Risk Management Manual of Examination Policies - FDIC

INTERNATIONAL BANKING Section 11.1
Country Risk – Refers to the spectrum of risks arising
from the economic, social, and political environment of a
given foreign country, which could have favorable or
adverse consequences for foreigners’ debt and/or equity
investments in that country.
Cover – The execution of an offsetting foreign exchange
trade to close or eliminate an open exposure.
Covered Interest Arbitrage – The process of taking
advantage of a disparity between the net accessible interest
differential between two currencies and the forward
exchange premium or discount on the two currencies
against each other.
Crawling Peg System – An exchange rate system in which
the exchange rate is adjusted every few weeks, usually to
reflect prevailing inflation rates.
Credit Risk – The possibility that the buyer or seller of a
foreign exchange or some other traded instrument may be
unable to meet his or her obligation at maturity.
Cross-border Exposure – The risk that arises when an
office of a bank, regardless of its location or currency,
extends credit to a borrower that is located outside the
booking unit’s national border.
Cross-currency Risk – The risk associated with
maintaining exchange positions in two foreign currencies
as the result of one transaction. For example, if a U.S.
operator borrows Swiss francs at 5 percent and invests the
proceeds in British pounds at 12 percent, the crosscurrency
risk is the chance that the pounds will depreciate
in values against the Swiss francs to such an extent that
there will be a loss on the transactions in spite of the
favorable interest-rate differential.
Cross Rate – The ratio between the exchange rate of two
foreign currencies in terms of a third currency.
Current Account – Those items in the balance of
payments involving imports and exports of goods and
services as well as unilateral transfers. Includes trade,
travel, military spending and other short-term financial
flows. Short-term and long- term capital flows are
excluded as they are included in the capital account
balance.
Customs Union – An agreement between two or more
countries in which they arrange to abolish tariffs and other
import restrictions on each other’s goods and to establish a
common tariff for the imports of all other countries.
Date Draft – A draft drawn to mature on a fixed date,
irrespective of acceptance.
Demand Draft – Draft payable immediately upon
presentation to the drawee. Also called a "sight" or
"presentation" draft.
Depth of the Market – The amount of currency that can
be traded in the market at a given time without causing a
price fluctuation. Thin markets are usually characterized
by wide spreads and substantial price fluctuations during a
short period of time. Strong markets tend to be
characterized by relatively narrow spreads of stable prices.
Devaluation – An official act wherein the official parity of
a country's currency is adjusted downward to the dollar,
gold, Special Drawing Rights (SDRs), or a currency. After
devaluation, there are more devalued currency units
relative to the dollar, gold, SDRs, or other currency.
Direct Quote – The method of quoting fixed units of
foreign exchange in variable numbers of the local currency
unit. Also called a “fixed” or “certain” quotation.
Dirty Float – A floating exchange-rate system in which
some government intervention still takes place. A
government may announce that it will let its currency float,
that is, it will let the currency’s value be determined by the
forces of supply and demand in the market. The
government, however, may secretly allow its central bank
to intervene in the exchange market to avoid too much
appreciation or depreciation of the currency.
Discount – In foreign exchange, the amount by which the
forward exchange rate of one currency against another
currency is less than the spot exchange rate between the
two currencies. If a dealer quotes $2.40 and $2.45 (bid
and asked) for sterling and the discounts for six months
forward are .0030 and .0275, the forward quotes would be
adjusted to $2.3700 and $2.4225. This discount usually
represents differences in interest rates in the U.S. and
Britain. However, in periods of crisis for a currency, the
discount can represent the market anticipation of a lower
price.
Divergence Indicator System – One aspect of the
European Monetary System that measures the departure of
a country’s economic policies from the European Union’s
“average.” The measure of divergence is based exclusively
on the movement of a country’s exchange rate with respect
to the European Currency Unit (ECU).
Documentary Credit – A commercial letter of credit
providing for payment by a bank to the named beneficiary,
DSC Risk Management Manual of Examination Policies 11.1-35 International Banking (12-04)
Federal Deposit Insurance Corporation