Udaya Raj Adhikari's Blog

1. Introduction Market risk can be defined as the risk of losses in on-balance sheet and off-balance sheet positions arising from adverse movements in market prices. The major constituents of market risks are: a. The risks pertaining to interest rate related instruments; b. Foreign exchange risk (including gold positions) throughout the bank; and c. The risks pertaining to investment in equities and commodities.                                                                             (Nepal Rastra Bank Unified Directives, 2019) Many banks have portfolios of traded instruments for short term profits. These portfolios -referred to as trading books -are exposed to market risk, or the risk of losses resulting from changes in the prices of instruments such as shares, bonds and currencies. Banks are required to maintain a minimum amount of capital to account for this risk. ( Basel Committee on Banking Supervision, 2005) 2. The Main Driver of Market Risk   Fig: Market R

1. Introduction Foreign exchange , or forex , is the conversion of one country's currency into another. In a free economy, a country's currency is valued according to the laws of supply and demand. It is the price at which one currency can be converted into another. It represents the rate at which a firm may exchange one currency for another. Thus, the exchange rate is simply the amount of a nation’s currency that can be bought at a given time for a specified amount of the currency of another country. According to Foreign Exchange (Regulation) Act, 2019: "Foreign exchange" means a foreign currency, deposits, credits and balances of all types which are paid or received in a foreign currency, foreign securities and cheques, drafts, travelers cheques, electronic fund transfers, credit cards, letters of credit, bills of exchange and promissory notes which are in international circulation and are or can be paid in a foreign currency, and this term also includes any oth