The Prudential Regulation and Management of Foreign Exchange Risk

Richard Abrams and Paulina Beato

No 1998/037, IMF Working Papers from International Monetary Fund

Abstract: This paper examines issues in the prudential management and regulation of foreign exchange risk. It begins with measurement issues, notably converting foreign currency items into domestic currency terms, and calculating foreign exchange positions. The focus then shifts to managing foreign exchange risks. Although the key to effective management lies in the bank’s reporting and internal control systems, regulators frequently seek to limit such risks directly. This usually involves limiting the overall open position in terms of bank capital or requiring that capital be set aside against such risks.

Keywords: WP; capital requirement; foreign exchange risk; VAR model; bank capital; market risk; prudential regulation; foreign exchange; risk; foreign currency; banking supervision; foreign exchange position; asset ratio; cross-currency exchange risk; FX limit; recording foreign exchange transaction; foreign exchange-denominated capital; Currencies; Exchange rate risk; Foreign currency exposure; Exchange rates; Global (search for similar items in EconPapers)
Pages: 33
Date: 1998-03-01
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