Hedging currency risks. Methods of insurance against currency risks Article optimization of currency risk in a bank

22.01.2024

Yaroslav Kabakov, Rector of the ANO Training Center Finam, Moscow

What questions will you find answers to in this article?

Methods of protection against currency risks and rising prices for raw materials
Currency risk management: how to reduce losses from changes in dollar and euro exchange rates
What steps do you need to take to hedge?financialrisks
How to choose a broker
What measures are being taken to reducenuyucurrency risksat the Electra Trade company

In 2009, Russian business faced devaluation for the first time. It turned out that many simply do not know how to work in conditions of increased currency risks and the risks of negative changes in prices for raw materials and products. Meanwhile, ways currency risk management have long been developed and widely used in world practice. In most cases we are talking about various financial instruments such as forwards, futures and options ( see Currency risk management). They will be discussed in this article (however, keep in mind that other methods can also bring benefits, for example, modifying business processes in a company).

Currency risk management

Option contract– the right of the buyer of a contract (an obligation for the seller of the contract), in exchange for a premium, to buy (“call option”) or sell (“put option”) a financial asset at a certain price during a certain period. It is one of the exchange instruments with the help of which the exchange controls the risks of non-payment, which significantly reduces the risk of non-fulfillment by the counterparty of the terms of the agreement.

Forward contract (forward)- an agreement between two counterparties for the delivery of a certain quantity of goods in the future (on a certain date) at a certain price. Forwards are classified as over-the-counter instruments: transactions are concluded directly between counterparties (they also bear the risk of non-fulfillment of contracts).

Futures contract (futures)- an obligation to deliver (sale of futures) or accept and pay (purchase of futures) a certain amount of goods in the future at a price determined today. One of the varieties is a currency futures, a contract for the supply of a certain currency at a predetermined rate. The sale (purchase) transaction of a futures contract is carried out only on the exchange.

– insurance against losses that may be caused by changes in prices for products, raw materials and currency. Hedging reduces the likelihood of cash shortages. The most common hedging instruments are forwards, futures and options.

Unique Selling Proposition (USP): development rules from A to Z

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Other methods to reduce currency risks

In addition to buying futures and options, you can always try using the following instruments.

Fix prices by determining the foreign exchange rate for a certain period. The main risk of this approach: if the currency goes down, the company will be at a loss. In addition, not all counterparties will agree to such agreements - in order to conclude them, you need to have a certain market power.

Find a ruble supplier. It is not always possible to find analogues of goods and raw materials in Russia. The main risks are loss of quality and unstable supplies.

Link your selling prices to the exchange rate. In this case, changes in prices for raw materials will not affect the profitability of your business (but there is a possibility of losing the market: consumers today are paying more and more attention to price).

Reducing commodity risks

Commodity risk occurs more often in manufacturing enterprises. There is always a possibility that raw materials will become more expensive, and the manufactured product will become cheaper (if demand for it falls). To protect your business, you can use hedging instruments. It is worth resorting to them only if there is an unfavorable forecast for prices for raw materials and products, since constant hedging of risks can be costly for the enterprise. But if the conditions in which your company is located change frequently, then you can hedge commodity risks constantly: with this approach, it will be possible to predict production activities.

If there is an unfavorable forecast for prices for raw materials, then they can be “frozen” for some time. Futures contracts can be concluded not for the raw materials themselves, but for some homogeneous goods (the main thing is that there is a price dependence). For example, oil prices were rising in summer. Aviation kerosene (its price depends on the price of oil) is one of the types of raw materials for air carriers. Fuel costs are one of the significant cost items for airlines. Airlines can hedge against rising prices by purchasing oil futures. If oil prices rise, the company, although it will incur large costs in its core activities, will be able to compensate for them through income from the futures contract. However, if oil prices go down, then everything will be exactly the opposite: due to the fall in oil prices, the airline’s costs will decrease, but the effect of the cost reduction will be offset by losses on the futures contract. It turns out that the air carrier can fix the oil rate convenient for itself. Similarly, you can reduce the risks of unfavorable price changes for other types of raw materials and products.

Hedging financial risksagricultural enterprises using futures contracts (example)

Let’s assume that today the market price for a ton of wheat is 6,500 rubles. The manufacturing company is quite happy with it, but there are a number of nuances:

the wheat harvest will only be a few months away;
according to the company’s own forecasts, the harvest will be high and demand growth will be insignificant, so prices may fall;
the cost of a ton of grain in previous periods was not higher than 3,100 rubles.

An agricultural enterprise can hedge against lower prices for its products using futures contracts. The situation on the stock exchange shows that the market partially shares the company's expectations for a high harvest, and wheat futures are trading at 6,200 rubles per ton. If a company enters into a futures contract for the supply of wheat, then the delivery of grain with all additional costs and exchange fees will be no more than 500 rubles per ton. The manufacturer is satisfied with this and begins the hedging operation. The wheat harvest is expected to be more than 20 thousand tons, so the company sells futures contracts for 20 thousand tons at a price of 6,200 rubles per ton. To conclude a transaction, you will need collateral (the so-called collateral) - for grain transactions it is approximately equal to 7% of the transaction volume. After the delivery under the contract is completed, the deposit is returned to the manufacturer. Collateral is another important aspect of a hedging transaction, and one must take into account how much funds will have to be diverted from the enterprise’s turnover to ensure the hedge.

As a result of the operations carried out, the agricultural producer recorded his income at approximately 5,700 rubles per ton (6,200 rubles per ton under the contract - 500 rubles per ton for delivery and exchange fees). And if wheat prices, as the company predicted, really fall, then the company will not lose anything. Of course, if prices rise contrary to the forecast, the company will not be able to earn more. But the main thing in the operation was different: the manufacturer secured a favorable price, minimized risks and increased the predictability of its business.

Reducing currency risks

Companies that purchase goods or take out loans in one currency and earn money in another often suffer from currency fluctuations. You can hedge currency risks using options and currency futures. You need to work with option contracts as follows (consider an example of working on the RTS exchange).

Hedging financial risks with options is beneficial if you predict strong currency fluctuations. By investing insignificant funds, if the value of the currency changes significantly in the direction you predict, you get a significant profit as a result. If your forecasts do not come true, then the loss will be small - it is limited to the initially invested funds. However, if the probability of a change in the price of a currency in the planned time interval is not too high, then it is better to hedge currency risks using futures. This will cost your company less.

An example of reducing currency risks using futures when importing goods from Europe

In June 2014, the company expects the delivery of a consignment of goods from Europe in the amount of 100 thousand euros. To make payments to suppliers, the company needs to convert rubles into euros, but the company does not want to do the conversion at the moment. At the same time, the company is satisfied with the euro exchange rate.

The company decides to hedge the risk of an increase in the value of the euro by concluding forward transactions on the stock exchange. To do this, the company transfers 200 thousand rubles to its trading account on the exchange and buys 100 futures contracts (obligations to buy euros) with a total volume of 100,000 euros (1 contract = 1000 euros). An amount of 200 thousand rubles in the account allows you to buy 100 futures (as in the case of hedging commodity risks, a collateral equal to approximately 4% of the contract volume will be required). In addition, an adjustment is made for possible unfavorable movement of the exchange rate (relative to our futures position) by 3000 points, which will correspond to the growth of the ruble against the euro. Thus, the company must deposit another 300 thousand rubles into the exchange account. (3000 points x 100 futures contracts = 300,000 rubles) - this is insurance for a possible unfavorable change in the exchange rate. In total, you need to have 500 thousand rubles on your exchange account.

By purchasing euro futures, the company insures the risk of further growth of the euro exchange rate. At the same time, the company is in no way insured against a fall in the euro exchange rate - if this happens, the company will suffer losses.

Hedging financial risks: 5 practical tips

First, determine which risks (currency, raw materials, commodity) need to be hedged.

Secondly, choose a trading platform and suitable contracts. FORTS (the futures section of the RTS, www.rts.ru) is suitable as a trading platform. It is not necessary for the contract to be completely consistent with the source of risk, but simple homogeneity of assets (as in the example of jet fuel and oil futures) is sufficient. Keep in mind that trading forward contracts (over-the-counter instrument) is essentially the same as trading futures (exchange-traded instrument). For an enterprise that contacts an investment company to trade forward contracts, the process will be no different from trading futures on an exchange. Nothing but risks. In the case of concluding forward contracts, the dealer (investment company) will act more flexibly - for a specific client, he will look for counterparties for specific instruments. However, the main risk in this case is non-fulfillment of the contract, since the transaction will be carried out between specific counterparties. You can minimize it if you choose a broker wisely. Exchange contracts are standardized, which, on the one hand, significantly reduces transaction costs and risks, but on the other hand, eliminates the flexibility of contract terms and narrows the list of goods for which contracts can be traded.

Third, determine who will handle the hedging transactions. Of course, it is impossible to participate in them without special training. Therefore you can:

contact a brokerage company (see How to choose a broker);
train your own specialists in conducting hedging operations (most large brokerage companies have training programs through which you can gain basic theoretical and practical skills in just one or two weeks for 8–15 thousand rubles);
attract a professional consultant who will carry out transactions with financial instruments (as a rule, the same large brokers are ready to provide him for a fairly moderate fee: the company will earn by receiving a percentage of your company’s turnover in the financial markets).

Fourth, if you contact a brokerage company or consultant, sign service agreements.

Fifth, transfer a certain amount of funds to the brokerage account - guarantee that obligations on open positions will be fulfilled. In order to open a regular brokerage account, you will need to deposit about 50 thousand rubles into it, for a full service account - about 3 million rubles. (in this case, the client receives a personal consultant who gives recommendations on basic investment issues). The maximum is determined by the needs of the enterprise.

How to choose a broker

You need to focus on several factors: how long the broker has been in the market, the scale of his business, the quality of services and their cost, the number of services offered, including free ones, and business reputation.

The scale of a company is expressed in the volume of operations it carries out. As an indicator for assessing scale, you can use the company’s ranking in terms of trading turnover on the stock exchange. The development of the broker’s regional network also plays a role: this parameter may indicate that clients are offered the most convenient method of service. You can also judge the scale of a broker by the number of clients who use its services.

The cost of services of different brokers is approximately at the same level. Therefore, many choose a broker based not only on cost, but also on the quality of services. An assessment of quality can be the recommendations of friends who are clients of a given broker, the qualifications and readiness of the staff to communicate, the reliability of the technical part, the availability of training and consulting centers, as well as various services that facilitate the work and, most importantly, the process of the client’s entry into the market. To insure against mistakes when choosing a broker, it is worth talking with several brokers, researching online forums, and studying publications about a specific brokerage company in the media.

When choosing between a federal and local company, preference should still be given to the first. Its advantage usually lies in greater technology, competence, more favorable conditions offered to clients, and, as a rule, in the fact that all-Russian companies provide much better information services (analytics, investment ideas, proprietary trading systems and other technological capabilities). In addition, federal players have the opportunity to offer their clients complex products, such as plastic card lending secured by securities.

Also pay attention to the commission rates. All possible commissions in the derivatives market are usually extremely small, so they are not even included as a separate cost item when hedging. When concluding a contract, make sure that it does not include costs that were not stated in advance. This happens in practice. You should pay attention to the procedure and timing for signing reports, and to the risks that the client must take when signing the contract.

Risk management system: the essence of risk management in a nutshell

General Director speaks

Alexander Khomutov, General Director of Electra Trade LLC, Moscow

We, like many, are faced with a decrease in income. Retail chains work with deferred payment, and for the goods that we delivered in the fall with a 60-day deferment, we received, in dollar terms, significantly less than we expected. To reduce currency risks today we use the following tools.

Payment deferment. We conclude contracts for a period of one year, so in January of this year we made amendments to the existing contracts. In particular, the terms of deferred payment have been changed. Previously it was 45 days, now it is 14 or 30 days. For a number of counterparties, prepayment has been established. Some, of course, refused such conditions, but we cannot work at a loss. It was difficult to come to an agreement with the networks - they have their own contracts with payment terms favorable to the networks. With some we managed to agree to work on mutually beneficial terms, and with others – on ours. For example, in Novosibirsk, one network in its proposed agreement required a deferred payment of 120 days. As a result of negotiations, it was possible to reduce it to 60 days.

Linking the cost of goods at wholesale prices to the dollar exchange rate. We link prices to the dollar exchange rate depending on the amplitude of its fluctuations. For example, if the dollar exchange rate fluctuates around 48 rubles, we set the internal rate at 49 rubles per dollar for this time (until there is a noticeable deviation from this figure). When there is a strong deviation in any direction, we change the internal course. Moreover, we can change the price under already concluded contracts with large chains: they usually allow price revisions every three months.

Reference

Yaroslav Kabakov graduated from REA named after. G.V. Plekhanov, majoring in investments, defended his dissertation at the department of Investment and Innovation Management. He worked in the consulting company Unicon, structures of Gazprom, agrochemical holding Acron, headed companies in the oil and gas (Neftegazservice) and telecommunications (GMD-Russia) sectors. Conducts teaching activities. Has extensive experience in finance, company valuation and analysis of investment projects. Co-author of books on investment analysis, author of articles on the theory and practice of investing.

Training center "Finam"
Field of activity: investments, training in the stock market.
Form of organization: autonomous non-profit organization (part of the Finam holding).
Location: Moscow.
Number of staff at the training center: 30.
Number of students: over 25 thousand in more than 80 cities of Russia

"Electra Trade"
Field of activity: wholesale supplies of household appliances and power tools.
Form of organization: LLC.
Territory: head office - in Moscow, representative offices - in Barnaul, Irkutsk, Krasnoyarsk, Nizhny Novgorod, Novgorod, Novosibirsk, Omsk, St. Petersburg, Smolensk, Yaroslavl.
Number of staff: 25.
Length of tenure of the General Director: since 1990.
Participation of the General Director in the business: hired manager

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Ministry of Education and Science of the Russian Federation

Federal State Budgetary Educational Institution of Higher Professional Education

"Vladimir State University named after Alexander Grigorievich and Nikolai Grigorievich Stoletov" (VlSU)

Department of Management and Marketing

Course test:

Management of risks

Completed by: st.gr. ZMNsd-113

Sivov I.T.

Accepted: Ph.D. Associate Professor Omarov T.D.

Vladimir 2015

Introduction

1. Essence and types of currency risk

2. Mechanism for managing the bank’s currency risk

3. Methods for minimizing a bank’s currency risk

Conclusion

Bibliography

Practical part

Introduction

The high and unpredictable volatility of exchange rates in the foreign exchange market, the instability of the economic and political environment for the functioning of banks determine the high complexity of managing currency risks in Russia. Problems of managing a bank's currency risk, such as determining its essence, structure, classification, assessment mechanism, and minimization, were developed in the works of domestic and foreign scientists. However, despite significant scientific results, the essence and problems of currency risk management remain poorly studied: its place in the general system of banking risks has not been identified; There are no comprehensive developments for its assessment, regulation and control. This is what determined the choice of the research topic and its relevance.

The purpose of the work is to study scientific approaches and practical recommendations for improving methods for assessing and minimizing currency risk using the example of a commercial bank.

The implementation of this goal determined the need to solve the following tasks in the work:

Find out the essence of the concept of “currency risk”;

Determine methods and corresponding tools for minimizing currency risk;

Justify the feasibility of using the transfer pricing method based on agreed repayment periods to regulate the main forms of the bank's currency risk.

The object of the study is the patterns and principles of currency risk management in modern conditions.

The subject of the study is the foreign exchange risk management tools of a commercial bank.

In the process of the research, such general scientific methods of understanding reality were used as theoretical generalization, comparison and systematization (in studying the essence of the concept of “currency risk”, determining the factors that determine it, determining the classification characteristics of a bank’s currency risk); comparisons (in the process of establishing the common and distinctive features of analysis methods and the bank’s currency risk based on global recommendations); system analysis (when determining the elements of the bank’s currency risk management system); methods of analysis and synthesis, induction and deduction, grouping method (to justify the feasibility of using the transfer pricing method).

currency risk bank pricing

1. Essence and types of currency risk

Considering the concept of “currency risk”, it should be noted that most scientists interpret it as the probability of financial losses as a result in the period between changes in exchange rates in the period between changes in the contract with individuals and production and settlements on it. E.A. Utkin believes that currency risks represent the likelihood of receiving foreign exchange income or losses associated with changes in the exchange rate of one foreign currency in relation to another, including the national currency when conducting foreign economic, credit operations, as well as when a company pursues its investment policy in another country . G.V. Pikus also interprets currency risk as “the probability of monetary losses or shortfall in profits of foreign exchange market entities compared to planned indicators due to an unfavorable change in the exchange rate.”

The following definition of currency risk is also given: “the likelihood for a bank of monetary losses or a decrease in the cost of capital due to unfavorable changes in exchange rates during the period from the acquisition to the sale of positions in foreign currency.” Currency risk is also considered as an existing or potential risk to revenues or capital that arises as a result of unfavorable fluctuations in foreign exchange rates and prices for banking metals. In general, three approaches to defining the concept of currency risk can be distinguished: opportunities, threats and probabilities.

In the economic literature, he distinguishes the following forms of currency risk: operational, translational and economic.

Operational risk is associated with trading operations, as well as with monetary transactions for financial investments and dividend payments. This risk may arise when entering into agreements to make payments or receive funds in foreign currencies in the future.

Translation risk is associated with the revaluation of assets and liabilities and profits of foreign branches into national currency, and can also arise when exporting or importing investments. It affects balance sheet indicators that reflect the statement of profits and losses after converting investment amounts into national currency. Translation risk can be taken into account when preparing accounting and financial statements. Unlike operational risk, translation risk is not associated with cash flows or the amount of amounts paid. The risk of loss or reduction in profit arises when preparing consolidated statements of multinational banks and their foreign subsidiaries.

Economic currency risk is associated with the possibility of loss of income from future contracts through a change in the general economic condition of both partner countries and the country where the banking institution is located. First of all, it is due to the need to carry out constant settlements for export and import transactions, the intensity of which, in turn, may depend on exchange rate fluctuations.

The economic form of currency risk is considered in the context of foreign economic activity of enterprises. Therefore, in terms of economic form, the following types of currency risk are distinguished:

Direct, if a decrease in profit on future operations is expected due to a decrease in the exchange rate;

Indirect, associated with the loss of a certain part of the competitiveness of domestic producers in comparison with foreign ones.

The main factor in the emergence of direct economic currency risk is future export-import transactions or currency transactions. After signing the agreement and before the payment deadline under the agreement, economic currency risk is transformed into operational risk.

Indirect risk characterizes the possibility of losses associated with a decrease in the company's competitiveness in comparison with foreign producers and exporters due to changes in exchange rates, high costs and relatively low prices for manufactured products.

Most domestic and foreign economists distinguish the three above-mentioned forms of currency risk. Others distinguish “conversion” currency risks, which are risks of losses on specific transactions in foreign currency, and “translation” (accounting) risks, which arise when the assets and liabilities of foreign branches and subsidiaries are revalued into national currency, without separately highlighting economic currency risk.

O.I. Lavrushin, believes that currency risk is directly related to the internationalization of the banking market, the creation of transnational enterprises and banking institutions and the diversification of their activities, provides a wider list of forms of currency risks, namely: the risk of exchange rate changes, conversion risk, commercial risks, conversion risks operations, forfeiting risks, translational and technological risks. According to the Basel documents, currency risk refers to market risk and there are two forms of currency risk: translational and transactional; the economic form of currency risk is not accepted for consideration.

2. MechanismBank currency risk management

A clearly formed management system is the key to effective management of currency risk. The following elements of the currency risk management system can be distinguished: object, subjects and instruments. The object of management of the bank's currency risk is the currency position. Subjects include all divisions of the bank that are in some way related to the management of the bank’s currency risk, namely:

Bank Supervisory Board;

Board of the bank;

Internal Audit Service;

Bank risk management division;

Mandatory collegial bodies of the bank;

Treasury Department;

Front and back offices of the bank.

Management of a bank's currency risk can be divided into strategic, tactical and operational levels. The General Meeting of Shareholders, as is known, is the highest management body of the bank. The competence of the general meeting in terms of managing the bank’s currency risk includes the following:

Approval of the bank’s internal documents regulating the basic principles of risk management of the bank (including currency risk), as well as the adoption of additions and changes to them;

Ensuring the creation of an organizational structure of the bank that complies with the basic principles of managing the bank’s currency risk;

Organization of inspections by internal audit bodies of the implementation of the principles of currency risk management by individual divisions and the bank as a whole;

Assessing the effectiveness of the bank's currency risk management;

Control over the activities of the bank's executive bodies in risk management.

The strategic level of management of a bank’s currency risk includes a body such as the supervisory board, whose functions include:

Determination of the main risk parameters that are acceptable in the current strategy of the bank;

Coordination, upon proposal of the Bank’s Board of Directors, of limits on foreign exchange transactions;

Allocation of resources to create and support an effective, comprehensive and balanced system for managing the bank’s currency risk;

Ensuring the avoidance of conflicts of interest at all levels of the risk management system, including currency ones.

The highest executive body of the bank is the board. This body also belongs to the strategic level of currency risk management and is authorized to perform the following functions:

Carry out general management of the bank’s currency risk;

Review and approve internal documents and amendments to them that define the rules and procedures for managing the bank’s currency risk (rules, methods, regulations, etc.);

Distribute powers and responsibilities for managing currency risk between heads of departments at various levels, provides them with the necessary resources, establishes a procedure for interaction and provision of the necessary reporting forms;

Approve limits on indicators used to control the level of individual and positional currency risk.

In addition to the above, the process of strategic management of a bank’s currency risk includes mandatory collegial bodies to be created in the bank, such as:

asset and liability management committee, credit committee, tariff committee.

Functions of the asset and liability management committee:

Defining an asset and liability management strategy;

Making management decisions on asset and liability management issues;

Review and approval of methods (provisions) on the assessment and management of banking risks;

Establishing minimum and maximum rates for placing and attracting client funds;

The functions of the credit committee in the field of managing the bank’s currency risk include the development of contractual methods for managing currency risk.

The main functions of the tariff committee include the following:

Setting tariffs for foreign exchange transactions with clients and other banks;

Consideration of forecasts and determination of directions for optimizing the bank’s tariff policy;

The tactical level of currency risk management of the bank covers the risk management division and the internal audit service. The functions performed by the risk management unit include:

Development and provision of substantiated proposals for establishing intra-bank limits on open currency positions;

Monitoring compliance with established internal banking risk limits for banking operations;

Performing calculations and monitoring compliance with established limits on currency positions;

Providing proposals to prevent violations of established economic standards.

We included the internal audit service at the tactical level of managing the bank's currency risk, although it does not directly participate in the implementation of risk management, but one of the functions of this body is to assess the adequacy of risk management systems and methods to the current needs of the bank. At the operational level of managing a bank's currency risk, we can distinguish heads of bank departments, back office workers, middle and front office workers. The powers of the heads of the bank's structural divisions are to monitor compliance with the established limits on the bank's foreign exchange transactions and daily inform the risk management executive body about changes in the indicators used to monitor the bank's currency risk.

The front office accepts risks, the back office registers the fact of risk acceptance and controls its magnitude and changes over time. The functions of the front office in the risk management process are to comply with established risk tolerance levels when conducting banking operations. In the area of managing the bank's currency risk, the Treasury regulates the currency structure of the bank's assets and liabilities in accordance with market conditions and limits on open currency positions.

Back office units perform the function of direct supervision of compliance with established limits. Currency risk management should be carried out based on the bank's risk management strategy, policies, business procedures, prices and limits determined by the bank's board and relevant relevant committees.

To manage currency risk, the bank uses internal and external information bases in accordance with factors influencing currency risk. The information that a banking institution receives from external sources includes the following:

Indicators characterizing the conditions of the foreign exchange market, rates for attracting (placing) funds in foreign currency, trading volumes on the market, dynamics of changes in the exchange rate, etc.;

Indicators of macroeconomic development - the volume of revenues and expenditures of the state budget; the size of the budget deficit; volume of money emission; cash income of the population; household deposits in banks; inflation index; discount rate, etc.;

Indicators of the state of the balance of payments - national levels of consumption and savings, investment and placement of financial assets, the state of the trade balance;

Indicators characterizing the level of inflation - PPI Index, CPI, GDP deflator, purchasing power parity, Paasche index.

Internal regulatory support refers to regulatory documents that are created within the bank:

Regulations on the bank's risk management policy;

Regulations on the Assets and Liabilities Management Committee;

The procedure for establishing and monitoring limits on foreign exchange transactions;

Treasury Regulations;

Regulations on the risk control department and the like.

Thus, we have presented the organizational structure of managing the bank’s currency risk in terms of management levels. It should be noted that the composition of the organizational structure and the method of its construction depends on many factors, including: the volume and complexity of the bank’s operations, the bank’s exposure to risk, the types of risks that the bank assumes, etc. We also reviewed the information support for managing the bank’s currency risk, which includes information about the macroeconomic situation in the country, the competitive environment, foreign exchange market conditions, etc., and the regulatory framework (established by the regulator and internal bank ones) that regulates the bank’s activities in managing currency risk .

3 . Methods mminimizing the bank's currency risk

An important stage in managing currency risk is minimizing risk, which is carried out through managing the bank’s currency position. There are two types of bank currency position management: natural and synthetic. The natural type of currency position management includes instruments for regulating the currency structure of a commercial bank’s balance sheet, which include:

Netting;

Conversion operations;

-“Leads and Lags”;

Structural balancing in terms of volumes and timing;

Position limits;

Transfer pricing.

Netting positional currency risk means covering a position (risk) in some currency by creating an opposite position in the same or some other currency. At the same time, it is expected that the exchange rates of these currencies will move in such a way that losses or profits on the first risky open currency position will be covered by the profit (loss) on another currency position (compensation risk).

The use of conversion transactions in order to minimize currency risk is that the excess volume of a position for a certain currency can be reduced by exchanging it for another currency for which the position volume was lower than the norm.

Structural balancing is the desire to maintain such a structure of assets and liabilities that will cover losses from changes in the exchange rate with profits received from the same changes in other balance sheet items. The essence of this method is to obtain the maximum number of closed positions.

“Leads and Lags” (lead and lag) is a method of minimizing a bank’s currency risk, which consists of manipulating the timing of settlements, used when sudden changes in the exchange rates of prices or payments are expected. The use of such tactics allows you to close short positions on certain currencies to an increase in their market rate, and long positions to a decrease in the rate.

The most common forms of “Leads and Lags” in practice are the following:

Accelerating the return to one’s country from abroad (repatriation of capital, profits and other cash flows in anticipation of revaluation of the national currency or slowing down the processes of repatriation of these inflows in the event of the possibility of devaluation of the national currency;

Acceleration or slowdown of repayment of principal and interest payments in foreign currency depending on movements in the exchange rate;

Acceleration or slowdown of the accrual and payment of dividends, repayment of the principal amount of loans and interest on them, receipt of funds in foreign currency to the bank’s authorized capital, etc.;

Early payment for goods (fixed assets and other inventory items), works and services in the event of an expected increase in the payment currency exchange rate or delay in payments in the event of a decrease in the exchange rate;

Independent determination of the timing of the exchange of foreign currency into national currency by the recipient of foreign currency funds.

Limitation is another method of minimizing currency risk. Limits are usually divided into two groups: external and internal. The purpose of external limits is to limit the risk of non-delivery of the amount of currency and are essentially limits on the credit risk that arises when carrying out a foreign exchange transaction. Internal limits limiting possible losses from foreign exchange transactions by bank employees. Internal limits include:

Daily limit on open currency position, which regulates the amount of losses on the bank’s open position on transactions during the day;

Night limit of open position, which sets the maximum possible limit of open position, which is allowed to be carried over to the next value date;

Loss limit - sets the maximum amount of losses when closing a currency position due to unfavorable movements in the exchange rate.

Stop-loss order is an order to close a position, the placement of which allows you to have time to implement the personal limit of a bank employee in the event of a landslide change in rates during periods of panic in the foreign exchange markets.

Another method of managing a bank's foreign exchange position is transfer pricing. Transfer price is the price of resources that are transferred within a bank from one responsibility center to another or between interconnected banks. To manage currency risk, transfer prices are differentiated by currency. Transfer income and expenses are calculated by selected currencies at par and in hryvnia equivalent, taking into account the average monthly balances of assets and liabilities for a certain period. Differentiation of transfer prices by currency ensures balancing in terms of terms and amounts of assets and liabilities in each of the foreign currencies that make up the bank’s currency basket, and therefore optimizes the management of the bank’s currency position.

Traditional methods of managing a bank's currency position are not a sufficiently flexible method for minimizing currency risk. Making changes to the balance sheet structure requires spending time and resources. The disadvantages of this group of methods are eliminated by methods belonging to the group of synthetic management of the bank’s currency position. These include derivatives: forwards, futures, options, swaps.

Forward transactions are transactions for the purchase and sale of currency with delivery within a period exceeding two business days from the date of conclusion of the transaction. Under a forward contract, one party undertakes to deliver a currency at the rate agreed upon in the contract on a certain date, and the other party undertakes to accept this delivery and pay the corresponding amount of funds in another currency. The amount and duration of the contract are not standardized and are determined by agreement of the parties.

Futures transactions are contracts to buy or sell a standardized amount of a foreign currency at an agreed rate at a specific date in the future. The exchange rate is fixed at the time the transaction is concluded. Futures are concluded and resold on the exchange market, which increases their reliability and the level of insurance against currency risks.

Currency options are a transaction between the buyer of the option and the seller of currencies, which gives the buyer of the option the right to buy or sell at a certain rate an amount of currency within a specified time for a fee that is paid to the seller. A currency option protects the owner from unfavorable fluctuations in exchange rates, but if the exchange rate has changed in a favorable direction, the owner of the option has the opportunity to refuse to exercise it and exchange currency without using the option.

Swap is a transaction involving the purchase or sale of a currency on a fixed exchange rate with the simultaneous conclusion of a reverse transaction. When concluding currency swap contracts, settlement terms are usually not preserved. Banks use swap contracts to insure the risks of foreign exchange transactions, as well as in transactions with other currency values, the commission of which may lead to the emergence of a short-term foreign exchange position.

Thus, we can highlight the advantages and disadvantages of currency risk hedging instruments. The main advantages of using derivatives for a bank are:

Flexibility and efficiency - a large number of varieties of derivatives allows market participants to satisfy any requirements at any time;

Quick response to changes in the size of open positions. An open balance sheet position can be quickly “overshadowed” by an off-balance sheet position that is polar to it and thereby reduce the size of potential losses from changes in exchange rates;

However, the use of derivatives contains certain limitations and disadvantages that must be taken into account:

The need for the functioning of a liquid derivatives market - this market will allow transactions with derivative instruments in any volume and at any time.

Excessive standardization - occurs when using certain types of derivatives (futures), causing insufficient flexibility in conducting hedging operations.

Consequently, methods for minimizing a bank’s currency risk can be divided into two groups: those based on natural management of the currency position and those based on synthetic management of the currency position. We include the first group of methods: netting; conversion operations; structural balancing with volumes and deadlines; position limits. These methods are simple and accessible to use, but they are quite expensive for the bank, and also do not provide the opportunity to quickly respond to changes in the external environment. The group of methods for synthetically managing a bank's currency position includes derivatives, the main advantages of which are the speed of response to changes in the external environment and flexibility in managing the bank's currency position, however, the lack of an active market for derivatives and certain legislative restrictions significantly limit the possibilities of their use.

Practical part

Methods for minimizing currency risk using the example of VTB-24

VTB Group is VTB Bank, its subsidiaries (VTB's share is more than 50% of voting shares/stakes) credit and financial organizations. Subsidiary credit organizations (banks) carry out banking operations. Subsidiary financial organizations provide securities market services, insurance services or other financial services. Management companies of pension funds, mutual investment funds, leasing companies and other organizations carry out operations in the financial services market. Together, subsidiary banks and financial organizations are called VTB Group companies.

VTB Group has an international network, unique for Russian banks, which includes more than 30 banks and financial companies in more than 20 countries. VTB provides its clients with comprehensive services in the CIS countries, Europe, Asia and Africa. In the Russian banking market, VTB Group ranks second in all key indicators.

VTB Group manages currency risk based on internal regulatory documents adopted by the Group’s Management Committee, ensuring compliance between assets and liabilities by currency and maintaining an open currency position (OCP) of each of the Group’s banks within the established limits, including internal limits, as well as regulatory ORP limits set by the regulator, stress testing methods and synthetic methods. Quantitative risk assessment is carried out using the VaR method, which allows one to estimate the maximum probable (with a given confidence interval) negative impact on the financial result of changes in the value of currency positions. VaR assessment is carried out using the historical modeling method with a historical period of 2 years, a time horizon of 10 trading days and a confidence interval of 99%.

The main methods for minimizing foreign exchange risks of VTB-24 are stress testing and synthetic methods, such as transfer pricing. Let's look at them in more detail.

Recently, stress testing methods have become very popular at VTB, which makes it possible to estimate the size of the bank’s losses for individual positions due to the occurrence of shock events. The main stress testing methods for VTB Bank are scenario stress testing and sensitivity stress testing.

A stress testing scenario is a model of possible developments under the influence of various risk factors. Stress testing scenarios should cover all prerequisites, the occurrence of which could cause serious impacts on the financial stability of the bank. The effectiveness of scenario analysis depends on the professionalism and training of experts. Expert assumptions and judgments are unformalized, however, very significant components of the scenario. Due to the versatility and complexity of economic processes, VTB specialists are forced to operate with general patterns and trends, taking into account historical relationships and rely on their own observations and experience.

Sensitivity stress testing consists of studying the impact of one or more interrelated risk factors on the activities of VTB Bank. This stress testing approach assesses the impact of an instantaneous change in one risk factor while other underlying conditions remain constant. Although the method lacks historical and economic content, which in turn may limit its usefulness for strategic decision making, sensitivity testing is a critical method of conducting operational stress testing, the results of which cannot be overestimated during the preparation of specific mitigation measures. risk level.

The effectiveness of currency risk management directly affects the competitiveness and stable development of the bank. Minimizing currency risk is a key point in currency management, the object of which is the bank’s currency position.

Today, the use of synthetic methods by banks to manage currency positions is not only limited by law, but an obstacle to this is the insufficient development of derivatives markets. Therefore, it is relevant to search for effective methods for managing currency positions among those available. These are methods of natural management of a currency position, one of which is transfer pricing.

Let's consider the use of a centralized approach to managing currency risk based on the construction of a transfer pricing system using the example of VTB-24. A position management department has been created as part of the bank's treasury, which will purchase all resources attracted by financial responsibility centers with their subsequent sale to carry out all active operations at certain transfer prices. Thus, the position management department takes on currency, interest rate, liquidity risk and the risk of complying with mandatory reserve requirements for funds in a correspondent account with the Central Bank of Russia and, using transfer pricing, manages these risks.

The key point in building a transfer pricing system to ensure its effectiveness is the establishment of an adequate level of transfer rates. The domestic realities of the functioning of the money market indicate the difficulty of determining a market benchmark for transfer pricing and confirm the need to develop a specific transfer pricing system adapted to the Russian market.

At VTB-24, all attracted liquid resources are purchased by the position management department at the BID transfer price for a specific type of financial instrument (deposit, savings certificate, etc.). The transfer price for different types of these instruments differs depending on their term (“changing”, “stable”, “perpetual”) and currency (USD, EUR, aggregate, “other currencies”).

Variable liabilities are funds, a significant part of which can be withdrawn from the bank at any time. These include funds on demand for legal entities and individuals, funds in correspondent accounts of other banks, savings and time accounts in the part that does not belong to minimum balances, accounts payable and transit accounts.

The specificity of “changing” resources determines the use as a basis for calculating their transfer price BID of the average rate of Treasury quotes for attracting overnight intrabank resources, which developed in the previous period relative to the reporting month. In turn, Treasury quotes depend on price fluctuations in the interbank resource market.

VTB-24 considers funds stable if the likelihood of early withdrawal is minimal. This group includes the above sources in terms of minimum balances (that is, minus reserves for the unstable part), certificates of deposit, non-deposit sources with fixed maturities, funds from the sale of securities. In the structure of “stable” resources, resource groups are distinguished by terms (up to 1 month, from 1 to 2 months, etc.). In this case, it is advisable to use the weighted average of the bank’s overall marginal rates for attracting resources of the appropriate type (depending on the urgency, currency, and instrument of attraction), which reflect the relative cost of various funds and allow one to determine expensive and cheap sources of financing as the basis for calculating the BID transfer price. The use of a single transfer price for the purchase of resources of a certain type makes it possible to take into account certain regional features of raising funds, which should lead to a reduction in the cost of raising resources for the bank as a whole. It should be noted that such a system operates subject to the possibility for financial responsibility centers to change the rates for attracting resources within certain limits. Such limits, depending on the goals and objectives of VTB-24 for the near future, are established by the asset and liability management committee.

An important source of information necessary for the effective functioning of the transfer pricing system in a bank is management accounting data. Thus, the use of transfer pricing in the currency risk management system, using the example of VTB Bank, allows:

Optimize the process of managing currency risk based on the centralization of regulatory functions in one structural unit of the bank - the position management department;

Manage on the basis that the position management department receives up-to-date and complete information regarding the structure of the balance sheet, taking into account the timing, volumes, currencies and cost of resources and the directions of their placement;

Increase the bank's stability during crises;

Reduce requirements for economic capital to cover risks;

Increase the profitability of the business as a whole.

Increasing the efficiency of currency risk management is facilitated by:

Differentiation of transfer rates through the use of incentive and disincentive margins serves as an economic method of directing the work of responsibility centers in the required direction;

Taking into account in the remuneration of employees the level of transfer results of financial responsibility centers, which helps to increase the productivity of their activities.

Thus, the use of transfer pricing in the VTB-24 currency risk management system makes it possible to optimize the process of managing currency risk based on the centralization of regulatory functions in the bank’s currency position management department. Using this method, management is carried out on the basis of the position management department receiving up-to-date and complete information regarding the structure of the balance sheet, taking into account the timing, volumes, currencies and cost of resources and the directions of their placement. Transfer pricing allows you to increase the stability of the bank during crises, reduce the requirements for economic capital to cover risks, and increase the profitability of the business as a whole. The use of transfer pricing in the currency risk management system allows you to optimize the process of managing currency risk based on the centralization of regulatory functions in the bank's currency position management department. Using this method, management is carried out on the basis of the position management department receiving up-to-date and complete information regarding the structure of the balance sheet, taking into account the timing, volumes, currencies and cost of resources and the directions of their placement. Transfer pricing allows you to increase the stability of the bank during crises, reduce the requirements for economic capital to cover risks, and increase the profitability of the business as a whole.

Conclusion

Based on analysis and systematization, it was determined that currency risk is internal relative to a banking institution, financial relative to the object of influence and price risk according to the source of origin, expressed in the likelihood that unfavorable fluctuations in foreign currency exchange rates affect the real value of the bank's open currency positions.

It has been determined that the complexity of managing currency risk is associated with a significant number of factors that determine it. For the purpose of comprehensive identification of currency risk factors, it is proposed to distinguish: external ones that are beyond the control of the bank, internal ones - those that the bank can control. Uncontrollable factors influencing currency risk, in turn, should be divided into short-term and long-term, and controllable factors into quantitative and qualitative.

The typology of a bank's currency risk is determined by identifying its following characteristics: by form; by type: by the degree of validity of the accepted currency risk, by the degree of systematicity, in accordance with the size of the risk, the adequacy of decision-making time: precautionary, current and delayed, depending on the number of decision-makers regarding the management of currency risk, by the nature of the action, depending on the level of risk.

The study of currency risk revealed that its management is of key importance for the effective operation of the bank, since the bank’s currency position has a significant impact on the financial results of the institution.

It has been determined that minimizing currency risk involves the justification and implementation of management decisions that ensure that currency risk is maintained at the level of established criteria, ensuring a relationship with the minimum level of required profitability and the volume of the bank’s equity capital.

The tools for minimizing currency risk are the following methods for managing the bank's currency position: netting, conversion operations, structural balancing with volumes and terms, position limits, transfer pricing, derivatives. The choice of instruments for regulating the currency risk position is determined by the bank’s overall risk strategy, which, in turn, depends on the total amount of potential losses, on the one hand, and the bank’s financial capabilities, on the other.

Clist of used literature

1. Beloglazova G.N., Krolivetskaya L.P. Banking: Textbook. - M.: Finance and Statistics. - 2012. - 289 p.

2. Money, credit, banks: textbook / team of authors; edited by O.I. Lavrushina. - M.: KNORUS, 2014. - 418 p.

3. Dumnaya N.N., Nikolaeva I.P. Modern economic science: textbook. - M.: Unity-Dana, 2012.

4. Krasavina L. N. Update of the scientific school of international currency, credit, financial relations in the context of global challenges // Money and Credit. - 2014. - No. 7. - P. 27-34.

5. Macroeconomics: a textbook for masters / N. M. Rozanova. - M.: Yurayt Publishing House, 2014. - 813 p. -- Series: Master.

7. Shchegortsov V. World financial betting. In 2 volumes. T. 1. Field of Miracles or the World Financial System / V. Shchegortsov, V. Taran, O. Osobenkov, M. Shchegortsov. - M.: OJSC "Printing House "Novosti", 2011. - 1272 p.

8. Shchegortsov V. World financial betting. In 2 volumes. Volume 2. The Watchful Eye or World Financial Control / V. Shchegortsov, V. Taran, O. Osobenkov, M. Shchegortsov. - M.: OJSC "Printing House "Novosti", 2011. - 728 p.

9. Khandruev A. Basel III will discourage appetite for risk // Direct investments. - 2014. - No. 11(127). - P. 65-73.

10. Official website of VTB-24. URL: http://www.vtb.ru/ (access date: 10/09/2015).

Posted on Allbest.ru

Task No. 1. Determination of currency risk

The first thing to do is to determine the currency risk, predict and calculate possible losses. A simple method for measuring foreign exchange risk is the open foreign exchange position (OCP), which is the difference between the volume of claims and obligations in foreign currency. So, if there are more obligations than requirements, this is a short open currency position. On the contrary - long. If they are equal, then the position is closed. In this case, the coincidence in time and amounts is important. For example, a completely ruble company:

1. Signs a contract: quarterly receipt of foreign exchange earnings in the amount of $5 million to the company during the year (long foreign exchange position 5x4 = $20 million is open)

2.Takes out a loan: in foreign currency for 9 months in the amount of $15 million (including interest). The loan proceeds are entirely used for the purchase of equipment (a short currency position of $15 million has been opened)

Bottom line: natural hedging of currency risk (Natural Hedge) 15 million dollars after the conclusion of the contract, at the time of receiving the loan. A long currency position of $5 million occurs when the contract is entered into.

There are a huge number of methods and their combinations for predicting possible losses (for example, Stress, VaR and Shortfal), which are based on the analysis of historical data and are effective in most cases. However, they cannot predict the appearance of black swans, and therefore the greatest losses, which are usually realized precisely in the event of extraordinary events on world markets.

Task No. 2. Decision-making

At the second step, the financial director will need to decide what to do with the information received. In the case when the company has written and approved a risk management policy ( hedging currency risk ), this issue should be regulated in detail in this document. In reality, such a document may not exist, and the question, if discussed, remains without a clear answer.

Faced with this situation, some CFOs decide to wait and not take the initiative. And de facto, this means completely taking on the risk without analyzing its possible consequences.

While the company receives unplanned profits from currency revaluation, the owner and top management do not want to delve into mythical threats to an apparently successful business. And if the risk materializes and, as a consequence, a loss, the owner comes to the conclusion about the incompetence of the financial director and management.

The most sensible decision for the CFO is to assess the size of the currency risk and make proposals to minimize it, without waiting for instructions from management. The result should be a decision to delegate authority or approve a formal risk document.

Task No. 3. Minimizing currency risk

The third objective is to minimize risks by using a specific method or combination of methods. The main methods are Natural Hedge and the use of financial instruments ( hedging currency risks ).

Natural Hedge. This is the elimination of the occurrence of open-source cash flows by balancing cash flows by timing and size. There are no risks, or they are immediately compensated by counter business transactions. For example, financing and obligations for the supply of equipment and consumables in foreign currency are covered by foreign exchange earnings. Or imported goods are purchased and sold for rubles, or purchased for foreign currency and sold for rubles, linked to the exchange rate. But, as a rule, in practice, only companies with foreign currency earnings, as well as completely ruble companies, manage to use this method.

Currency risk hedging . This is the execution of transactions with derivative financial instruments, which allows you to compensate for the possible negative effect of the realization of currency risk. A decrease in potential profit from the implementation of a favorable scenario for the behavior of financial markets is a direct payment for reducing non-core risks. No risk - no non-core income.

Working with risks- this is handmade for each individual company. There is no magic solution or method here.

Information is collected, interested departments, managers and business owners make decisions, develop and approve risk management policies. This document contains not only the acceptable level of risk, but also ways to minimize it, responsible departments, the amount of financing and answers to many other questions.

Where to hedge risks

The choice is large, the offers of servicing banks and exchanges are replete with variety: these include standardized forward and futures contracts, options and complexly structured derivatives, which can be either part of loan agreements or a combination of exchange or over-the-counter transactions. The most important points are: the presence or absence of collateral requirements, the credit risk of the counterparty and the possibility of early closure of the transaction. At first glance, everything is very simple: the exchange is simple instruments that are liquid and traded on the organized market (futures, options, forwards and swaps), and over-the-counter instruments are everything else, with limited liquidity and high risks. The nuances are in the details.

Optimal solution

To minimize currency risk, the optimal solution for business is an over-the-counter transaction within the limit with the largest bank. The advantages are obvious, there is no need to transfer and track the amount of collateral, it is possible to create complex products. The counterparty risk is minimal. All that remains is to check the adequacy of pricing and take into account the reduction in the credit limit by the amount of risk on the derivative.

If there is no limit from a bank in the top ten, you should not tempt fate. The Moscow Exchange provides a much more transparent mechanism for working on the basis of collateral. Pricing is clear, there is the possibility of targeted transactions with the same banks, and the risks associated with the execution of transactions tend to zero.

Types of hedging transactions

Basic management tool currency risks - This is the conclusion of hedging transactions. Elena Ageeva, financial director of Golder Electronics, talks about what types of transactions there are.

The activities of any commercial bank involve the assumption of various risks. In general, risk is understood as probabilistic uncertainty associated with incurring potential losses due to deviations of actual results from their preliminary quantitative and qualitative assessment. One of the risks that requires continuous monitoring is currency risk.

Currency risk is the risk of losses due to unfavorable changes in the exchange rates of foreign currencies and (or) precious metals on positions opened by a credit institution in foreign currencies and (or) precious metals.31

There are several different methods for managing currency risk, the main one is setting limits on foreign exchange transactions. Limits can be set on transactions with the state or an individual counterparty, on instruments (restrictions on currencies and instruments used), on the maximum size of an open currency position or loss. In order to limit currency risk, banks set the following sizes (limits) of open currency positions:

· The sum of all long (short) open currency positions in individual foreign currencies and individual precious metals on a daily basis should not exceed 20 percent of the bank’s own funds (capital).

· Any long (short) open currency position in certain foreign currencies and certain precious metals, as well as a balancing position in rubles, should not exceed 10 percent of the bank’s own funds (capital) on a daily basis.

Banks with branches and banks with a wide network of divisions independently control the size (limits) of open currency positions by establishing sublimits for open currency positions of head offices and branches. Sublimits can be set both as a percentage of the bank’s own funds (capital) and in absolute terms. The distribution of sublimits between branches of credit institutions is carried out by the head offices of credit institutions.32

In practice, the establishment of currency risk limits is combined with methods for reducing currency risk, which traditionally include:

· “matching” - mutual offset of purchase and sale of currency by asset and liability;

· “netting” - reduction of foreign exchange transactions through their enlargement;

· various methods of analysis and forecasting of changes in exchange rates and their dynamics;

· hedging losses - opening positions in one market (an equal position in another market) in order to cover potential losses due to unfavorable changes in prices for the asset for which the position is opened. Hedging also makes it easier to forecast cash flows because it allows you to fix the exchange rate in advance.

The main instruments for hedging currency risks are:

· deliverable forward - a transaction of purchase/sale of one currency for another) at a certain point in time in the future at the rate agreed upon at the time of conclusion of the transaction;

· settlement forward (NDF) - an analogue of a delivery forward with the difference that on the date of execution of this contract, settlements between the parties to the transaction occur only in the amount of the exchange rate difference;

· option – a derivative financial instrument that gives its holder the right to purchase one foreign currency for another foreign currency at a predetermined rate at a certain point in time;

· futures contracts for the US dollar and euro for Russian rubles on the Moscow Interbank Currency Exchange (MICEX) - standardized forward contracts, which are instruments without delivery (settlement);

One of the most effective tools for controlling the level of currency risk is forecasting, which consists of modeling the most likely development scenarios, which allows you to take a set of measures in a timely manner to avoid taking on unnecessary risks. Let's consider various economic and mathematical methods for constructing models for forecasting the level of currency risk.

Calculation of expected losses. Financial losses are assessed based on a functional cost analysis of risk factors and a calculated aggregated indicator of credit risk. The expected loss EL is calculated using the formula:

Where w is the weight of the j-th currency risk;
VR - indicator of currency risk of the j-th risk factor;

C - costs (direct and indirect costs of the bank for foreign exchange transactions); j - interest, or commission, income on a foreign exchange transaction.

31 of the Bank of Russia dated June 23, 2004 N 70-T “On typical banking risks”

Chapter 32 2, Instruction of the Bank of Russia dated July 15, 2005 N 124-I (as amended on April 28, 2012) “On establishing the size (limits) of open currency positions, the methodology for their calculation and the specifics of supervising their compliance by credit institutions” (ConsultantPlus)

Forecast of the required amount of capital for currency risk. The capital reserve for currency risks (CRRR) for the bank as a whole is calculated using the formula:

where summation by index i is carried out for all foreign exchange transactions of the bank. The calculation base for the capital reserve can be the amount of capital against currency risk, which is determined by the formula:

BPCi = yl ´ ELi,

where yl is the coefficient of unexpected losses;

ELi - expected losses for the analyzed currency risk factors i;

ELi = BPi ´Ci .

As an alternative, the ValueatRisk (VaR) model can be used.

When using the universal method, the claim amount is calculated using the following formula: E* = max (0, ),

where E* is the amount of the claim after reducing the currency risk; E - current claim amount;

He - requirement correction (haircut);

C is the current value of the guarantee (for guaranteed foreign exchange transactions); Hc - guarantee correction;

Hfx - Adjustment of a guarantee for the currency difference between the value of the guarantee and the claim based on market value fluctuations and exchange rate fluctuations.

Thus, the essence of the main methods of managing currency risk comes down to compensating for losses from unfavorable price changes (through parallel transactions with derivative financial instruments) and eliminating the assumption of unnecessary currency risks.

Bibliography

1. Instruction of the Bank of Russia dated July 15, 2005 N 124-I (as amended on April 28, 2012) “On establishing the size (limits) of open currency positions, the methodology for their calculation and the specifics of supervising their compliance by credit institutions”

2. Order of the Federal Financial Markets Service of the Russian Federation dated March 4, 2010 N 10-13/pz-n “On approval of the Regulations on the types of derivative financial instruments”

3. Bank of Russia dated June 23, 2004 N 70-T “On typical banking risks”

4. Nag P.M. Basel 2 for bank managers: main characteristics and implications of implementation for Central and Eastern Europe // Banking. 2006. N 3. P. 8 - 17.

5. Article: Standard for assessing the effectiveness of the currency risk management system in a credit institution (Sokolinskaya N.E.) ("Audit statements", 2015, No. 2) (ConsultantPlus)

Risk is inherent in banking activities. Banks have a special influence on cash flows in the economy. In the structure of banking resources, the share of attracted (i.e., “foreign”) funds is especially large. The materialization of risks in the banking sector can have particularly severe consequences for the entire economy. Therefore, banking activities are subject to special government regulation and control.

Entry into the banking business is complicated by the high and constantly increasing level of minimum capital of the 1st level, special requirements for the reputation of bank managers, etc. The requirements of the Bank of Russia for obtaining a license to carry out financial activities are aimed at initially reducing risk in the banking system.

The risk must be assessed and, where possible, limited and/or reduced. To implement this task, the Baka of Russia establishes mandatory economic standards for commercial banks, the implementation of which banks report at various intervals (daily, monthly).

In addition to the mandatory standards established by the Central Bank, Moscow-Paris Bank OJSC has created and for many years maintained its own analytical database on macroeconomic indicators, on the indicators of the bank and the banking system. This allows you to calculate and track the dynamics of additional coefficients and ratios. Through this, the management of the Moscow-Paris Bank OJSC receives a more complete and comprehensive assessment of banking risks.

Risk management at OJSC "Moscow-Paris Bank" is carried out through a set of decisions implemented in the bank's organizational structure, in the decision-making system, in the developed regulatory framework, procedures, regulations for the implementation of various operations. But the most advanced risk prevention system in a bank still works under the control and influence of the human factor.

Management (including risks) is a subjective activity; it can be more or less successful. Understanding this, OJSC Moscow-Paris Bank pays special attention to training staff, improving their qualifications, and corporate spirit.

The Moscow-Paris Bank OJSC has created and operates an Asset and Liability Management Committee (ALMC), Credit Committees of the Moscow-Paris Bank OJSC and branches, etc. The bank has implemented a system of delimitation of powers. The higher the amount of the upcoming operation and/or the level of risk associated with it, the higher the level of making the final decision.

Risk management at the Moscow-Paris Bank OJSC is carried out, in particular, through:

1) forecasting exchange rates, choosing a long or short position for open traded goods;
2) establishing an internal exchange rate for the purchase and sale of foreign currencies;
3) conducting operations on the interbank market, through the purchase and sale of currency to clients at internal auctions;
4) regulation of the structure and dynamics of foreign currency assets (including the volume of loans in foreign currency) and foreign currency liabilities (not only by volume, but also by currency);
5) establishing a certain amount of interest rates on foreign currency loans and deposits;
6) compliance with the requirements of the standards for the open market for each type of foreign currency, as well as for all foreign currencies;
7) establishing internal limits on the performance of certain currency transactions.

The need to insure currency risk. There are two strategies for insuring currency risks: speculation and the risk of lost profits. Currency risk insurance refers to measures to eliminate it, that is, measures aimed at eliminating the dependence of the results of international economic transactions on changes in exchange rates.

Currency risk insurance aims to fix the result of an international economic transaction at the time of its conclusion or, at least, limit the possibility of changing these results. Currency risk insurance allows participants in international economic transactions to achieve planned, but not necessarily better, results in terms of efficiency.

The possibility of obtaining worse economic results when choosing one of two management decisions (to insure or not to insure currency risk) compared to another possible decision is called the risk of lost profits. The point in this case is that a change in the exchange rate may turn out to be favorable for the enterprise, and, having insured the contract against currency risks, it may lose the profit that it would otherwise receive.

A number of banks never insure currency risks, believing that currency instability is one of the components of the problems of modern international trade, so that uncertainty in terms of currency risks is considered by them as a normal risk. Often this policy brought large losses, and since the liquidation of the fixed parity system, the number of such firms has decreased significantly. The second category of enterprises covers all open positions regardless of exchange rate forecasts.

The costs of such a policy may be too great. The existence of the risk of lost profits, as well as the desire to combine the advantages of two other strategies - confidence and low costs - leads to the fact that the vast majority of banks and commercial and industrial companies refrain from 100% insurance of currency risk, deliberately maintaining open currency positions in order to increase the efficiency of foreign economic transactions .

The deliberate refusal to insure currency risk in order to make a profit on an open currency position is called currency speculation. There is a fundamental difference between currency risk and the risk of lost profits, which lies in the impact on the final efficiency of foreign economic transactions. The risk of lost profits, in essence, only expresses the “regret” of participants in economic transactions about receiving slightly worse results from transactions compared to possible better results.

The risk of lost profits does not lead to real losses, since by insuring the currency risk, participants in international transactions guarantee themselves the required rate of profit, although not the maximum possible under the given circumstances. On the contrary, currency risk, especially in terms of the risk of cash losses, can lead to real losses and even bankruptcy of banks and commercial and industrial corporations.

The possibility of real losses from currency speculation is explained by the fact that each currency transaction of a participant in international economic relations is opposed by transactions on the other side of the balance sheet. For example, a decrease in the amount of proceeds from export transactions and loans provided in comparison with the planned results may lead to the fact that the amounts received will not cover its current expenses or the cost of borrowed bank funds.

Forecasting exchange rates is a prerequisite for choosing between currency risk insurance and currency speculation. Forecasting exchange rates means obtaining information about future exchange rate changes using the methods of special scientific research. With the introduction of a system of floating exchange rates, their fluctuations became constant, large-scale and difficult to predict.

This significantly increased currency risk and made it difficult to choose between currency risk insurance and currency speculation. The dependence of the effectiveness of international economic transactions on the accuracy of forecasting exchange rates has increased. The content of forecasting itself has changed: from a purely auxiliary value, forecasting exchange rates has turned into an independent area of professional activity.

Forecasts are used to establish the range of changes in the open currency position in the future. Minimum and maximum indicators are used to calculate possible foreign exchange losses (full insurance, refusal of insurance, partial insurance), which are compared with insurance costs. If the size of potential foreign exchange losses exceeds the amount of coverage costs, it is recommended to insure a portion or all of the open foreign exchange position.

Expected cash rate the share of an open currency position that is recommended to be insured (based on the cost of coverage at the time the decision is made) Long position Short position maximum (upper parameter, 90% confidence level) insure 100% do not insure mode (the most likely impact of the exchange rate on income/loss ) insure 50% insure 50% minimum (lower parameter, level of 90% confidence) do not insure insure 100%.

If the cost of coverage exceeds the level of probability of exposure to probable losses, but is greater than the most profitable option, the decision on insurance will be made depending on the degree of negative attitude of the company to risks. Based on this, the shares of open positions subject to insurance may also be changed. The degree of coverage of currency risk is determined, as a rule, by the traditions of each individual corporation or bank.

Large banks and chambers of commerce and industry of corporations strive not to abuse currency speculation. In addition, in many countries the size of open foreign exchange positions of banks is regulated by foreign exchange laws. The considered insurance decision-making rule can only serve as a guide and is acceptable to the extent that the input data is reliable and accurate.

If the open position is incorrectly defined or the exchange rate forecast is inaccurate, the rule may indicate incorrect decisions. Therefore, an important element of the currency risk insurance strategy is to obtain as accurate a picture of the situation as possible.

It is known that the following strategies can be used to reduce risk: diversification, concentration, immunization, and hedging.

Diversification and concentration strategies can be successfully applied against the risk associated with deviations in the term structure of interest rates, however, to reduce the level of currency risk in the activities of the Moscow-Paris Bank OJSC, hedging is more suitable.

Hedging techniques have many potential applications. Borrowers of funds can use the futures markets to protect themselves from high interest rates on loans. Lenders can also protect themselves from falling interest rates by purchasing high-rate financial futures contracts. Portfolio managers can lock in the prices and yields of the instruments to be purchased in the futures markets and maintain the current face value of the assets. Consumers of foreign exchange, such as importers and exporters and financial institutions, can use currency futures and forwards to protect against currency risk.

When making hedging decisions, exchange rate volatility is an important consideration. A certain amount of interest rate risk is part of the normal financial risk of all banks. The use of financial leverage (through the use of borrowed funds) increases income expectations, and for the sake of these expectations they are willing to accept increased risk.

Hedging is carried out by using contracts that have price fluctuations similar to the price fluctuations of the hedged instrument.

Hedging costs can be divided into two categories: the first is transaction execution costs and the second is transaction costs. The costs of executing transactions are reflected in the difference between the buyer and seller prices in the foreign exchange market. In addition, there are potential losses due to unfavorable changes in basis. Transaction costs include brokerage commissions and the opportunity cost of not earning interest on money deposited as margin.

Basis risk can be measured by the potential for imperfect price correlation. This must be added to the transaction costs expressed as a percentage of the principal amount to be hedged. If the hedge is carried out using options, the option premium must be included in the cost of hedging.

Let's consider hedging technology using the example of a hedge against an increase in the exchange rate of a currency, which can be effectively used in the activities of the Moscow-Paris Bank OJSC.

Example 1. Refusal of a business entity to hedge currency risks. In this case, the business entity takes on the risk and implicitly becomes a currency speculator, counting on favorable exchange rate dynamics. At the same time, the value of assets becomes directly dependent on the exchange rate.

The bank plans to make payments in the amount of 10 thousand US dollars in 3 months. At the same time, the SPOT exchange rate is currently 28 rubles. for 1 dollar. Therefore, the cost of purchasing 10 thousand dollars will be 280 thousand rubles. If after 3 months the SPOT rate drops to 26 rubles. for 1 dollar, then the equivalent of a dollar position is 260 thousand rubles. (26 rubles x 10 thousand dollars). The business entity will spend 260 thousand rubles on the purchase of foreign currency in 3 months, i.e. will have cash savings, or potential profit, of 20 thousand rubles. If after 3 months the SPOT rate increases to 30 rubles. for 1 dollar, then the cost of a business entity to purchase 10 thousand dollars will be 300 thousand rubles. (10 thousand dollars x 30 rubles).

Consequently, additional purchase costs will be equal to 20 thousand rubles. (300-280).

The advantage of not hedging is the absence of upfront costs and the possibility of unlimited profits. The disadvantage is the risk and possible losses caused by an increase in the exchange rate.

Example 2: Hedging using a forward transaction. A forward transaction is a mutual obligation of the parties to carry out currency conversion at a fixed rate on a pre-agreed date. A fixed-term, or forward, contract is an obligation for two parties (seller and buyer), i.e. the seller is obliged to sell and the buyer to buy a certain amount of currency at a set rate on a certain day.

The bank decided to enter into a three-month fixed-term (i.e. forward) contract for the purchase and sale of 10 thousand US dollars. At the time the contract was concluded, the SPOT rate was 28 rubles. for 1 dollar, and the three-month forward rate under the contract is 30 rubles. for 1 dollar. Consequently, the cost of purchasing currency under the contract will be equal to 300 thousand rubles. (10 thousand dollars x 28 rubles). If three months later on the day of contract execution the SPOT rate rises to 31 rubles. for 1 dollar, then the bank’s costs for purchasing foreign currency will be 300 thousand rubles. If he had not concluded a fixed-term contract, the cost of purchasing foreign currency would be 310 thousand rubles. ($10 thousand x 31).

Savings of monetary resources, or potential profit, will amount to 10 thousand rubles. If after three months on the day of execution of the contract the SPOT rate drops to 26 rubles. for 1 dollar, then at a cost of 300 thousand rubles. under a fixed-term contract, lost profits (potential losses) will amount to 40 thousand rubles. (10 thousand dollars x (260 - 300 rubles).

The advantage of a forward transaction is the absence of upfront costs and protection from unfavorable changes in the exchange rate. The disadvantage is the potential losses associated with the risk of lost profits.

Example 3: Hedging with options.

A currency option is the right for the buyer to buy and the obligation for the seller to sell a specified quantity of one currency in exchange for another at a fixed rate on a pre-agreed date or within an agreed period of time. Thus, an option contract is binding on the seller and optional on the buyer. A business entity buys a currency option, which gives it the right (but not the obligation) to buy a certain amount of currency at a fixed rate on an agreed date (European style).

The bank expects to make payments of $10,000 in three months and fix the minimum dollar exchange rate. He buys an option to buy dollars with the following parameters:

- amount - 10 thousand US dollars;
- period - 3 months;
- option rate - 28 rubles. for 1 dollar;
- bonus - 1 rub. for 1;
- style - European.

This option gives the right to a business entity to buy 10 thousand US dollars in 3 months at the rate of 28 rubles. for 1 dollar. The business entity pays the currency seller an option premium in the amount of 10 thousand rubles. (10 thousand dollars x 1 rub.), i.e. the price of this option is 10 thousand rubles. If three months later on the day the option is exercised, the SPOT dollar exchange rate falls to 26 rubles, then the business entity will refuse the option and buy the currency on the cash market, paying 260 thousand rubles for the purchase of the currency. (10 thousand dollars x 26 rubles).

Taking into account the purchase price of the option (premium), the total costs of a business entity for the purchase of currency will be 270 thousand rubles. If three months later, on the day the option is exercised, the SPOT dollar exchange rate rises to 30 rubles, then the future expenses of the business entity for the purchase of foreign currency are already insured. He exercises the option and spends 280 thousand rubles on the purchase of currency. If he bought currency on the cash market at the SPOT rate of 30 rubles. for 1 dollar, then I would spend 300 thousand rubles on the purchase.

The advantage of hedging with an option is complete protection against unfavorable changes in the exchange rate. The disadvantage is the cost of paying the option premium.

In general, it is obvious that the Moscow-Paris Bank OJSC needs to actively use hedging to overcome currency risks.

At the same time, I would like to note that the value of net interest income from transactions with foreign currency for three years ranges from 3,386 thousand rubles. up to 5868 thousand rubles.

To identify the reasons for this dynamics, you should also pay attention to the value of such indicators as profit and the level of the bank’s own funds.

The level of equity shows stable growth by an average of 10,000 thousand rubles. per year, while the level of profit fluctuates without clear trends in development. However, the value of net interest income from foreign exchange transactions has a similar behavior for the analyzed period.

It is worth noting that the share of income from foreign exchange transactions in the overall structure of the bank's income is not large - as of January 1, 2007, only 5.44%. The share of expenses from foreign exchange transactions in the overall structure of bank expenses is also not large - 5.4% - approximately equal parts.

Analyzing the above data, it is worth noting that the bank needs to pursue a policy aimed at increasing and stabilizing the level of profit from operations with foreign currency. At the present stage of development, increasing profits is possible by improving already implemented operations and introducing new ones.

You can offer the bank the following ways to increase the profitability of the bank’s foreign exchange transactions:

operations to execute forward contracts for the purchase and sale of currency;

optimization of interest rates on foreign currency deposits and loans;

technologies for urgent operations

optimization of the operation of bank currency exchange offices;

issue of credit cards;

issuance of multicurrency smart cards;

account management via the Internet, mobile phones.