Measuring And Managing Interest Rate Risk With The Application In China

Since the early seventies, the breakdown of the Bretton Woods Agreement, coupled with a liberalization of the financial markets and the inflation and oil crisis of the same time, led to increased volatility of interest rates of fixed-income securities. The international financial institutions witnessed operational plight stemming from interest rate risk. Under this background, the significance of the measurement and management of interest rate risk both in theory and practice is distinct for financial institutions. After a discussion on the history, application and improvement of the measurement and management of interest rate risk, this paper is just motivated by the outstanding problems existent in the measurement of interest rate risk management of financial institutions and its application in local market.The essay performed the demonstration and analysis from the five aspects:1. Foreword. The paper first analyzed the problem both in theory and practice. Besides, the introduction outlines the main subjects of interest rate risk and provides an overview of relevant literatures on interest rates studies.2. The measurements of interest rate risk. This part expounds the measurements of interest-rate risk used in financial institutions commonly.3. This part introduced the application of duration, an important measurement of interest rate risk, and its scarcities. Thus, the amelioration is given in the paper. Besides, this part also established the risk hedging strategy under the nonparallel-shift yield curve.4.For this part, Value at Risk(VaR) model in the measurement and management of interest rate risk is proposed. And there is an description about the concepts of key rate duration and key rate convexity.5.Different methods of interest rate risk management should be applied according to different financial institutions. This part tried to find the proper measurement and management of interest rate risk for the financial institutions in China during the transition period of interest rate control. And two case studies are demonstrated in practice.