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Adjusting the Currency Composition of China’s Foreign Exchange Reserve
Author(s) -
Kai Shi,
Li Nie
Publication year - 2012
Publication title -
international journal of economics and finance
Language(s) - English
Resource type - Journals
eISSN - 1916-9728
pISSN - 1916-971X
DOI - 10.5539/ijef.v4n10p170
Subject(s) - foreign exchange reserves , foreign exchange risk , currency , reserve currency , treasury , special drawing rights , liberian dollar , monetary economics , business , foreign exchange swap , debt , economics , china , international economics , financial system , finance , archaeology , political science , law , history

During the sovereign debt crisis, the national credit of some developed economic entities has been degraded repeatedly. It is adjusting the currency composition of China’s foreign exchange reserve that becomes an important risk management tool. In this paper, we first make an analysis on possible currency composition of China’s foreign exchange reserve combining data from the Treasury International Capital System of United States with IMF Currency Composition of Official Foreign Exchange Reserve, and then discuss the currency composition of minimum variance risk within the framework of Mean-Variance Analysis. Afterwards, a dynamic adjusting route from the real composition to the optimal structure is built up through the dynamic optimization approach. It is found that converting dollar assets to yen assets according to the optimal schedule will lower the risk of foreign exchange reserve effectively.

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