By directly matching its foreign asset and liability book, Bank can lock in a positive return or profit spread whichever direction exchange rates, change over the transaction period. In essence, Bank is hedged against both foreign exchange rate risk and foreign interest rate risk only if it matches both the size and the durations of its foreign assets and liabilities(suppose reporting currency is GBP then talking about USD assets and liabilities as Foreign) in a specific currency.
My question is, Currency Swap transactions, customer Forward contracts and Interbank Forward bookings all are reported as Off Balance sheet items. Therefore to identify whether a Bank is hedged against FX Risk, do we need to put all these transactions in respective time buckets with ON Balance sheet Items to see whether the size of tenor duration of each buckets (like 1 month,2 month.....12 month) are matched against respective Assets & Liabilities in tenor bucket-wise?
If there are large differences in respective tenor buckets even though total assets and liabilities are matched is that mean Bank is not hedged against FX Risk?
Can anyone explain. Thanks
My question is, Currency Swap transactions, customer Forward contracts and Interbank Forward bookings all are reported as Off Balance sheet items. Therefore to identify whether a Bank is hedged against FX Risk, do we need to put all these transactions in respective time buckets with ON Balance sheet Items to see whether the size of tenor duration of each buckets (like 1 month,2 month.....12 month) are matched against respective Assets & Liabilities in tenor bucket-wise?
If there are large differences in respective tenor buckets even though total assets and liabilities are matched is that mean Bank is not hedged against FX Risk?
Can anyone explain. Thanks
Last edited:
