Foreign exchange risk management in banks and companies
Foreign exchange risk management in banks and companies

Summary/Abstract: Today’s market environment is global and inter-connected without any significant boundaries for doing business. We are evidencing growing presence of banks and companies existing on the international scene, offering products and services globally. Those entities expend their activities in many countries having local currency other than the mother company’s one and by doing that the entities are exposed to a risk arising from the movement between the original and local currency, known as foreign exchange risk (FX risk). Namely, foreign exchange risk represents a risk arising from the change in the value of the currency which is involved in the business activities. Together with the credit and interest rate risk; the foreign exchange risk is among the most significant risks that directly influence the profit & loss account of a company.Hence, the identification of the foreign exchange risk is very important. Some banks and companies are very much aware about this risk and they have introduced and engaged separate units that are monitoring and managing FX risk on a daily basis, but there are plenty of companies, mainly existing in non-developed markets, which are fully ignorant of the FX risk.As it was mentioned, the FX exposure does not originates just from the transaction, there are effects that are produced from the revaluation activities of the foreign exchange positions, which is known as translation exposure. So, measuring the foreign exchange risk is a crucial activity aimed to protect the company to face huge material loss. The need for protection led the banks and companies to develop a lot of tools and models for protection against foreign exchange risk.The protection against FX risk depends also on the risk appetite of the company- the higher risk appetite- the higher material effects, either negative or positive.The most common used tool for protection is hedging- undertaking the parallel transaction that is aimed to neutralize the negative effects of the concluded deal. But also there are much more sophisticated tools like forwards, interest rate arbitrage, swaps and many more that gives different possibilities for protection. However, the usage of this models depends on the availability and allowance from the regulators to be used and on the knowledge of the companies.The empirical evidence shows that in not developed countries the banks and companies are lagging behind and are not aware about foreign exchange risk, therefore a lot of efforts should be put in overcoming of such situation.

• Details
• Contents