If international capital markets are well integrated and operate efficiently, will financial institutions be exposed to...
If international capital markets are well integrated and operate efficiently, will financial institutions be exposed to foreign exchange risk? What are the sources of foreign exchange risk for financial institutions?
Homework Answers
Foreign exchange risk refers to the unfavorable change in the value of assets and liabilities or cash flows that are denominated in foreign currencies due to adverse movement in exchange rates. Therefore financial institutions will still be exposed to foreign exchange risk even if international capital markets are well integrated and operate efficiently.
Sources of foreign exchange risk for financial institutions
- borrowing and lending in foreign currencies.
- payment or receipt of dividends and interests in foreign currencies.
- assets and liabilities of a balance sheet denominated in foreign currencies.
- long-term cash flow exposure
- open long or short positions in foreign currencies.
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