China's Commercial Banks Use Financial Derivatives To Hedge Interest Rate Risk

With the overall opening of our country's financial market on Dec.27^th 2007, our country's monetary policy is increasingly influenced by international monetary policy. And interest fluctuation tends to converge with the fluctuation in the international market. At the same time, our country accelerated the process of interest rate liberalization. Therefore, the market entities in our country especially commercial banks inevitably face bigger interest risk. Due to the limitations of the supposition, the operation and validity of the traditional management methods regarding the interest rate risk have already been greatly reduced. In order to manage interest risk, it is imperative to explore the application of financial derivatives as the primary risk-avoiding instruments in international financial market in the interest risk management.The interest rate liberalization is an organic part of the financial reform. With China's accession to WTO, the interest rate liberalization will be growing more urgent and more important. The process of the interest rate liberalization is actually a process of creating conditions for the interest rate liberalization, as well as a process of controlling risks. Begin with the awareness of risk, the paper points out the important role of the interest rate risk management in banking administration. It also gives observations on China's interest rate management through applications on theory of interest rate risk management to commercial banks: dissecting the appearance and reason of interest rate risk in China's commercial bank and the existing problems during management, exploring the measurement for the risk, and bringing forward the practical measures to bring down the risk and strengthen the management.Due to the idea, this dissertation researches the application of characteristics and hedging functions of financial derivatives in interest rate risk management. Firstly, this dissertation consists of six chapters.The first chapter defines the conception and explains contributing factors, and the forms of interest rate risk, as well as the process of interest rate liberalization of our country.The second chapter explains the methods of interest risk management in foreign commercial banks, the history and development of the interest rate risk management and the present situation of interest rate risk management in china's commercial bank.The third chapter defines the conception of financial derivatives and analyses the characteristics of the financial derivatives and the price of derivatives.The forth chapter analyses the basic thought of hedging as well as the effect in the risk management on interest rate by the financial derivatives. These financial derivatives are: Forward Rate Agreements, Interest Rate Futures, Interest Rate Swaps, and Interest Rate Options. At the same time, we primarily show two quantitative analysis methods on The choice of hedging method.The fifth chapter according to the legal and market environment of the development of our country's derivative financial Instrument analysis how to manage interest rate risk in china's commercial bank by derivatives transaction.The sixth chapter introduces the paper's conclusion. Through the compare of our country's financial derivatives market and other country, we elicit the total idea of the development of our country's financial derivatives market. And propose that China should develop the treasury bonds futures firstly.