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Implementation and Risk Management of Financial Derivatives in China Construction Bank Jilin Branch

Author: XiaoLi
Tutor: YangHuiZuo
School: Jilin University
Course: Senior management of Business Administration
Keywords: Bank Valet financial derivative products Risk control
CLC: F832.2
Type: Master's thesis
Year: 2012
Downloads: 86
Quote: 0
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Abstract


The financial derivatives are also called as derivative instruments or derivativesecurities. The definition of the supervising committee of the Basel bank is," thefinancial derivatives are a kind of contract and its value will be decided by the valueof an or several underlying assets or index." The financial derivatives comes out fromthe traditional financial instruments and its’ value is based on the price of theunderlying instruments such as foreign exchange, deposits and loans, stocks, bondsand stock index etc. On the international financial market the financial derivativeshas many varieties of products, but the most basics of derivatives are forwards,futures, options and swaps.Furthermore, the more complicated products can becombined by these basic derivatives.Financial derivatives have had a strong influence on financial industrydevelopment. Its beneficial effects are mainly embodied in the following aspects: itcan avoid price risk by using of hedging tools. It is a new profit growth point to thefinancial institutions. It can Improve the operational efficiency of financial markets. Itcan promote the rapid development of the securities market. The adverse effects offinancial derivatives on financial industry include: The improper use of the financialderivative products may result in huge losses. The improper use of the financialderivative products may affect the stability of the financial systemFinancial derivative product originated very early, but the real meaning ofmodern financial derivatives were appeared in the1970’s. In1972, the internationalmonetary market division of the Chicago commodity exchange (CME) is the firstexchange engaged in the financial futures contracts. From1980’s, financial derivativeproducts obtained unprecedented development. According to statistics, now in the international financial market, financial derivatives were known as more than2000kinds of varieties.The history of financial derivative products in our country is only more than10years. The main financial derivatives products in China’s financial market are forwardsettlement and sale of foreign exchange, stock options, the RMB interest rate swaps,currency swaps, forward rate agreements etc.The China Bank Regulatory Commission released formally The temporary rulesof financing institution develops the financial derivatives business in year2004, itcarry out since March1in2004. In2001February, CCB formally established fundtrade department, and joined the International Swaps and Derivatives Association(abbreviation ISDA), became an ISDA member.CCB has its inevitability to develop the financial derivatives business. Firstly,the financial derivatives business can fulfill the need of the implementation ofstrategic goal that is to be an international competitive modern commercial bank.Secondly, the financial derivative business offers one of the new channels todeveloping intermediate business and increasing profitability. Thirdly, the financialderivative business is as a means of improving the assets and liabilities managementlevel and strengthening asset liability risk management.In order to prevent the huge risk of the derivatives transactions, we mustestablish a sound internal risk management system. In CCB, derivatives riskmanagement usually includes the following sections: senior executives, financialmarkets department, asset liability management department, credit managementdepartment, international business department, risk management department,financial accounting department, operation department, information center,information technology management department, legal and compliance department,human resources department, audit department and the domestic and overseasbranches.CCB develop a strict and effective internal control system on service access,trading privileges, risk limits and risk capital measurement, monitoring and reporting,risk management, file management and emergency treatment etc.In order to hedge risk, CCB Jilin Branch take many measures while proceeding transaction, they are as follows:First, it’s from the management aspect of China Construction Bank itself.Establishing the reasonable organization construction and separating the trade intothree parts, the marketing counter, dealing trade counter and accounting and riskmanagement counter. Making flowing chart and regulations and rules of riskmanagement and setting up the effective and efficiency risk management system inorder to evade risks.Second, it’s from the trade opponent. Making trade with a opponent whichreputation rating organization regards it as better reputation rating, and the bargainopponent in good record; establishing credit limit for each opponent and having tradewithin the credit limit with the opponent.Third, it’s from the customer’s aspect. Before trading, we are sure that thecustomer, who entrusts us to do financial derivatives product, comprehend well therisk of the product. And we need to insure the customer having the enough powerwith authorization to be engaged in the financial derivatives trades, having thelegitimacy to do the bargain; and perfecting bargain contract item; and to managecustomer risk in the kind of credit limit.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Banking system and business
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