Foreign Exchange Risk Management Essay

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FOREIGN EXCHANGE RISK MANAGEMENT IN FINANCIAL INSTITUTION. BACKGROUND With the demise of the foreign currency exchange rates during the 1970’s and after the collapse of the Bretton Woods Agreement, the world economy has undergone drastic changes. This has signaled an increase in currency market volatility and trading opportunity. The foreign exchange market has played a vital role in the last decade or so in guiding the purchase and sale of goods, services and raw materials globally. The market directly affects each country’s bond, equities, private property, manufacturing and all assets that are available to foreign investors. The market is a stabilizing factor in the world system of monetary exchange and was created not by design but necessity. There is in excess of one trillion dollars of average daily turnover in the global foreign exchange market. Fifty one percent is in spot transactions followed by thirty two percent in currency swaps and forward outright transaction represents another five percent of the daily turnover. Foreign exchange rates also play a major role in determining who finances government deficits, who buys equities in companies and literally effects and influences the economic scenario of every nation to cope with the foreign exchange risk in an open market economy. The market has its own momentum and therefore it is crucial to follow a universal time tested policy to tackle the forces behind the free market system with minimal risk involvement. The Bangladesh Taka, which is the domestic currency of Bangladesh and the country’s foreign exchange, had been strictly regulated until the early 1990s. At that time, Bangladesh Bank used to regulate the local currency’s parity against the international currencies. The cross border movement of currencies was also regulated. Bangladesh Bank used to publish a daily foreign exchange rate sheet that
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