Currency position is the ratio of assets and liabilities of a commercial bank, which arises when performing transactions with funds in foreign currency. When carrying out foreign exchange transactions, there is a risk associated with changes in foreign exchange rates. Competent management of the foreign exchange position allows ensuring the stability of a commercial bank and avoiding losses associated with foreign exchange risk.
Types of currency positions
Depending on the ratio of claims and obligations in a separate foreign currency, there are:
- closed currency position;
- open currency position.
A closed foreign exchange position is formed when the claims and obligations for a specific currency are equal, in which case the risk does not arise. In case of mismatch of claims and obligations for a separate foreign currency, an open foreign exchange position (OCP) is formed. It can be long or short.
If the bank's assets quantitatively exceed its liabilities in a certain currency, then a long open-ended position arises. When liabilities exceed assets, a short ORP is formed.
Let's look at the difference between long and short with a practical example. At the time of opening, the foreign exchange position of the commercial bank was closed. During the day, the client makes a purchase of 100,000 euros for dollars. Market exchange rate: 1 EUR = 1, 1323 USD. When selling 100,000 euros, the bank will receive 113,230 dollars. As a result of this operation, a short open exchange rate in euros and a long open exchange rate in dollars will be formed. In this situation, a commercial bank can close a foreign exchange position without risk and without profit by buying euros at the same rate. Suppose that the bank was able to buy euros cheaper, for example, at the rate of 1 EUR = 1.0992 USD. In this case, the bank will not only be able to close its currency position, but also make a profit:
113,230 - 1.0992 × 100,000 = 3310 USD
Mechanisms for regulating an open foreign exchange position
An open foreign exchange position is always associated with risk. To minimize its negative impact, two methods of currency position regulation are used: hedging and limiting.
Hedging is a method of regulation that creates an offsetting foreign exchange position. This approach achieves full or partial compensation of one risk with another foreign exchange risk. Most often, hedging involves balancing buying and selling of the respective currencies.
For example, a long ORP for a certain currency means that the purchase volumes of that currency are exceeded the sales volumes. In this case, it is necessary to make a difference between the requirements and obligations of a commercial bank by concluding a balancing transaction for the sale of this currency. If the bank has a short open-ended position, then the sales volumes of a certain currency exceed the purchase volumes. In this case, it is possible to compensate for the currency risk by purchasing this currency additionally.
Limiting is a method of regulation in which a commercial bank sets limits on the open exchange rate. Limitations on the size of the currency position can be established on a mandatory or voluntary basis.
In accordance with Bank of Russia Instruction No. 124-I of July 15, 2005 (as amended on September 1, 2015), the sum of all OCP should not exceed 20% of the credit institution's equity capital. And the value of the open exchange rate in certain currencies should not exceed 10% of the bank's equity capital.
