Currency risk is the risk of incurring losses due to unfavourable exchange rate changes. The risk is generated by maintaining open currency positions in a given foreign currency.
The objective of currency risk management is to mitigate the risk of incurring losses arising from exchange rate fluctuations to an acceptable level by shaping the structure of balance and off-balance sheet items.
Measurement of the currency risk
The Bank measures the currency risk using the Value at Risk (VaR) model and stress tests. The value at risk (VaR) is defined as a potential loss arising from currency position and foreign exchange rate volatility under the assumed confidence level and taking into account the correlation between the risk factors.
Stress-tests and crash-tests are used to estimate potential losses arising from currency position under extraordinary market conditions that cannot be described in a standard manner using statistical measures. Two types of scenarios are used by the Bank:
- hypothetical scenarios – which assume a hypothetical appreciation or depreciation of currency rates (by 20% and 50%),
- historical scenarios – bases on the behaviour of currency rates observed in the past.
Forecasting and monitoring of currency risk
VaR of the Bank and stress-testing of the Group’s financial assets exposed to currency risk are stated cumulatively for all currencies in the table below: