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International Banking - Essay Example

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International Banking

Exchange rate risk is the risk to earnings or capital arising from movement of exchange rates. The need to manage the exchange rate risk is very crucial for any bank and it has generally been observed that the exchange rate risk management form the integral part of the risk management policies of all major global banks. [Gorton, G. & Rosen, R., 1995] When a multinational operates in such a number of markets, internationally, it is exposed to a great deal of risks, and in order to operate as per its predetermined objectives, the management of these risks is of prime importance.[ Moffet, M. & Karlsen, J., 1994] These risks pose a direct threat to the assets, liabilities and operative income of the firm which commonly results from the variations in interest rates, exchange rates and inflation rates. Macroeconomic environment of different countries plays n important role in setting up these risks which affect different countries according to their structure. ...
Exposure of a firm can be defined as the value of its assets and liabilities, presented in its functional (primary) currency, exposed to the change in the foreign interest rates, exchange rates and inflation rates.[ Nobile, J. (2007)] The foreign risk exposure can be classified into two broad categories. Transaction Exposure; and Translation Exposure Transaction and Translation Exposure Transaction exposure can be defined as the risk arising due to the unanticipated change in the exchange rate which affects the cash inflow or outflow at the time of the settlement of an asset or liability. An important factor to consider in these types of risks is that the foreign currency value in such circumstances is fixed and thus these types of risks are also termed as contractual exposure. On the other hand, translation exposure arises due to the operation of the accounting and legislative standards which requires the foreign currency balances of assets and liabilities appearing in the balance sheet, to be revalued at the closing spot rate. These assets are of the time which is not going to be liquated in the near future. Translation risk, which is also termed as the accounting risk, is basically the related measure of variability. Exchange rate can be defined as the relative price of one currency in terms of other. The exchange rate plays a very significant role in determining the capital flows and investments between international boundaries. In order to exercise prudent financial management, it is of prime importance for the multinationals to forecast the future exchange rates so that they do not suffered exchange losses and incur additional liability. There are two famous theories used for the determination for the prevailing exchange rates. One is interest ...Show more
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Summary

Introduction Banks and financial institutions have played a significant role in integrating the different economics of the world. A brief analysis of the global economic scenario can highlight the fact that the banking industry has always been that sector which has either strengthen or uplifted the economic outlook of a particular region, or has caused turmoil …
International Banking
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