With the fast build-up of Chinese foreign exchange reserves, the risk management becomes a huge problem to the Chinese central bank. In this paper we present a model which can be used to help decision makers select a suitable currency structure based on Analytic Hierarchy Process (AHP) that allows both the economic demand and risk control factors to be taken into account. The model presented here recommends currency allocation and identifies the most suitable percentages among USD, Euro, Pound and Japanese Yen, consistent with the needs of trade settlement, debt repayment and risk control. The results indicate that the Chinese central bank should hold diversified currencies. The model can help the central bank's analysts to work better and will significantly improve the professionalism in the management on the foreign exchange reserves.
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