Aug 20

Foreign Currency Risk: On-balance sheet hedge – 9 min screencast

by David Harper, CFA, FRM, CIPM

Yesterday I showed Saunders’ un-hedged bank: $200 million in U.S. dollar deposits fund investments which are split (50%/50%) between US dollar assets and British assets. We saw that un-hedged foreign currency exposure directly impacts returns in either direction (i.e., a material risk factor).

In on-balance sheet hedging, the bank instead funds with $100 million in British Pound Sterling: the asset and liabilities are matched in regard to their foreign currency exposure (please note: this does not immunize; asset/liability durations may different such that interest rate exposure remains).

Screencast: