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. 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. 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.