The Prudential Regulation and Management of Foreign Exchange Risk
IMF Working Papers, March 1, 1998
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- The Prudential Regulation and Management of Foreign Exchange Risk
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Bibliographic details
- Authors: Richard K. Abrams, Paulina Beato
- Published: March 1, 1998
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451845549.001
Summary
- Examines issues in the prudential management and regulation of foreign exchange risk.
- Begins with measurement issues, notably converting foreign currency items into domestic currency terms, and calculating foreign exchange positions.
- Focus then shifts to managing foreign exchange risks.
- Emphasizes that the key to effective management lies in the bank’s reporting and internal control systems.
- Notes that regulators frequently seek to limit such risks directly, usually by:
- limiting the overall open position in terms of bank capital, or
- requiring that capital be set aside against such risks.
Measurement issues
- Converting foreign currency items into domestic currency terms.
- Calculating foreign exchange positions.
- Recording foreign exchange transactions (keyword present in source).
Managing foreign exchange risks and regulatory approaches
- Effective management relies primarily on bank reporting and internal control systems.
- Prudential regulation commonly imposes direct limits on foreign exchange risk exposure:
- Limits on the overall open position expressed in relation to bank capital.
- Capital requirements set aside explicitly against foreign exchange risks.
- Related supervisory and risk-monitoring tools and concepts noted in source keywords: VAR model, FX limit, market risk, foreign exchange-denominated capital, foreign currency exposure, cross-currency exchange risk.
Content in this bundle
- The Prudential Regulation and Management of Foreign Exchange Risk - WP/98/37