International Banking & Finance

Foreign Exchange Risks and Country Risks

Prof Bharat Nadkarni

International Banking & Finance

Foreign Exchange Risks The risks related to foreign exchange are many and are mainly on account of the fluctuations in foreign currency. Types of Foreign Exchange Risks Transaction risks Position risks Settlement or credit risks Mismatch or liquidity risks Operational risks Sovereign risks Cross country risks

International Banking & Finance

Transaction risk Position risk Mismatch risk

Any transaction leading to future receipts in any form or creation of long term asset. A Banker gets a customer on either bid side or ask side. Banker is yet to square off his position. So he has open position (either or short) Now, the banker would square-off the position by opposite transaction but value of opposite side transaction is not exactly the same. Or settlement date is not exactly the same. There is some mismatch. Transaction is squared-off. But after some days, before settlement date, customer on either side cancels the transaction. Or he does not honour his transaction on settlement date. Customer is willing to honour the contract on settlement date but government of his country is not allowing the transaction to happen. (may be due to unstability or govt./ political change) Deal orally agreed but not yet signed, deal confirmation yet to happen and hence it is not recognized by the main server (HO) of the bank. Excessive holdings of one particular foreign currency.

Pre-settlement risk Settlement risk Sovereign risk (Country risk or political risk) Operational risk Cross Country risk

International Banking & Finance

Country Risk Categories Economic Risk Transfer Risk Exchange Rate Risk Location or Neighborhood Risk Sovereign Risk Political Risk