Currency risk management, influence of interest rate and exchange rate on bank profit

Abstract

Bank activity is connected with the risks that are caused by different circumstances. A risk means the uncertainty which is related with beginningof any event or its consequences. The continuous functioning of currency market is its main peculiarity, that results in the fact that a bank which has open position from foreign currency is exposed to the currency risk even then, when it does not work. Leaving in the evening the currency position open, then in the morning it is possible to find out losses or incomes as a result of change of exchange rate during the night.

Realization of currency operations is the most difficult and the most risky type of bank activity, that can bring both high incomes and become the source of considerable losses. Today a percent risk acquires for domestic banks greater value as a result of tendency to reduction of percent margin. The search of effective methods of its estimation and ways of minimization becomes an urgent task. The solving of this  problem  considerably influences financial – economic activity of bank institutions.

It is important to note that not only the changes of interest rates considerably influence the results of financial – economic activity of bank institutions but also permanent oscillation of exchange rates. This problem becomes even more important for bank institutions that every day carry out currency operations in considerable volumes. That is why for such banks the use of effective methods of management a currency risk acquires the special actuality. Participants of foreign economic activity, both commercial banks and their clients, constantly suffer from instability and impossibility to counteract to purposeful currency speculations.