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Foreign Exchange (FX) Risk

Foreign Exchange (FX) Risk - Foreign Exchange(FX Risk In...

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Foreign Exchange (FX) Risk 1 In our global economy, FIs often include foreign assets in their portfolios. Just as country’s economies are not perfectly correlated, their currencies are not either. e.g.: $/€ may be increasing while $/¥ decreasing. FX risk results from movement in a foreign currency that adversely affects the value of a FI’s asset or liability denominated in that currency. A FI may be net long or net short in various currencies. Undiversified foreign expansion creates FX risk. Further, the interest rate risk from mismatched maturities is exacerbated. More in Chapter 14.
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Country (or Sovereign) Risk 2 Investments in foreign countries introduces Country Risk. FIs are subject to the laws and regulations governing defaults in other country’s jurisdictions which often lack usual recourse via the judicial system. Further, FIs are exposed to foreign governments that may impose restrictions on debt repayment to foreigners.
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