money Position

edges are involved in foreign money operations. When buying / selling them, an asset (requirement) is formed in that money and there is a liability (obligation) formed in another. consequently, edges have demands and limitations in several different currencies which are heavily influenced by money exchange rates.

The likelihood of loss or profit as a consequence of negative changes in the exchange rate is called money risk.

The ratio of assets and limitations of the bank in foreign money determines its money position. If requirements and obligations of a bank in certain money are equal, the money position is closed but if they there is a mismatch – it is called open. Closed arrangement is a comparatively stable state of the banking sector. But receiving a profit from the change in the exchange rate with this arrangement is impossible. The open one in turn can be “long” and “short”. The position is called as «long” (if requirements go beyond obligations) and “short” (obligations go beyond requirements). Long position in a certain money (when the Bank’s assets in the money go beyond the limitations in it) produces the risk of loss if the exchange rate of that money falls. Short money position (when the limitations in that money go beyond its assets) produces the risk of loss if the exchange rate of this money will rise.

The following operations influence the money locaiongs of edges:

• Receiving interest and other income in foreign money.

• Conversion operations with the immediate delivery of funds

• Operations with Derivatives (forward and futures transactions, settlement forwards, swap deals, etc.), for which there are requirements and limitations in foreign money, in spite of of the method and form of settlements for such transactions.

To avoid money risk, one should strive for a closed position for each money. It is possible to compensate for the imbalance of assets and limitations with the quantity of the money bought and sold. consequently, commercial edges should create effective systems of management of money risks. empowered bank can have an open money position from the date of receipt from the National Bank a license to make operations in foreign money values. In order to avoid risks, or losses in money transactions; the Central Bank sets the standards for an open money position. This approach to the regulation of foreign exchange risk is based on international banking practices in addition as recommendations of the Basel Committee on banking supervision. In the UK the parameters of the open money position is restricted to 10% and 15% of the Bank’s capital and in France 15 % and 40 %, the Netherlands – 25 % respectively.

money locaiongs are recorded in the account at the end of the day. If the bank has an open foreign exchange position, the changes in the exchange rate rule to either profit or loss. consequently, the Central Bank take measures to exclude a sharp fluctuation in the exchange rate

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