Week07 - Ch14 - Foreign exchange risk

Week07 - Ch14 - Foreign exchange risk - Chapter 14 Foreign...

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Click to edit Master subtitle style 5/26/11 Copyright _ Chapter 14 Foreign Exchange Risk
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5/26/11 214- Overview This chapter discusses the measurement and management of foreign exchange risk to which FIs are exposed. This chapter discusses how interest rates might impact on the value of different currencies.
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5/26/11 Financial crises related Latin American debt crisis (1980s) http://en.wikipedia.org/wiki/Latin_American_debt Black Wednesday for British Pound: 1992 http://en.wikipedia.org/wiki/Black_Wednesday Mexican peso crisis: 1994 http://en.wikipedia.org/wiki/1994_economic_crisi Asian Financial Crisis (1997) http://en.wikipedia.org/wiki/1997_Asian_Financia Ruble Crisis (1998) http://en.wikipedia.org/wiki/1998_Russian_financ 315-
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5/26/11 414- Sources of Foreign Exchange Risk Exposure: FX exposure and FX volatility Globalisation of financial markets has increased foreign exposure of most FIs. FI may have assets or liabilities denominated in foreign currency (in addition to direct positions in foreign currency). Net exposure of an FI: = (FX assetsi – FX liabilitiesi) + (FX boughti – FX soldi) = Net foreign assetsi + Net FX boughti Where: i = i th currency Net long in a currency: Net exposure > 0 Net short in a currency: Net exposure < 0
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5/26/11 514- Foreign Exchange Rate Quotes Direct quote: the price of the foreign currency expressed in the local currency, example: AU$0.95 per US dollar Indirect quote: the price of the local currency in terms of the foreign currency, example: US$1.05 per AU$ Exchange rate: AUD/USD (from Yahoo Finance) Reason for FX volatility: fluctuations in the demand for and supply of a country’s currency. Sources of Foreign Exchange Risk Exposure: FX exposure and FX volatility
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5/26/11 614- Sources of Foreign Exchange Risk Exposure: Measurement of an FI’s exposure to FX risk: DEARi = Net exposure in foreign currency i measured in domestic currency× the return of foreign currency i under adverse circumstances
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Week07 - Ch14 - Foreign exchange risk - Chapter 14 Foreign...

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