Financial Derivatives, Interest Rate Risk Management

Our country became the formal member of WTO on Feb.13th 2001. According to the requirements of WTO. The member of WTO should completely open financial market. And then, 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. Therefore, the market entities in our country especially commercial banks inevitably face bigger interest risk. 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.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 five chapters. The second chapter defines the conception and explains contributing factors, and the forms of interest rate risk, as well as the two main methods of measuring interest rate risk: sensitive gap analysis and duration gap analysis. 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, the path dependence theory is introduced. 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.