Features of foreign currency risk management

Abstract

The basic approaches to the concept definition of "risk" are considered and the author's vision of the risk essence is proposed. It has been researched that the risk is caused by the existence of uncertainty, which is an integral part of the market conditions. Risk concepts are associated with the likelihood of underreporting, loss or additional expense, or the aggregate of favorable or unfavorable outcomes, and any deviation from the desired outcome. The study found that the bank's currency risk management is considered as a system of developing, making and implementing decisions on the impact on currency risk in order to prevent, limit or minimize its associated losses. Banks mainly use hedging currency risk in managing currency risk and currency position. The concept interpretation of the hedge method establishes that it is a method of entering into forward contracts and agreements, which allows to account for probable changes in the future exchange rates and provides the opportunity to avoid the adverse effects of such changes. The advantages of using hedging tools have been analyzed and the most appropriate tools, which are summarized in the table, have been identified in the real world. It is concluded that futures and stock options are the most suitable instruments. This choice was made due to the properties of these derivatives: the highest availability (stock exchange instrument, all agents equal access), flexibility (possibility of early exit), availability of data (daily quotes), high liquidity and reliability (no risk of failure of the transaction).