Research On Measurement Of Exchange Rate Risk In China Commercial Banks

Our country began to implement a market-based, with reference to a basket of currencies, managed floating exchange rate system on July 21th,2005. From then on, the exchange rate becomes more and more flexibility day by day. Since the central bank restart the exchange rate reform on June 2010, the fluctuation of the exchange rate becomes more obviously. With the development of the market-oriented exchange rate system reform, the fluctuations of the exchange rate will be more substantial and more frequent. It will make the exchange rate of commercial banks greater and greater, and raise new requirements for commercial banks in exchange rate risk management. At this stage, exchange rate risk has caused our great concern. How to control and guard against exchange rate risk effectively in the risk management of commercial banks becomes more important, the premise of which is to measure and predict risk exactly. As a result, it is important for commercial banks to study the risk measurement and find out the suitable model.The core part of the exchange rate risk management of Commercial banks is the risk measure, and the central issue of portfolio risk management is the analysis of correlation and the depiction of the joint distribution of financial assets. In general, the distribution of financial assets has emerged as "high peak and fat tail" characteristics, and the traditional multivariate normal distribution and linear correlation assumptions may make bias or misleading results. As we know, the Copula function does not limit the choice of the marginal distributions and can construct flexible multivariate distribution. While using Copula theory to construct models, the marginal distribution and correlation structure among random variables can be studied separately, in which their correlation structures can be described by a Copula function, which not only simplifies the modeling problem, but also make up the lack of the assumptions of traditional multivariate statistical and correlation effectively,and can better measure the portfolio VaR.Over the years, there are not many papers used to study the correlation between the financial time series through a combination of the Copula theory and GARCH models, there are even fewer papers used to study the measurement of the exchang rate risk.This paper describes the basic theories of the exchange rate risk management firstly. Then analyzes the major exchange rate risk of commercial banks and the current situation of the exchange rate risk measurement, and the necessity and feasibility to measure the exchange rate risk of the commerical banks based on the Copula-VaR method. At the end, it makes empirical study in measurement of exchange rate risk in China commercial banks based on the Copula-VaR method, hopes that, the empirical study can be useful for financial institutionsand supervisors to manage their exchange rate risk.