Foreign Exchange Risk & Sovereign Risk

Net exposure of an FI = (FX assets FX liabilities) + (FX bought FX sold)

Measurement of an FI's exposure to FX risk: DEAR = Net exposure 1.65
Returns on a foreign investment

Purchasing Power Parity Theorem

Interest Rate Parity Theorem

Liquidity Risk

Liquidity Index
[(

) (

)]

o W
i
= the per cent of each asset in the DI's portfolio
o P
i
= the immediate sales price
o P
i
*
= the fair market price
Capital Adequacy

Leverage Ratio
Capital-Assets (Leverage) Ratio: L =

o Tier 1 capital = core capital
Book value of common equity
Qualifying cumulative perpetual preferred stock
Minority interests held in the consolidated subsidiaries, minus goodwill
Risk-based capital ratio
Risk-based capital ratio =

Calculating credit-risk adjusted assets:

o a
i
= dollar (book) value of the ith asset on the balance sheet
o w
i
= risk-weight of ith asset, where i = 1 to n
Minimum capital ratios for credit risk under Basel II
Tier 1 (core) capital ratio =
( )


Total risk-based capital ratio =
( )


Securitisation

Interest Only Strips

Principal Only Strips