Foreign Exchange Risk in Commercial Banks

 

Foreign Exchange Risk in Commercial Banks- Foreign exchange risk applies to the losses that an international financial transaction may acquire due to currency changes. Also known as currency risk, FX risk, and exchange-rate risk, it illustrates the possibility that an investment’s value may decrease due to changes in the relative value of the involved currencies. Investors may experience jurisdiction risk in the form of foreign exchange risk.

Risk management in banks has changed substantially over the past ten years. The regulations that emerged from the global financial crisis and the fines that were levied in its wake triggered a wave of change in risk functions. These included more detailed and demanding capital, leverage, liquidity, and funding requirements, as well as higher standards for risk reporting.

Commercial banks dealing in foreign currencies and holding assets and liabilities in foreign-denominated currencies are constantly exposed to Foreign Exchange Risk. These risks come from the activities that are carried out by the bank. The activities include The purchase/sale of foreign currencies to allow customers to participate in international commercial trade transactions. 

• The purchase/sale of foreign currencies to allow customers or the financial institution to take positions in foreign real and financial investments
• The purchase and sale of foreign currencies for hedging purposes to offset customer/FI exposure in a currency
• To purchase/sale of foreign currencies for speculative purposes base on forecasting Foreign Exchange rates

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