Foreign Exchange

Foreign Exchange risk arises when a bank holds assets or liabilities in foreigncurrencies and impacts the earnings and capital of bank due to the fluctuations inthe exchange rates. No one can predict what the exchange rate will be in the nextperiod, it can move in either upward or downward direction regardless of what theestimates and predictions were. This uncertain movement poses a threat to theearnings and capital of bank, if such a movement is in undesired andunanticipated 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, asthe name implies because of transactions in Foreign Currencies, can be hedgedusing different techniques. Other one Translational Risk is an accounting riskarising 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 andliabilities in foreign denominated currencies, are continuously exposed to ForeignExchange Risk. Foreign Exchange Risk of a commercial bank comes from itsvery 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 financialinvestments.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 toforeign exchange risk as a result of all of the above. The commercial bank isexposed to foreign exchange risk only upto the extent to which it has not hedgedor covered its position. Wherever there is any uncertainty that the future exchangerates will affect the value of financial instruments, there lies the foreign exchangerisk of a commercial bank. Foreign Exchange risk does not lie where the futureexchange rate is predefined by using different instruments and tools by the bank.

The abovementioned trade activities are the typical trade activities of acommercial bank and all of these activities do not involve risk exposure of thebank. The first 1 & 2 activities are done by the commercial bank on behalf of itscustomers and the foreign exchange risk is transferred to the customers as thebank takes Agency Role in this case. Third activity of bank involves hedging andthere is no risk in this as well as the bank has hedged its risk by pre-determiningthe exchange rate with other financial institutions using different financialinstruments. The fourth one involves the risk which may result in the gain or lossdue to unexpected outcome. Ready, spot, forward & swap are the principal FXrelated contracts whereas banking products and services in foreign exchange giverise 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 aposition is said to be Open Position in that particular currency. If a bank has soldmore foreign currency than he has purchased, it is said to be Net Short in thatcurrency, alternatively if it has purchased more foreign currency than it haspurchased than it is in Net Long position. Both of these positions are exposed torisk as the foreign currency may fall in value as compared to local or homecurrency and becomes a reason for substantial loss for the bank if it is in Net Longposition or the foreign currency may rise in value and cause losses if the bank isNet Short in that currency.Long Position is also known as Overbought or Net Asset Position and ShortPosition is also known as Net Liability or Oversold Position. Sum of all the NetAsset positions & Net Liability positions is known as Net Open Position or NetForeign Currency Exposure.“Net Foreign Currency Exposure” gives the information about the ForeignExchange Risk that has been assumed by the bank at that point of time. Thisfigure represents the unhedged position of bank in all the foreign currencies. Anegative figure shows Net Short Position whereas positive figure shows Net OpenPosition.

Exchange Rate Volatility

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

Foreign Exchange Risk Management

Whenever a commercial bank deals in foreign currency, it is exposed to risk ofexchange rate. When these transactions are done on the behalf of customers, therisk is also transferred to them and the bank has no exposure. Bank’s assets &liabilities in foreign currencies or assets and liabilities in other countries give riseto 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 riskexposure. 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 bydealing in FX. By using this technique the positive profit spread is ensuredregardless of the movements in exchange rate at the respective maturities ofthese assets and liabilities, in the investment period. For example, if a bankhas a liability in shape of a deposit for one year in US$ at rate of 3% p.a. andit has another liability of same type but in PKR @ 10% p.a., it can match itsassets 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 willget US$ & PKR to repay the principal and exchange rate will not affect thecost 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 Futuresb. Foreign Currency Swapc. Foreign Currency Optionsd. Foreign Currency Forward Contracts

The most popular amongst all others as mentioned above are FX forwardContracts. Instead of matching FX asset-liability bank enters into a forwardcontract having the same maturity. For example in above examples bank doesnot need to advance loans in the same currency rather it uses forwardcontracts to insulate FX risk. An important feature of such contracts is thatthey do not appear on the balance sheet of the bank instead it appears underthe head of Contingencies & Commitments and hence are off-balance sheetitems.3. Hedging through Diversification of Foreign Asset-Liability Portfolio:

Commercial Banks try to mitigate the foreign currency risk on its individualcurrency by holding Multicurrency Asset-Liability Positions. Holding assetsand liabilities in various foreign currencies does not reduce the risk of theportfolio 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 isdiversified by holding a position in foreign currency. The main reason for thisis the differential inflation and interest rates in different countries. Almost allcommercial banks hold such type of multicurrency asset-liability portfolios.

Central Bank’s Role in Foreign Exchange Risk Management

Central Banks across the globe continuously strive to achieve the financialstability in their respective economies. Nearly all the central banks issueguidelines for Risk Management in the commercial banks which they have tofollow. State Bank of Pakistan has also issued a comprehensive set of guidelinesfor the management of different types of risk faced by commercial banksincluding foreign exchange risk. These guidelines provides the minimumrequirement and procedures to manage risks faced by a commercial bank andfocus on establishing Risk Management Committee & Asset LiabilityManagement committee by banks, setting limits for the open positions,measurement & control of risk , independent audit of risk management processand 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 theearnings 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 forCommercial banks & DFIs, Foreign exchange risk also exposes a bank to InterestRate Risk due to the mismatches in the maturity pattern of foreign assets andliabilities. Even if the maturities of different assets and liabilities are properlymatched, mismatches in the maturities of forward positions taken by bank alsoexpose it to interest rate risk. Since the banks hold assets and liabilities in foreigncurrency, it also poses a serious risk of Counterparty (default) Risk, although insuch case there is no principal is at stake due to the notional principal of thecontracts but still the bank has to enter into different spot and forward positions tocover such failed transactions. In this case bank faces replacement cost dependingupon the exchange rates at that time. The forex transactions with the partiessituated outside the home country also lead to Time Zone Risk, risk arisingbecause of difference of settlement time between the markets in two differenttime-zones, and Sovereign or Country Risk.

BDT Exchange RateThe 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 GBP EUR

  Buying Selling Buying Selling Buying Selling

Bangladesh

Bank

78.050

0

78.080

0

119.611

6

119.665

4

102.151

8

102.198

9

Sonali Bank 79.00 80.00 116.15 120.15 99.35 103.35

Uttara Bank

78.800

0

80.000

0

118.219

4

120.322

6 - -

AB Bank

77.350

0

78.300

0

118.060

7

121.874

3 - -

Southeast Bank

77.350

0

78.350

0

118.425

8

122.065

4

100.062

5

104.636

6

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.