The Analysis Of Exchange Rate Risk To Chinese Commercial Bank After Reforming The Exchange Rate System

Since July 21st, 2005 China made the announcement on reforming the RMB exchange rate system. China has moved into float exchange rate system, which is base on the demand and supply in the market with reference to a basket of currencies. The exchange rate would fluctuate more frequently under the management. The new policy has made serious influence to China's Economy. With the expectation of the appreciation of RMB, the Hot Money keeps swarming into China market which made the CPI and China's Foreign Exchange Reserves increased dramatically. The report is based on the analysis of the current forget exchange rate risk to Chinese commercial banks from the respects of capital adequacy, profitability, the structure of assets and liabilities, it was concluded that due to the changes of exchange rate system the risk to the banks is much higher than before. The loss will be very serious if we don't use any measure to eliminate the risk.This report apply the VaR model to the current position of the new system by study the management experience and risk measurement tools of foreign countries. Under consideration ofρvalue, this report calculated the VaR of the assets in foreign currency of Bank of China as at the end of 2007. With analysis of the discrepancy of VaR value due to the different asset structures. With the discussion of derivation tools available in the market, this report also gives attention to the feasible financial production to reduce the risk with emphasis of forward business.This report also made suggestion about the improvement of internal system in the bank by establishing new risk management system as well as build a better environment by the government such as setting up a more open and transparency market so as to help the banks to control the risk. This report is aim to provide some feasible and useful advice refer to the management of foreign exchange rate risk.