Banks are involved in foreign currency operations. When buying/selling them, an asset (requirement) is formed in that currency and a liability (obligation) is formed in another. Therefore, banks have claims and liabilities in several different currencies that are strongly influenced by currency exchange rates.

The probability of loss or gain as a result of adverse changes in the exchange rate is called foreign exchange risk.

The bank’s foreign currency asset-liability ratio determines its monetary position. If a bank’s requirements and obligations in a given currency are the same, the currency position is closed, but if there is a mismatch, it is called an open. The closed deal is a relatively stable state of the banking sector. But making a profit from the change in the exchange rate with this arrangement is impossible. The open in turn can be “long” and “short”. The position is called “long” (if the requirements exceed the obligations) and “short” (the obligations exceed the requirements). A long position in a given currency (when the Bank’s assets in the currency exceed its liabilities in that currency) risks loss if the exchange rate for that currency falls The short currency position (when its liabilities in that currency exceed its assets) you risk losing if the exchange rate of this currency rises.

The following operations influence the currency positions of banks:

• Receive interest and other income in foreign currency.

• Conversion operations with immediate delivery of funds

• Operations with Derivatives (forwards and futures, settlement forwards, swaps, etc.), for which there are requirements and liabilities in foreign currency, regardless of the method and form of settlement of said operations.

To avoid currency risk, one should strive to have a closed position for each currency. It is possible to offset the imbalance of assets and liabilities with the volume of currency bought and sold. Therefore, commercial banks must create effective foreign exchange risk management systems. The authorized bank may have an open foreign currency position from the date of receipt from the National Bank of a license to carry out operations in foreign currency securities. To avoid risks or losses in currency transactions; the Central Bank sets the standards for an open currency position. This approach to foreign exchange risk regulation is based on international banking practices, as well as on the recommendations of the Basel Committee on banking supervision. In the UK the open currency position parameters are restricted to 10% and 15% of the Bank’s capital and in France 15% and 40%, the Netherlands 25% respectively.

Currency positions are posted to the account at the end of the day. If the bank has an open currency position, changes in the exchange rate generate profit or loss. Therefore, the Central Bank takes measures to exclude a strong fluctuation in the exchange rate