Banks engage in foreign exchange operations. When bought/sold, an asset (claim) is formed in that currency and a liability is formed in another currency. Therefore, banks have demands and liabilities in several different currencies that are strongly influenced by currency exchange rates.
The possibility of loss or gain due to adverse changes in exchange rates is called currency risk.
The ratio of bank assets and liabilities in foreign currency determines the currency position. If the bank's requirements and obligations in a particular currency are the same, the currency position is closed but if there is a mismatch – it is called open. Closed arrangements represent a relatively stable condition for the banking sector. However it is not possible to profit from exchange rate changes with this arrangement. The slot, in turn, can be either “long” or “short”. These positions are called “long” (if requirements exceed commitments) and “short” (obligations exceed requirements). A long position in a particular currency (when the bank's assets in that currency exceed its liabilities in it) bears the risk of loss if the exchange rate of that currency declines, and a short currency position (when its liabilities in that currency exceed its assets) bears the risk of loss if the value the currency exchange rate goes up.
The following processes affect the currency position in the bank:
• Receive interest and other income in foreign currency.
• Transfer with immediate delivery of funds
• Derivative operations (forward and futures transactions, forward settlement, swap transactions, etc.), which have terms and obligations in foreign currency, whatever the method and form of settlement of the transaction.
To avoid currency risk, one should strive to have a closed position for each currency. It is possible to compensate for the imbalance of assets and liabilities by the amount of currency bought and sold. Therefore, commercial banks must build an effective currency risk management system. Licensed banks can have open currency positions from the date of receiving permission from the National Bank to carry out operations in foreign currency values. To avoid risks or losses in currency transactions; The central bank sets standards for open currency positions. This approach to managing foreign exchange risk is based on international banking practices as well as recommendations from the Basel Committee on Banking Supervision. In the UK, the criteria for open currency positions are limited to 10% and 15% of the bank's capital, in France 15% and 40%, and in the Netherlands – 25% respectively.
Currency positions are recorded in the account at the end of the day. If a bank has an open foreign exchange position, changes in the exchange rate result in a profit or loss. Therefore, the Central Bank takes measures to exclude sharp fluctuations in exchange rates
