A Study On Risk Management Of Financial Derivatives In China

The 1970s' saw many changes: disintegration of Bretton Woods Region, eruption of global oil crisis, and drastic fluctuation of interest rates and exchange rates on international financial markets, almost every economy entity had then experienced the risk of losses brought by the exchange/interest rate movement, hence there was a great desire to avoid risks on the international financial markets. As the key financial innovation of the last several decades, financial derivatives have shown both great vitality and immense destructive power: it improved the liquidity of financial markets and promoted the development of banking industry, but on the other hand, it also created a lots of troubles and had forced people to reconsider the issue of risk management.Along with the opening of Chinese financial market, domestic enterprises show increasing demands on better risk control, which makes wide usage of financial derivatives an inexorable trend. This paper discusses the risk management of financial derivatives base on Chinese reality.Firstly this paper argues that accounting is the foundation of risk management. Base on the analysis of current accounting rules and regulations, the author put forward a proposal of setting up Chinese hedging accounting regulation, and some opinions regarding accounting treatment and information disclosure of financial derivatives.The paper then emphasis the importance of internal control, the author argues that limits should be set for various kinds of risks associated with financial derivatives, accurate measurement is needed in order to control the risks.At the last, the author points out that external administration, including government supervision and international supervision, is a superior form of financial derivative risk management. Some constructive suggestions on how to incorporate the new Basel Capital Agreement with the practices of local government supervision is given.