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Foreign Exchange Risk Management in Commercial Banks in Pakistan

by Sabri, Maroof Hussain, MS

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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.

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