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The Application and Risk Management of Interest Rate Derivatives in Commercial Bank

Author: LiuJiaE
Tutor: TianLiJie
School: Jilin University
Course: Finance
Keywords: Commercial Bank Interest rate derivatives Risk management
CLC: F832.2
Type: Master's thesis
Year: 2010
Downloads: 277
Quote: 0
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Abstract

Interest rate is indicator of the price of capital, in essence, the interest rate is determined by capital supply and demand. The supply and demand of funds are reflected through the market economic conditions, government policies and other factors. Since 2004, China is gradually carried out market-oriented interest rates. The PBOC announced the liberalization of financial institutions at lower interest rates on deposits and lending interest rate cap (except for urban and rural credit cooperatives), only provides the maximum interest rates on deposits and lending interest rates tube floor. This also shows that commercial banks in interest rates will have greater autonomy, which is not only no longer carrying out the central interest rate policy, commercial banks will be take application of interest rate management to participate in market competition, along with market-oriented interest rates from interest rate fluctuations will greatly increase the commercial banking activities, the uncertainty of commercial banks in the absence of effective interest rate risk management tools, will result in a huge bank assets exposed to interest rate risk.Interest rate derivative products as a produced in a short time, the development of fast growing volume of financial instruments,it has been play an extremely important role in the financial institutions and non-financial institutions from its born in the international financial derivative markets. Interest rates risk management played an important role. This paper introduce the interest rate interest rate derivative products and the market developments from interest rate derivative products in the worldwide production and the rapid development.Commercial banks have been mostly used to adjust the balance sheet on the management of interest rate risk, but such a table management methods need to accurately predict future interest rates ,the prediction itself contains a large risk.On the other hand, this traditional management method also requires a very high cost. In view of the lack of traditional management methods, the introduction of interest rate derivatives methods will gradually replace the traditional methods of operation , that need only a relatively small cost to pay in, lock in profits. Foreign banks face a more prefectable market environment, the product is rich in broad business areas. In particular, some foreign banks in interest rate derivatives product innovation has a wealth of experience. Due to the maturity of financial markets and financial regulations ,China’s commercial banks’s development and application of derivative instruments subject to considerable constraints. The development and application of interest rate derivatives, in theory and practical application of research are small . Thus, by borrowing the advanced guard against interest rate risk, the use of interest rate derivatives, interest rate risk the transfer of China’s financial sector has become a key step in the development of the current .Commercial banks’interest rate derivatives are forward rate agreements, interest rate swaps, interest rate futures, and interest rate options. The development of interest rate derivatives was mainly due to transfer of risks, a system product, the promotion of financial engineering, information development, arbitrage and speculative factors. At the macroeconomic level, the interest rate derivative product’s function is price discovery, optimize resource allocation. As for the micro-economic entities, interest rate derivatives has to avoid interest rate risk, increasing investment banking channel.Second, pointing out how to apply the interest rates in commercial banks .In a highly competitive, commercial banks can no longer rely solely on traditional interest income to survive, therefore, commercial banks are also increasing emphasis on the use of derivatives to change the profit model. First, commercial banks increasingly focused on the use of the interest rate derivatives to interest rate risk management, the cost is lower. The bank may through these forward interest rate agreement, the interest rate exchange, the interest rate option and the interest rate prompt sale carries on to the risk to flushes, the derivation variety class deadline structures many may satisfy the different deadline property to flush the operation, moreover the derivation also has the transaction cost to be low and release lever effectiveness, in the actual service operation, does not need the capital finalizing, only needs according to the request payment ration earnest money, like this through a part of jot’s payment guarantee large quantity transaction’s advance, increased the property fluidity. While interest rate derivatives business increased profitability as intermediary business, the commercial banks as a clearing bank or clearing members to participate in interest rate derivatives market . Meanwhile through the example means that introduced these four interest rate derivative product utilization in detail.Third, according to the Commercial bank interest rate derivation’s utilization situation, the place interest rate derivation tool’s market risk, the credit risks and the operation risk, and has given the concrete risk measurement model and the risk management suggestion to these three broad heading risk. During the period of transactions, due to changes in interest rates, bank transactions, parties to the transaction process operation of credit rating changes or breach of contract resulted in bank losses. Therefore, risk management also appears to be particularly important. In this regard, banks should take appropriate and timely measurement model. Risk can not be unified under a single indicator, but should be based on business type of choice model specific measurements. This article when carries on the measurement to the interest rate derivative product’s market risk uses the VAR method, has used the Monte Carlo analogue method to the credit risks, to operated the risk to use the internal weight law to carry on the measurement. In addition, in our country, the database construction started late, the amount of data is small, as well as the lack of data specialized information processing ,analysis method can not be applied to risk calculations, therefore, the establishment of information databases and the providing data on the measurement model for the field of applied mathematics access to get risk capital value. Derivatives trading, because of its complexity, pricing is too much trouble ,the fluctuations in the value of its profit ,proposed to take daily stare system, specify exposure limits, and timely collection of information to take measures to ensure that the risk of fluctuations in an acceptable range. Last , proposing Commercial Bank of China’s interest rate derivatives product development countermeasures and proposals.Combination of China’s current interest rate marketization process and the current actual situation of interest rate derivatives. First of all should pay attention to the cultivation of professionals. Interest rate derivatives is a high-tech requirements of financial instruments, commercial banks conducting an interest rate derivatives business innovation must be related to the study carried out by professionals to determine product prices in the market. Interest rate derivative products must bring out at a higher degree of inter-bank bond market and bond market. Enriching our country’s interest rate derivation market, simultaneously must complete the interest rate derivation risk management, consummates the risk management system gradually. China’s interest rate derivative products, though at the early stage of development, but it can be encouraged and supported by the Government of the gradual development suited to China’s level of interest rate market interest rate derivative products. Play its due role to improve China’s financial market and promoting economic development .

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