Thursday, November 2nd, 2017

Foreign Exchange: On balance sheet hedge

Yesterday I reviews Saunders’ un-hedged bank: $200 million in US 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 (ie, 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 immunizes; asset/liability durations may different such that interest rate exposure remains).

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