The Application of Value at Risk in Chinese Commercial Banks for the Foreign Exchange Rate Risk Management

This paper mainly discusses the application of VaR models in the commercial banks of China for the foreign exchange rate risk management, comparing three basic approach of VaR: variance-covariance method, historical simulation approach and Monte Carlo approach. The foreign exchange rate system is reformed at 21st July 2005 from fixed to floating in China. After the system reform, commercial banks need to bear foreign exchange risk by themselves, which is untertook by the state before. As a result, foreign exchange risk management attract more attentions and concerns from bank managers. Due to the limitations of traditional methods, a more avdanced approach for foreign exchange risk management is required. Appling VaR to the portfolio consists of four foreign currencies to find whether it is fitted. This research suggests that there are several aspects need to be improved in China's commercial banks in order to use VaR model for foreign exchange risk measurement and management