The concept of exchange rate risk exposure
Risk comes from uncertainty. Exchange rate sensitive assets (liabilities) refer to assets (liabilities) whose maturity value will be uncertain when the exchange rate changes. Due to the uncertainty of maturity value, there will be the risk of appreciation or impairment, that is, exchange rate risk.
The appreciation or impairment of exchange rate-sensitive assets and liabilities can be offset by themselves. In order to reduce and control risks, banks will also arrange such offsets artificially, which is the so-called "write-off" risk.
Exchange rate sensitive assets or liabilities that cannot be offset after write-off are exposed to exchange rate risk, which is called "exchange rate risk exposure" or "exchange rate risk exposure".
According to different purposes of holding exchange rate sensitive assets and liabilities, the exchange rate risk exposure of commercial banks is generally divided into trading account exchange rate risk exposure and bank account exchange rate risk exposure.
The trading accounts of commercial banks, that is, the market value of financial instruments denominated and settled in foreign currencies held for trading purposes, will change with the fluctuation of the exchange rate of RMB against major foreign currencies.
The exchange rate risk exposure of bank trading accounts mainly refers to the open position of banks in self-operated foreign exchange trading business, which can be analyzed by the method of foreign exchange transaction record table.
The foreign exchange transaction record itself is only a transaction record, but it is a powerful tool to analyze the bank's exchange rate risk exposure.
Using foreign exchange transaction records and constantly reassessing the market value, we can analyze the exchange rate risks undertaken by banks in time so as to take measures to control and avoid them.
Single currency risk exposure test point description
The net exposure position of a bank in a single currency includes the sum of the following items:
Net spot position: that is, all asset items priced in a certain currency MINUS all liability items, including interest receivable.
Net forward position: that is, all receivables under forward foreign exchange transactions MINUS all payables, including the principal of foreign exchange futures and foreign exchange swaps not included in spot positions.
Guarantees (and similar financial instruments) that are explicitly required to be performed and may be irrevocable.
Net expected income/expenditure that has not yet occurred but has been fully hedged.
Other subjects that express gains and losses denominated in foreign currency according to the specific accounting practices of different countries.
Net equivalent of all foreign exchange option accounts.
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Description of risk exposure test points of foreign currency portfolio
According to the Basel Accord, banks have two methods to measure the position of foreign currency portfolio: simple method and internal model method. Due to the complexity of the internal model method, only banks that meet strict conditions can adopt it. Here, only the simple method is explained:
According to the simplified method, after converting the nominal amount (or net present value) of each currency and the net position of gold into the reporting currency at the spot exchange rate, the net open position of foreign currency portfolio is obtained by the following methods:
1. Sum of net positions or sum of net positions, whichever is greater.
2. Net position of gold (multiple positions or short positions), regardless of sign.
Management measures of exchange rate risk
Measures for Exchange Rate Risk Management of Trading Accounts-Quota Management
The purpose of holding positions in bank trading accounts is profit, that is, actively holding risk exposure, but in order to control risks, quota management is generally adopted.
Overall exchange rate risk management measures-capital requirements
According to the spirit of the Basel Accord, banks' capital should meet the requirements of covering all kinds of risks, which is commonly called 8% capital adequacy ratio.