Research On Chinese Corporation’s ERM Of Derivatives

Since the1970s, along with the collapse of the Bretton Woods system, the oil crisis and the international debt crisis, the international finance markets have becoming more unstably. The interest rates, exchange rates and other important financial variables are fluctuating all the time. This makes the financial risks faced by the enterprises and other agencies increasing dramatically. Under this severe situation, the businesses and individuals urgently need for new hedging instruments, in order to achieve the purpose of risk aversion. In this context, financial innovation came into being, and led to a far-reaching revolution in financial sector. Swept up in this wave of financial innovation, lots of new types of derivatives are invented at an alarming rate.In the reality of imperfect market conditions, the development of derivatives indeed provides the dealers with a place in which can achieve the purpose of risk transfer and price discovery. But the revenue is always accompanied by risk, because of the characteristics of the highly leveraged and virtual, the risk of derivatives is often more concentrated and dangerous compared to traditional financial instruments. So the derivatives just like a sword with two edges, it may bring huge profits to investors, and also may lead to huge losses and even bankruptcy. Since the1980s, the frequent exposure of the huge losses caused by the trading of derivatives on the international financial markets has proved this. In recent years, with the increased participation of Chinese businesses in derivative transactions, such events have also occurred in our country.Why the derivatives that had been used to hedge the risk are becoming a new risk for the businesses? The key to answer this question is to examine what problems exist in the enterprise risk management of the derivatives. Therefore, based on the status of the derivatives transaction of Chinese enterprises, this paper will make a deep analysis of the risk management of derivatives in China.This paper’s research method is the combination of theoretical research and case studies. Based on the systematically elaborate the risk characteristics of derivatives as well as the enterprise risk management theory, this paper analyzes the event of Eastern Airlines and the events of CITIC Pacific respectively from the perspective of the enterprise risk management. Specifically, this paper’s analysis of the reason of the two enterprises’huge losses is not only from the view of pure derivative investment strategy, but also from the view of enterprise risk management. Finally, this paper summarizes the problems that exist in the enterprises risk management of Chinese enterprises who engage in derivative transactions, and then gives the suggestions to improve the enterprise risk management of derivatives in China.