Document Text (Pages 61-65) Back to Document

Foreign Exchange Risk Management in Commercial Banks in Pakistan

by Sabri, Maroof Hussain, MS


Page 61

Conclusion

Based on the findings of this study, following conclusions can be drawn regarding
the Foreign currency exposure, ways to manage foreign exchange risk, currency
derivatives usage & income from dealing in foreign currencies of the commercial
banks in Pakistan:
Foreign Currency Exposure of Commercial Banks in Pakistan
Majority of the bank have significant net position in foreign currencies and this
position varies from bank to bank. If net foreign currency exposure of commercial
banks is taken as a percentage of Net Assets, different factors which are
Ownership Status, Exchange Rate Volatility and Size of Bank do not have any
effect on it. Some bank have zero exposure, majority have net foreign currency
exposure equivalent to or around Net Assets. Net foreign currency exposure is
positively related to Net Assets which means that majority of banks have Net
positions moved with the movement in their Net Assets. There is no difference
between the Net positions as taken by Public Sector Commercial Banks and Local
Private Banks whereas there is a significant difference between the net positions
of conventional and Islamic banks.
Foreign Exchange Risk Management by Commercial Banks in Pakistan
Commercial banks in Pakistan use different tools to manage foreign exchange risk
which include foreign currency portfolio diversification, foreign currency assets
and liabilities matches and Use of currency derivatives.
Usage of Currency Derivatives by the Commercial Banks in Pakistan
In Pakistan, commercial banks use three types of currency derivatives i.e. forward
exchange contracts, currency swaps & foreign currency options. All of these
contracts are over the counter. Forward exchange contracts are used by all the
banks whereas currency swaps are second popular tools used by commercial
banks and foreign exchange options are used by only few banks. The usage of
currency derivatives depends on the ownership status of bank, size of banks and
net foreign currency exposure relative to net assets whereas it does not depend on
exchange rate volatility and type of bank.
Income from Dealing in Foreign Currencies
Income from dealing in foreign currencies is not different if the type of bank or
ownership of bank is considered. Similarly size of bank does not play any role in
increasing income from dealing in foreign currencies of banks. Type of currency
derivative used & exchange rate volatility during the year also do not have any
effect on income from dealing in foreign currencies.

Page | 61


Page 62

Page | 62


Page 63

References

Abken, P. A., & Shrikhande, M. M. (1997). The role of currency derivatives in
internationally diversified portfolios. Economic Review of Federal Reserve
Bank of Atlanta, Third Quarter 1997.
Allayannis, G., Ihrig, J., & Weston, J. (n.d.). Exchange Rate Hedging: Finacial
Vs. Operational Strategies. American Economic Review Papers &
Proceedings, 91 (2), pp391-395.
Allayannis, George, Ofek, & Eli. (2001). Exchange Rate Exposure, hedging and
the use of foreign currency derivatives. Jounal of International Money and
Finance, 20 (2001) 273-296.
Allen, S. L. (2003). Financial Risk Management: A Practitioner’s Guide to
Managing Market and Credit Risk. Hoboken, New Jersey: John Wiley and
Sons.
Atindehou, R., & Gueyie, J. (2001). Canadian Chartered Banks' Stock returns and
exchange rate risk. Management Decisions, 39 (4), 285-295.
Barton, T. L., Shenkir, W. G., & Walker, P. L. (2002). making Enterprise Ris
Management Pay Off: How Leading Companies Implement Risk
Management. Brookfield, Connecticut: Fei Research Foundation.
Choi, J. J., Elyasiani, E., & Kopecky, K. J. (1992). The sensitivity of bank stock
returns to market, interest & exchange rate risks. Jounal of Banking and
Finance, 16, 983-1004.
Daugaard, D., & Valentine, T. (1993). Bank Share prices and profit stability.
Working Paper Series (No.31), School of Finance & Economics,
University of Technology. Sydney.
Gandhi, G. S. (2006). Hedging Foreign Exchange Risk - Isn't it also a risk. The
Instt. of Chartered Accountants of India, "The Chartered Accountant",
August 2006, Page 260-264.
Gandhi, G. S. (2006, Novemner). Selecting a Suitable Currency Options Hedging
Strategy for Managing Foreign Exchange Risk. "The Chartered
Accountant". The Instt. of Chartered Accountants of India.

Page | 63


Page 64

GECZY, C., MINTON, B. A., & SCHRAND, C. (1997, September). Why Firms
Use Currency Derivatives. The Journal of Finance, Vol. 52. No.4, pp.
1323-1354. BlackWell Publishing.
Hue Hawa Au Yong, Faff, R., & Chalmers, K. (2006). Derivative Activities and
Asia Pacific banks' interest rate and exchange rate exposures. Journal of
International Financial Markets, Institutions and Money, Volume 19,
Issue 1, February 2009, Pages 16-32.
Irio, A. D., & Faff, R. (2000). An Analysis of asymmetry in foreign currency
exposure of the Australian equities market. Jounal of Multinational
FInancial Management, 133-159.
Lam, J. (2003). Enterprise Risk Management: From Incentives to Controls.
Hoboken, New Jersey:John Wiley and Sons.
Liu, S. (2007). Currency Derivatives and Exchange Rate Forecastability.
Financial Analysts Journal, volume 63, Number 4, Page 72-78.
Mbutor, M. O. (2010, November). Exchange rate volatility, stock price
fluctuations and lending behavior of banks in Nigeria. Journal of
Economics & International Finance, Vol 2(11),p.p 251-260.
Pakistan, S. B. (n.d.). Risk Management: Guidelines for Commercial Banks &
DFIs. Karachi, Pakistan: State Bank of Pakistan.
Papaioannou, M. (2001). Volatility and Misalignments of EMS and Other
Currencies During 1974-1998. In J. Jay Choi and Jeffrey M. Wrase (eds).
European Monetary Union and Capital Markets, International Finance
Review, 2, Amsterdam:Elsvier Science, pp. 51-96.
Papaioannou, M. G. (2006). EXCHANGE RATE RISK MEASUREMENT AND
MANAGEMENT: ISSUES AND APPROACHES FOR FIRMS. South-
Eastern Europe Journal of Economics 2 (2006) 129-146.
Saunders, A., & Cornett, M. M. (2003). Financial Institution Management. New
York, NY, 10020: McGraw-Hill/Irwin.
Shamsuddin, A. F. (2009). Interest rate and foreign exchange exposure of
Australian banks: A note. International Journal of Banking and Finance
2008/09, vol:6, Number 2:2009: 129-138. University of New Castle,
Australia.
Suranovic, S. (2010). International Finance: Theory & Policy. The International
Economics Study Center.
Page | 64


Page 65

Walter, A. d., & Tewodros, G. G. (2004). The Exchange Rate Exposure of Major
Commercial Banks in South Africa. African Finance Journal, Vol: 6,
Page 21-35.

Page | 65

© 2009 OpenThesis.org. All Rights Reserved.