Research On Foreign Exchange Portfolio Of Commercial Bank Under Var Constraints

After the reformation of exchange rate system in2005, China began to implement floating exchange system, which leads to foreign exchange risk growing widely in commercial banks. The method of China’s commercial banks in the foreign exchange risk management is not efficiently, because many banks just take a simple risk measurement, and has not take effective measurement to control risk. Considering measurement method, mostly banks take exposure method to calculate risk of foreign currency, which ignores the correlation between foreign assets and it also cannot provide advices for the portfolio adjustment. In foreign country VAR is wildly used in risk measurement. However, the VAR in China started late, there is no much application research on foreign exchange risk in commercial banks, even though some studies measured the foreign exchange risk by VAR, there is no further advices to adjustment portfolios. Considering the status of foreign exchange risk management in our country and risk management method in foreign county, it’s really an issue with great practical significance to introduce VAR to measure and manage foreign exchange risk of commercial banks.Firstly, the thesis analyzes the current situation of foreign exchange management in China’s commercial banks, starting from the foreign exchange needs and operations of commercial banks, and analyzes the status of losses arising from changes in exchange rate. Then we find that the method of Exposure can’t measure risk effectively and also can’t provide advices for the portfolio adjustments. So it’s an urgent need to put forward an effective risk measurement methods and tools of portfolio management to deal with the foreign exchange risk of commercial banks.Second, we use VAR to measure risk of foreign exchange of commercial bank. We firstly collect596exchange rate data from January2011to July2013, which includes USD, EUR, HKD, GBP, and YEN. Then the data is changed to the form of logarithmic return. After the analysis, the results show that kurtosis coefficient is larger than1, and also the white test shows the existence of heteroscedasticity of return sequences. In order to take the fat tail and heteroscedasticity into account, the thesis uses GARCH model to adjust the VAR, and calculates the VAR, MVAR, IVAR, and CVAR. Then use VAR calculated above to adjust the foreign portfolio.Finally, considering the balance of risks and benefits, the thesis uses the theory of assets portfolio, and takes VAR as the denominator of Sharpe ratio to represent the value of the risk, and then uses the deformed Sharpe ratio as foreign exchange portfolio optimal model. By building maximum of the objective function of Sharpe ratio, the optimal weight of portfolios is found. Finally, by comparing the initial portfolio with the optimal portfolio, it is found that the optimal portfolio largely reduces the risk based on little changed return. So the Sharpe model with VAR adjusted can achieve the purpose on portfolio adjustment.The optimal model of foreign exchange portfolio under VAR constraint in the thesis only considers the case of normal distribution of assets return, but for other distributions of assets return, it needs further research.