Exchange Rate Risk Management Of Commercial Bank Based On VaR

As the development of globalization, the connection between the countries was increasingly close. The development of a country’s economy, policymakers tend to produce different degrees of influence on other countries. The influential country’s monetary policies often changes the exchange rate of other countries. Especially the rapid development of information technology, lead to the spread of the exchange rate volatility faster velocity, more extensive coverage. At the same time, the influence factors of exchange rate become more complex and subtle. For uncertainty changes of exchange rate, as commercial banks can’t avoid. Commercial banks can influence the supply and demand situation of foreign exchange, but its influence is limited after all. In most cases, banks in the business for the current exchange rate is passive acceptance, given the huge role of banks in the financial system, for the sound operation of the bank’s macroeconomic performance has important significance, therefore, how to analyze and measure the exchange rate risk and thus to control and manage, has become an important issue of commercial bank market risk as well as comprehensive risk management.Our country controlled the exchange rate before, the exchange rate fluctuation is relatively limited, the banks do not pay attention to the exchange rate for a long time. From the current practice, the traditional methods often used to manage risk. Such as the foreign exchange exposure management. Although the application of this method is simple, it is not adapt to the need of supervision due to the multilateralism of factors which impact the exchange rate.In recent years, from theory to practice VaR model has used to measure the exchange rate by foreign financial institutions. It also focuses on the contents of this article describes. In order to simplify regulation, uniform standards, Basel also made some other ways to measure risk, such as internal Models. This paper introduces the concept of VaR, followed by the introduction of some commonly used VaR estimation methods, including historical simulation, Monte Carlo simulation, EGARCH models and extreme value theory, and a brief analysis of the strengths and weaknesses of the various methods. In order to make the evaluation of different methods or models, in the last chapter, also describes Kupiec back testing test. Finally using different VaR methods to estimate the yuan-dollar exchange rates. Then using back testing test to evaluate the various models. Result shows that historical simulation results at various confidence levels are is invalid, and the Monte Carlo simulation method, EGARCH models and extreme value theory on the advantages and disadvantages of different confidence level.