callable asset duration with puttable liability duration can't effectively hedge the equity value of commercial banks. The paper proposes a new set of puttable assets and callable liabilities as hedging instruments against convexity-mismatch.The duration used by most of current documents is only appropriate for default-free bonds. However, not adjusting the duration of default bonds to default risk will lead to great error in the interest risk estimation. The paper derives a default risk-adjusted duration formula based on default risk term structure. The paper demonstrates that default risk-adjusted duration of defaultable coupon bonds is the sum of the bond's Fisher-Weil duration and the duration of the potential expected delay in recovery caused by the default option.Interest future is a most common method to hedge against interest risk. The paper defines price change of fixed-income instruments in term of duration and convexity at first, and then develops a two-instrument model to hedge duration effect and convexity effect caused by change in interest rate. The result of numerical simulation shows that the two-instrument hedge model developed in the paper is much superior to the one-instrument hedge model only based on duration and traditional two-instrument hedge model based on duration and convexity.The paper uses econometric method to estimate the Chinese commercial banks'exposure to interest rate risk. The result of econometric model shows that the ability of China's commercial banks to withstand interest rate risk is weak as a whole and the exposure of medium-sized banks to interest rate risk is serious than the exposure of large banks to interest rate risk. Based on the result, the paper proposes that enhancing the development of interest rate risk management system and improving the ability to manage interest rate risk is an urgent task for China's commercial banks.