Foreign Exchange

Foreign Exchange risk arises when a bank holds assets or liabilities in foreign currencies and impacts the earnings and capital of bank due to the fluctuations in the exchange rates. No one can predict what the exchange rate will be in the next period, it can move in either upward or downward direction regardless of what the estimates and predictions were. This uncertain movement poses a threat to the earnings and capital of bank, if such a movement is in undesired and unanticipated direction. Foreign Exchange Risk can be either Transactional or it can be Translational. When the exchange rate changes unfavorably it give rise to Transactional Risk, as the name implies because of transactions in Foreign Currencies, can be hedged using different techniques. Other one Translational Risk is an accounting risk arising because of the translation of the assets held in foreign currency or abroad.

Foreign Exchange Risk in Commercial Banks

Commercial banks, actively deal in foreign currencies holding assets and liabilities in foreign denominated currencies, are continuously exposed to Foreign Exchange Risk. Foreign Exchange Risk of a commercial bank comes from its very trade and non-trade services. Foreign Exchange Trading Activities (Saunders & Cornett, 2003)include: 1. The purchase and sale of foreign currencies to allow customers to partake in and complete international commercial trade transactions. 2. The purchase and sale of foreign currencies to allow customers (or the financial institution itself) to take positions in foreign real and financial investments. 3. The Purchase and sale of foreign currencies for hedging purposes to offset customer (or FI itself) exposure in any given currency. 4. To purchase and sale of foreign currencies for speculative purposes base on forecasting or expecting future movements in Foreign Exchange rates. The above mentioned Trade Activities do not expose a commercial bank to foreign exchange risk as a result of all of the above. The commercial bank is exposed to foreign exchange risk only upto the extent to which it has not hedged or covered its position. Wherever there is any uncertainty that the future exchange rates will affect the value of financial instruments, there lies the foreign exchange risk of a commercial bank. Foreign Exchange risk does not lie where the future exchange rate is predefined by using different instruments and tools by the bank.

The abovementioned trade activities are the typical trade activities of a commercial bank and all of these activities do not involve risk exposure of the bank. The first 1 & 2 activities are done by the commercial bank on behalf of its customers and the foreign exchange risk is transferred to the customers as the bank takes Agency Role in this case. Third activity of bank involves hedging and there is no risk in this as well as the bank has hedged its risk by pre-determining the exchange rate with other financial institutions using different financial instruments. The fourth one involves the risk which may result in the gain or loss due to unexpected outcome. Ready, spot, forward & swap are the principal FX related contracts whereas banking products and services in foreign exchange give rise to non-traded foreign currency exposure.

Foreign Currency Exposure of a Commercial Bank

Any unhedged position in a particular currency gives rise to FX risk and such a position is said to be Open Position in that particular currency. If a bank has sold more foreign currency than he has purchased, it is said to be Net Short in that currency, alternatively if it has purchased more foreign currency than it has purchased than it is in Net Long position. Both of these positions are exposed to risk as the foreign currency may fall in value as compared to local or home currency and becomes a reason for substantial loss for the bank if it is in Net Long position or the foreign currency may rise in value and cause losses if the bank is Net Short in that currency. Long Position is also known as Overbought or Net Asset Position and Short Position is also known as Net Liability or Oversold Position. Sum of all the Net Asset positions & Net Liability positions is known as Net Open Position or Net Foreign Currency Exposure. Net Foreign Currency Exposure gives the information about the Foreign Exchange Risk that has been assumed by the bank at that point of time. This figure represents the unhedged position of bank in all the foreign currencies. A negative figure shows Net Short Position whereas positive figure shows Net Open Position.

Exchange Rate Volatility

There is a real time fluctuation in floating exchange rate. The Exchange rate volatility measures the degree to which the exchange rate fluctuates or varies over a period of time. Exchange rate is said to be more volatile if there are more frequent ups and downs or less volatile if there are lesser changes in it over a period of time.

Foreign Exchange Risk Management

Whenever a commercial bank deals in foreign currency, it is exposed to risk of exchange rate. When these transactions are done on the behalf of customers, the risk is also transferred to them and the bank has no exposure. Banks assets & liabilities in foreign currencies or assets and liabilities in other countries give rise to Foreign exchange risk which has to be managed by the bank.

Hedging
Foreign exchange risk is mitigated by using different hedging techniques. Hedging is a way by using which a bank eliminates or minimizes its risk exposure. Hedging can be done using different ways: 1. Foreign Currency Assets & Liabilities Matches: A commercial bank matches its assets and liabilities in foreign currencies to ensure a profitable spread by dealing in FX. By using this technique the positive profit spread is ensured regardless of the movements in exchange rate at the respective maturities of these assets and liabilities, in the investment period. For example, if a bank has a liability in shape of a deposit for one year in US$ at rate of 3% p.a. and it has another liability of same type but in PKR @ 10% p.a., it can match its assets with these liabilities by advancing US$ at rate of 4.5% p.a. and PKR @ 15% p.a. Using this the bank has locked into the profit of spread. Bank will get US$ & PKR to repay the principal and exchange rate will not affect the cost of exchanging the currencies. 2. Hedging using Derivatives: A commercial bank uses foreign currency derivatives to hedge foreign exchange risk. Foreign currency derivatives are: a. Foreign Currency Futures b. Foreign Currency Swap c. Foreign Currency Options d. Foreign Currency Forward Contracts The most popular amongst all others as mentioned above are FX forward Contracts. Instead of matching FX asset-liability bank enters into a forward contract having the same maturity. For example in above examples bank does not need to advance loans in the same currency rather it uses forward contracts to insulate FX risk. An important feature of such contracts is that they do not appear on the balance sheet of the bank instead it appears under the head of Contingencies & Commitments and hence are off-balance sheet items. 3. Hedging through Diversification of Foreign Asset-Liability Portfolio: Commercial Banks try to mitigate the foreign currency risk on its individual currency by holding Multicurrency Asset-Liability Positions. Holding assets and liabilities in various foreign currencies does not reduce the risk of the portfolio of assets and liabilities of a bank alone but also significantly lower

the cost of capital. The risk of holding any net open position in a currency is diversified by holding a position in foreign currency. The main reason for this is the differential inflation and interest rates in different countries. Almost all commercial banks hold such type of multicurrency asset-liability portfolios.

Central Banks Role in Foreign Exchange Risk Management

Central Banks across the globe continuously strive to achieve the financial stability in their respective economies. Nearly all the central banks issue guidelines for Risk Management in the commercial banks which they have to follow. State Bank of Pakistan has also issued a comprehensive set of guidelines for the management of different types of risk faced by commercial banks including foreign exchange risk. These guidelines provides the minimum requirement and procedures to manage risks faced by a commercial bank and focus on establishing Risk Management Committee & Asset Liability Management committee by banks, setting limits for the open positions, measurement & control of risk , independent audit of risk management process and role board of directors & management.

Foreign Exchange Risk & Its Association With Other Types of Risks
FX risk is not only the impact of adverse exchange rate movements on the earnings of the bank due to different open positions held; it impacts the earnings & capital of bank in different ways. As per Risk Management Guidelines published by State Bank of Pakistan for Commercial banks & DFIs, Foreign exchange risk also exposes a bank to Interest Rate Risk due to the mismatches in the maturity pattern of foreign assets and liabilities. Even if the maturities of different assets and liabilities are properly matched, mismatches in the maturities of forward positions taken by bank also expose it to interest rate risk. Since the banks hold assets and liabilities in foreign currency, it also poses a serious risk of Counterparty (default) Risk, although in such case there is no principal is at stake due to the notional principal of the contracts but still the bank has to enter into different spot and forward positions to cover such failed transactions. In this case bank faces replacement cost depending upon the exchange rates at that time. The forex transactions with the parties situated outside the home country also lead to Time Zone Risk, risk arising because of difference of settlement time between the markets in two different time-zones, and Sovereign or Country Risk.

BDT Exchange Rate

The Foreign-Exchange Rate, Forex Rate or Exchange Rate specifies the value of one currency in terms of other currency. In our case, it's Bangladeshi Taka (BDT).

Bangladesh is a country where a huge number of people live abroad sending their hardly earned remittance back to the country. They always want to get updated with the Bangladeshi Taka (BDT) Exchange Rate information, so that, they can take the benefit when converting their earned currency in BDT. Foreign Currency Exchange Rate is also important for those business doing export import operations. Each bank has its own Bangladeshi Taka (BDT) Exchange Rate which updates daily. To get updated with their Bangladeshi Taka (BDT) Exchange Rate one needs to visit each website one by one which is time consuming. To save your time and efforts we are showing important currency rates from the respected banks website so that you can have a quick glance. Currently, we are showing Bangladeshi Taka (BDT) Exchange Rate information for following banks only. We will add more banks in future when they have their updated currency informaion on their respective website.

Bank

USD Buying Selling

GBP Buying Selling Buying

EUR Selling

Bangladesh Bank Sonali Bank Uttara Bank AB Bank Southeast Bank

78.0500 79.00 78.8000 77.3500 77.3500

78.0800 80.00 80.0000 78.3000 78.3500

119.6116 116.15 118.2194 118.0607 118.4258

119.6654 120.15 120.3226 121.8743 122.0654

102.1518 99.35 100.0625

102.1989 103.35 104.6366

Note: Exchange rates are collected from the respected bank's website automatically in every hour. This information is for view only, before taking any investment decision please visit the respected bank's Website.