Enterprise Risk Management at ABN AMRO

Details

Themes: -
Period : 2003
Organization : ABN AMRO
Pub Date : 2003
Countries : Global
Industry : Banking

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Case Code : ERMT-023
Case Length : 19 Pages
Price: Rs. 300;

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Market Risk Contd...

Currency Risk
Currency risk was the result of investments in the bank's overseas operations and through trading activities. In trading portfolios, exposures to exchange rate movements were managed through market risk limits based on VAR. Short and long positions were monitored to ensure compliance with the GRC's limits. Gains or losses in the trading book were reported in the P&L. ABN Amro pursued various hedge strategies with respect to investments in overseas operations to protect itself against the adverse effects of translating foreign currency into euro, the reporting currency:

• Ratio hedge
The Bank's BIS-ratios (tier-1 and tier-total capital as a percentage of RWA) were protected against fluctuations in the EUR / USD rate. As capital and RWA were subject to foreign currency translation, this was done by maintaining the BIS-ratios for USD elements close to the overall BIS-ratios.
• Capital hedge
Investments in overseas operations denominated in currencies other than USD were hedged selectively.

Hedging was considered when the expected currency loss was larger than the interest rate differential between the two currencies (the interest rate differential represented the cost of the hedge). Gains and losses on these capital exposures were taken through equity, as were the costs of hedging.

As of 31 December 2002, an increase of 10% in the value of the euro against all other currencies would have led to a EUR 437 million reduction in reserves, and vice versa. On this basis, there would have been no material impact on the Bank's BIS ratios because the ratios were hedged against changes in the EUR / USD exchange rate.

• Profit hedge
Profits were hedged selectively to dampen the impact of currency movements on the P&L. The decision criteria for profit hedging were similar to capital hedging. As of 31 December 2002, all budgeted net USD profits for the years 2003 and 2004 were sold forward at a rate of USD 0.8994 per EUR and USD 0.9563 per EUR respectively.

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