1.3.8 Foreign Exchange Risk Management

1.3.9 Stages and methods Foreign Exchange Risk Management

Measurement and identification of risk today is only the first step of risk management and control. Bankers should consider risk management as a logical sequence of actions of the problem to resolve it.

The key stages of the process of risk management in the banking sector are as follows:

      1. The identification and measurement of the sensitivity of the bank's risk appetite.

         Management must decide what risk factors are dangerous to the various divisions of the bank, as well as how to measure the magnitude and extent of these risks.

      2. Review of the operational policies of each of the branches of the bank and daily implementation of that policy to determine

         In order to adequately if it covers each of the risk factors.

         The bank's management must determine whether changes are needed in daily activities or strategic guidelines to combat major and most important risk factors for each of the divisions.

      3. Analysis of the results of the activities of the bank conducted in the field of risk management, and the consequential changes to short-term and long-term plans of the bank. The bank's management must decide whether the bank's response to the various risk factors goals. Do I need to change the plan to reflect the new situation to the bank in terms of risk?

      4. Analysis of the results of the activities and decisions in the field of risk management during and at the end of each reporting period. The bank's management needs to know how well it device recognizes the potential risk factors and contributed to neutralize them from the point of view of the objectives of the short-term and long-term plans of the bank

Currency risks are usually managed in banks in different ways. The first step to managing currency risk within the structure of the bank is to set limits on foreign exchange transactions. So, for example, are very common following limits:

       1. Limits on foreign countries (as set possible sums for operations during the day with clients and Rear partners in the sum of each country).

       2. Limits on transactions with counter partners and clients (set to the maximum possible amount for operations on each counter partner, customer or client types).

       3. Limit tools (placing restrictions on used instruments and currencies with the definition of a list of possibilities to trade currencies and the tools of the trade).

       4. Setting limits for each day and each dealer (usually set the maximum possible size of the open positions on foreign currencies traded, the possible transfer of the share on the next working day for each dealer and each individual instrument).

5. Stop-loss limit (set to the maximum possible size of the losses, after reaching which all open positions must be closed with a loss). Some banks have a limit set on each working day or a particular period (usually one month), some banks it is subdivided into separate kinds of tools, and some banks may also be installed on individual dealers.

In addition to limits in the world practice the following techniques currency risk:

  - Set-off purchase and sale of currency assets and liabilities, the method of "matching", where by deducting foreign exchange earnings of the value of its outflow bank has the ability to influence their size and thus its risks;

  - The use of the "netting", which is to maximize the reduction in the number of foreign exchange transactions through their consolidation. For this purpose, banks create units that coordinate the flow of orders for purchase and sale of foreign currency;

- The acquisition of additional information by the acquisition of information products, specialized firms, real-time mapping the movement of exchange rates and the latest information;

  - A thorough study and analysis of the currency markets on a daily basis. 1

Красивина Л.Н. “Междуноародные валютно-кредитные и финансовые отношения”- Москва: Финансы и статистика, 1994

1. Питер С. Роуз «Банковский менеджмент» – Москва.: Дело, 1997