Summary:
Exchange rate fluctuations will directly affect the costs and benefits of enterprises. If enterprises do not take effective foreign exchange risk management measures, they will face losses caused by exchange rate fluctuations.
The generation of risk comes from uncertainty, and exchange rate-sensitive assets (liabilities) are assets that encounter fluctuations in exchange rates that will cause uncertainty in their maturity value. Due to the uncertainty of the value to maturity, there will be a risk of appreciation or impairment, that is, foreign exchange risk.
The appreciation or impairment of exchange rate-sensitive assets and liabilities may be self-funded. In order to reduce and control risks, banks will also artificially arrange such offsetting, which is called "offsetting" risk.
Exchange rate-sensitive assets or liabilities that have not been offset after write-off, that is, exposure to foreign exchange risk, are called "foreign exchange risk exposure" or "foreign exchange risk exposure".
According to the different purposes of holding exchange rate-sensitive assets and liabilities, the foreign exchange risk exposure of commercial banks is generally divided into foreign exchange risk exposure of trading accounts and foreign exchange risk exposure of bank accounts.
The trading accounts of commercial banks, i.e., the market value of financial instruments denominated and settled in foreign currencies held for trading purposes (in RMB), will fluctuate with the fluctuations in the exchange rate of RMB against major foreign currencies.
The foreign exchange risk exposure of the bank's trading account mainly refers to the bank's exposure position in the proprietary foreign exchange trading business, which can be analyzed using the method of the foreign exchange transaction record sheet.
The foreign exchange transaction record table is only a record of transactions in itself, but it is a powerful tool for analyzing the bank's foreign exchange risk exposure.
By using the foreign exchange transaction record sheet and constantly revaluing the market value, we can timely analyze the foreign exchange risk undertaken by the bank so as to take measures to control and avoid it.
Single Currency Risk Exposure
The net exposure position of a bank in a single currency includes the sum of the following:
Net spot position refers to all asset items priced in a certain currency minus all liability items, including interest receivable.
Net forward position: all receivables under forward foreign exchange transactions minus all payables, including the principal of foreign exchange futures and foreign exchange swaps not included in the spot position.
Definitive requirements for performance and potentially irrevocable guarantees (and similar financial instruments).
Net expected income or expenses that have not yet occurred but have been fully hedged.
Other accounts that represent foreign currency-denominated gains and losses according to specific accounting practices in different countries
Equivalent net amount of all foreign exchange option accounts.
Exposure to Foreign Currency Portfolios
According to the Basel Accords, banks have two options for measuring foreign currency portfolio positions: the simple method and the internal model method. Since the internal model method is complex and can only be used by banks that meet strict conditional requirements, only the simple method is explained here:
According to the simplified method, the nominal amount (or net present value) of each currency and gold net position is converted into the reporting currency at the spot exchange rate, and the net exposure position of the foreign currency combination is obtained by adding it up as follows:
1. The sum of net short positions or net long positions, whichever is greater.
2. The net position of gold (long or short), regardless of the sign
Management Measures
Trading account Foreign exchange risk management measures: limit management
The position of a bank trading account is held for profit purposes, that is, to actively hold risk exposure, but in order to control risk, limit management is generally adopted.
Management measures for overall foreign exchange risk: capital requirements
According to the spirit of the Basel Accords, banks' capital should meet the requirements of covering all kinds of risks, that is, the well-known requirement of an 8% capital adequacy ratio.
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