Foreign exchange riskForeign exchange risk

Foreign exchange risk

1. The standard method also covers the risk of holding or taking positions in foreign currencies and gold.[25] Where, however, an ADI is exposed to interest rate exposure on such positions, the ADI must include the relevant interest rate positions in the calculation of interest rate risk.
2. The capital charge for foreign exchange risk is eight per cent of the foreign exchange net open position plus eight per cent of the net position in gold.

Measuring the exposure in a single currency

1. An ADI must include in its net open position in each currency:

2. the measurement of currency exposure in accordance with paragraphs 14 to 17 of Attachment A; and

3. the net delta-equivalent of the total book of foreign currency options, subject to separately calculated capital charges for gamma risk and vega risk as described in paragraphs 77 to 95 of this Attachment. Alternatively, options and their associated underlying assets may be subject to one of the other methods described in paragraphs 77 to 95 of this Attachment.

4. An ADI must separately report positions in composite currencies but, for measuring its open positions, may treat them as either a currency in their own right or as split, on a consistent basis, into their component parts.

5. An ADI may treat currency pairs subject to a binding inter-governmental agreement linking the two currencies as the one currency.

6. An ADI must measure positions in gold in accordance with paragraph 70 of this Attachment.[26] An ADI may double-count gold in Australian dollar equivalent amounts, first as a gold exposure and secondly as a US dollar exposure, allowing the US dollar exposure to then be netted against US dollar exposures arising from other activities.

7. An ADI must value forward currency and gold positions at current spot market exchange rates. An ADI that bases its normal management accounting on net present values must use the net present values of each forward position, discounted using current interest rates and translated at current spot rates, for measuring its forward currency and gold positions.

Measuring foreign exchange risk in a portfolio of foreign currency positions and gold

1. Under the standard method, an ADI must convert at spot rates the nominal amount (or net present value) of the net position in each foreign currency and in gold into the reporting currency.[27] The overall net open position must be measured by aggregating: