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Forecasting Currency Risk in an Enterprise Using the Monte Carlo Simulation

Abstract

A non-financial enterprise with receivables or liabilities denominated in a foreign currency is exposed to currency risk. Wanting to calculate a financial reserve in order to secure its receivables or liabilities, an enterprise can introduce the concept of the value at risk. To determine value at risk, an enterprise has to know the probability distribution of the future value of the receivable or the liability for a specific moment in future. Using a geometric Brownian motion to reflect exchange rate changes is among the possible solutions. The aim of the paper is to indicate that using the Monte Carlo simulation for forecasting the currency risk of an enterprise is a clear, easy-to-implement and flexible in terms of the assumptions approach. The flexibility of the Monte Carlo approach relies on the possibility to take up the assumption that the currency position changes caused by currency fluctuations have an other than normal probability distribution.

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Exchange Rate Risk On The Mortgage Market

Abstract

Strict connections of the real estate market with the financial market are an unquestionable phenomenon at every level of investing, starting from the lowest individual investor, and finishing with national and transnational players. One of the more interesting examples of such a dependency is the problem of the risk of financing the real estate market, which results from numerous macro-, mezo- and microeconomic conditions, including, inter alias, the phenomenon of capital migration, supranational bank regulations or the development of currency exchange rates on world markets. The most recent example of such a dependency is, among others, the decision of the National Bank of Switzerland from the beginning of 2015 to abandon the Swiss franc-euro cap, which will go down in the history of the world financial market. Its global effects will surely be very difficult to assess, while the resulting turbulences and consequences for many (institutional, corporation and individual) market participants cause, on the one hand, awaiting a reaction and actions aimed at helping entities affected by the consequences of the mentioned decision and, on the other, many questions and doubts.

The paper will present current selected aspects concerning currency risk in the context of financing the residential real estate market and the directions of actions prepared in reaction to the abovementioned risk. Polish conditions will be presented against the background of examples of foreign solutions.

The aim of the work is to present:

  1. the essence of currency risk in the context of the current financial situation of the Polish banking sector,
  2. the most important directions of proposals for remedial actions aimed at mitigating the effects of the significant increase in the exchange rate of the Swiss franc in relation to the Polish currency,
  3. a short overview of selected solutions/regulations regarding the exchange rate risk of mortgages taken out in a foreign currency in other countries.

The method employed was the critical analysis of the most-recent reports and recommendations of the National Bank of Poland, Polish Financial Supervision Authority, Polish Banking Union, and other experts on the subject of financing the real estate market, as well as a comparative analysis of solutions regarding currency risk in selected countries.

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Does Risk Aversion Matter for Foreign Asset Holdings of Pension Funds – The Case of Poland

Abstract

In this study we explore the issue of foreign assets in mandatory pension funds portfolios. First we provide an overview of the regulatory policies regarding international assets and indicate the externalitieswhich may account for the observed differences among the CEE states. Then, taking the perspective of portfolio theory, we run a simulation study to measure the diversification benefits that may be achieved by greater international asset allocation. By applying the specific constraints and exchange rate volatility to our optimization procedure, the study reflects the perspective of the Polish pensioner. However, the findings regarding risk aversion intensity and the discussed directions of further research should be of a universal character.

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The Influence of Currency Risk Upon the Market Value of Commercial Banks Operating in the Polish Banking Sector

Abstract

The objective of the paper is to analyse the impact of the Swiss National Bank’s decision to introduce the floating exchange rate of the franc on January 15th, 2015, upon the market value of commercial banks operating in the Polish banking sector. The analysis involved twelve commercial banks quoted on the Warsaw Stock Exchange. The results are inconclusive. The predicted reduction of the banks’ market value was less significant than indicated by market investors’ reaction on the day after the announcement of the decision to introduce the floating exchange rate of the franc. The banks most prone to granting credit denominated in CHF did experience the largest reduction of their share quotations. However, the Pearson product-moment correlation coefficient calculated for the correlation between the average cumulative abnormal returns on shares for the entire analysed sample, and the proportion of credits denominated in Swiss francs in the total credit portfolio, indicated only a moderate correlation between both variables.

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Fiscal Imbalance and Fiscal Risks Management on the Regional Level

Fiscal Imbalance and Fiscal Risks Management on the Regional Level

The aim of the paper was to evaluate usage of the fiscal instruments (mainly liabilities and fiscal risks management) in present practice of Czech regions. The current practice of fiscal instruments was explored particularly by the means of structured interviews in which representatives of all Czech regions participated. The survey showed different attitudes to debt/liabilities management exercised on the Czech regional level. An active debt management, as defined by the theory, has not been encountered in any of the Czech regions (except for the capital of Prague), although their representatives are convinced otherwise. Risk maps or risk matrixes are not usually created either but the risks connected with the regional budgets are monitored (especially currency risks and interest rate risks) and solved if necessary.

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Constructing an Optimal Investment Portfolio for the Bank of Lithuania

Abstract

The main goal of this article is to illustrate the strategy, devised to improve the effectiveness of utilizing the financial assets, or in this case, the official international reserves, belonging to the Bank of Lithuania. In Lithuania, the value of financial assets as a percentage of total state assets has doubled in the span of 10 years. Moreover, a strong correlation between the real GDP growth and the Bank of Lithuania’s financial assets/ profitability implies that the effectiveness of financial assets management has a nationally wide impact. Unfortunately, the Bank’s profit/invested value indicator has reached a record low in 2012-2013, which resulted in the whole bank’s profit being absorbed into the state’s budget (as opposed to 70 % of it). Such signs meant that the previous investment strategy has become ineffective and needed changes. To highlight the necessary changes, the authors conduct a practical research and construct the optimal investment portfolio, according to the goals and variables given by the guidelines, proposed by Bank of Lithuania. The size of the portfolio is 4,14 bn euros, and the maximum loss per year (VaR) allowed is -100 M euro/year, as stated by the Bank of Lithuania’s risk budget limit. The authors also focus on the issue of increased currency risk after investing in volatile share indices and whether hedging against it with Forex spot transactions is beneficial. The result of the research is an optimal portfolio, consisting of 9,85 percent of risk-free assets and 90,15 percent of risky assets. Hedging against currency risk in this case is an ultimately beneficial course of action, yielding an increase of annual returns by 0,3 percent, which translates to +12,3 mln euros. Finally, the portfolio is flexible and simple to reshape into a less risky variant, if the institution predicts the dangers of possible future economic downfalls. This research was further used in a broader paper whose goal was to analyse and assess the effectiveness of currently employed assets’ management strategies in Lithuania.

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Euroisation in the Western Balkans: The Evidence for Macedonian Economy

Abstract

Euroisation is a problem with a long history and usually persistent phenomena. The high level of euroisation is common in emerging countries in Europe as in the countries with fixed exchange rate regime. In Western Balkan countries have been identified a strong presence of foreign currency. The fact is that transactions could take a place outside of the banking channels, which is not a case for FX-loan and FX-deposit ratios. It’s difficult to measure how much foreign money is in the economy. This is the reason to use data for currency substitution index. This index is high for Macedonia indicating high level of real euroisation. After the crisis, the levels are reduced (lower remittances from abroad). Considering the exchange rate experience of Macedonia, it’s likely to remain significantly euroised country for an extended period. IMF considers appropriate strategy which provides support for the gradual de-euroisation in maintaining macro-prudential policy and development of the domestic market. Another important strategy is the maintenance of prudent policies that mitigate foreign currency risks. The paper shows the persistence of FX mainly in Macedonian economy and discusses about benefits and costs, in light of the recent economic crisis.

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Realistic Evaluation of the Ratio: Loan-To-value – The Key to Minimising the Credit Risk

Abstract

As a rule, long-term bank loans entail solid security - a mortgage, regardless of their purpose. The mortgaged property has its specific market value during the loan approval period but during the repayment period, the value of the real estate varies. This is the reason why the initially specified indicator of the coverage of loans with the value of the mortgage - the LTV ratio changes, which in turn increases the risk of loan repayment. The aim of this paper is to draw attention to the necessity of establishing adequate initial LTV ratios (together with other important ratios). This would help nullify the risk of any variations in real estate prices, the loan currency risk, the interest rate risk, as well as the risk of an increase in bank's claims because of a long foreclosure process. The paper analyses effects of changes in LTV ratios caused by varying circumstances using the case study method. The comparative method analyses the changing trends of data on the LTV ratios for the already approved loans over a seven-year period by comparing the flow of the loan capital sum with the real value of the mortgage for three types of loans. The conclusion reached is that commercial banks should establish the initial LTV ratio for various long-term loan products and thus prevent its rise. Banks should do this by taking into account all the factors that cause the ratio’s increase, and thus give preference to the reduction of the credit risk and not the attractiveness and accessibility of loan products.

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Appreciation of the Swiss Franc and its Impact on Romania and other Central and Eastern European Countries

://ec.europa.eu/eurostat/statistics-explained/index.php/Exchange_rates_and_interest_rates#Main_tables;Accessed_march_2015; 14. The Economist (2015), Currency risk, retrived from http://www.economist.com/news/europe/21639760-poles-were-slow-get-out-swiss-franc-mortgages-nowthey-are-paying-price-currency-risk, Accessed in march 2015; 15. http://finzoom.ro/articole; Probleme pentru cei cu credite in franci elvetieni, www.finzoom.ro/Info/art/.../~c3e416c5f6114a55abf1a3c10badb1cb/, Accesed in february 2015.

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ISSUE OF RISK IN LITERATURE

zabezpieczające (Currency Risk - Instruments and Hedging Strategies), Wydawnictwo ABC, Warszawa, p. 28. BEREZA S., 1992, Zarządzanie ryzykiem bankowym (Bank Risk Management), Związek Banków Polskich, Warszawa, p. 35. BITNER J.W., GODDARD R.A., 1992, Successful Bank Asset/Liability Management. A Guide to the Future Beyond Gap, John Wiley and Sons, p. 265. BORYS F., 1999, Metodyczne aspekty podejmowania i zarządzania realizacją przedsięwzięć gospodarczych (Methodical Aspects of Undertaking and Managing the Realization of Economic

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