Bank Foreign Exchange And Interest Rate Risk Management

Interest rate and exchange rate as two elements of economic development are playing the irreplaceable roles in the development of the banking sector. With the advancement of marketization of interest rate in our country, the interest rate determined by the supply and demand is bound to have a huge impact on the bank deposit and lending business.Meanwhile, along with the reform of the exchange rate mechanism, bank exchange rate will face a bigger test. In this paper, In order to reduce the bank’s overall business risk we study using financial derivatives hedging of interest rate risk and exchange rate risk. But a great characteristic of this article is not only simple hedging on two risks respectively but hedging on two risks simultaneously,then determine the optimal hedging ratio. But because the domestic financial market is not developed and the types of derivatives are not rich, this article will banking market in the United States as an example for analysis, and hope the conclusion can do something useful for the future development of China’s banking industry with the reference value of the information.This article is divided into four chapters. The first chapter is introduction, mainly introduces the research background and motivation for this article, including an overview of the exchange rate risk management,interest rate risk management, the present situation of the domestic two kinds of risk management and study motivation. After the research content of this paper is to introduce and framework.The second chapter is literature review of hedging. This chapter introduces the development of hedging theory and determination of hedging ratio. Then it introduces the domestic related research were reviewed.The main content of the third chapter is the establishment of the model and the determination of the optimal hedging ratio(using the MGRACH model),then comparing with separate hedging strategy. In order to better illustrate the comparison results of statistical significance test is also required(using the GMM model).The fourth chapter is the conclusion and relevant policy recommendations. For this article research results further textual description, at the same time is the development of the banking of our country, the interest rate risk and exchange rate risk management for the future in the future.The focus of this article and the difficulty lies in the determination of model hedging ratio. By fully considering the long-term relationship between the spot contract and the forward contracts, we can get the optimal hedging ratio that will be more theoretical and practical significance. The research to these questions will involve a lot of data collection. Due to the domestic market is not developed and financial products is relatively scarce, We will use U.S. Banks for analysis. At the same time, various parameters variable estimates of the need to use a lot of knowledge of econometrics and cooperate with many the use of computer software, so there’s more difficult. In addition, the application of multivariate GARCH model in China is still in its infancy, the related literature material we can refer to is not rich.This paper investigates the hedge ratio dynamics for large US banks with exposure to both interest rate and foreign exchange risks. Using a mean-variance framework, the paper evaluates hedging performance when interest rate and foreign exchange risks are hedged separately versus simultaneously. Optimal hedge ratios for separate and simultaneous hedging strategies are estimated using the multivariate GARCH model. The magnitude of separate hedge ratios is found to consistently overstate that of simultaneous hedge ratios for banks that engage in both domestic loan extensions and foreign exchange operations. Both in-sample and out-of-sample results indicate that a simultaneous hedging strategy outperforms a separate hedging strategy. The mean-variance efficiency test results strongly support statistical significance to this finding.