Banking Risk Management in a Globalizing Economy

By Panos Angelopoulos; Panos Mourdoukoutas | Go to book overview

7

Foreign Exchange
Risk Management

In the late 1990s, as Greece was preparing to join the European Monetary Union (EMU), Olympic Bank economists had yet another worry, the prospect of a Greek Drachma devaluation against major European currencies, especially against the Deutchmark (DM). If materialized, such a currency devaluation would have an adverse effect on standby lending commitments to Greek importers.

In a deregulated global economy where funds cross national borders at a mouse click, Olympic Bank is not alone. American and European banks, which borrowed in Japanese yen to take advantage of the large interest rate differentials between their own domestic and Japanese interest rates also faced the foreign exchange rate risk. As discussed in the previous chapters, every bank that draws part of its liabilities from, or allocates part of its investment or loan portfolio to foreign markets is exposed to foreign exchange risk, especially banks expanding their operations in countries with highly volatile currencies, as is the case with emerging economies.

Banks are not the only institutions concerned with foreign exchange risk. So are the world's large corporations that are engaged in international trade and investments.

-135-

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Banking Risk Management in a Globalizing Economy
Table of contents

Table of contents

  • Title Page iii
  • Contents vii
  • Figures and Tables ix
  • 1: Introduction: from Financial Intermediation to Risk Management 1
  • 2: Banking Risk Management: an Overview 11
  • 3: Evolution of Banking Risk Management 51
  • 4: Risk Management Methods: Financial Derivatives 73
  • 5: Credit Risk Management 97
  • 6: Interest Rate Risk Management 109
  • 7: Foreign Exchange Risk Management 135
  • 8: Conclusion 155
  • References 163
  • Index 169
  • About the Authors 172
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