Risk Management Manual of Examination Policies - FDIC

INTERNATIONAL BANKING Section 11.1
market to maintain market rates within a set range defined
by an upper and lower band around the par value.
Par Value – The official parity value of a currency relative
to the dollar, gold, Special Drawing Rights, or another
currency.
Placement Memorandum – A document in a syndicated
Eurocredit that sets out details of the proposed loan and
gives information about the borrower.
Political Risk – Political changes or trends often
accompanied by shifts in economic policy which may
affect the availability of foreign exchange to finance
private and public external obligations. The banker must
understand the subtleties of current exchange procedures
and restrictions as well as the possibilities of war,
revolution, or expropriation in each country with which the
bank transacts business, regardless of the actual currencies
involved.
Position – A situation created through foreign exchange
contracts or money market contracts in which changes in
exchange rates or interest rates could create profits or
losses for the operator.
Position Book – A detailed, ongoing record of an
institution’s dealings in a particular foreign currency or
money market instrument. Also known as position sheet.
Position Limits – The maximum net debit or credit foreign
currency balance either during the day (daylight limits) or
at close of business (overnight limits) as stipulated by bank
management.
Premium – The adjustment to a spot price that is made in
arriving at a quote for future delivery. If a dealer were to
quote $2.00 and $2.05 (bid and asked) for sterling and the
premiums for six months forward are .0275 and .0300, the
forward quotes would be adjusted to $2.0275 and $2.0800.
The premium usually represents differences in interest
rates for comparable instruments in two countries.
However, in periods of crisis for a currency, the premium
may represent the market anticipation of a higher price.
Price Quotation System – A method of giving exchange
rates in which a certain specified amount of a foreign
currency (1 or 100, usually) is stated as the corresponding
amount in local currency.
Privatization – The selling of a government owned
business (power, gas, communications) to the public.
Governments privatize businesses to raise money for fiscal
operations or to improve the efficiency of a firm.
Quota – A government-imposed restriction on the quantity
of a specific imported good.
Rate Risk – In the exchange market, the chance that the
spot rate may rise when the trader has a net oversold
position (a short position), or that the spot rate may go
down when the operator has a net overbought position (a
long position).
Reciprocal Rate – The price of one currency in terms of a
second currency, when the price of the second currency is
given in terms of the first.
Representative Office – A facility established in the U.S.
or foreign markets by a bank to sell its services and assist
clients. In the U.S., these offices cannot accept deposits or
make loans.
Reserve Account – Those items in the balance of
payments that measure changes in the central bank’s
holdings of foreign assets (such as gold, convertible
securities, or Special Drawing Rights).
Reserve Currency – A foreign currency held by a central
bank (or exchange authority) for the purposes of exchange
intervention or the settlement of intergovernmental claims.
Reserve Requirements – Obligations imposed on
commercial banks to maintain a certain percentage of
deposits with the central bank or in the form of central
bank liabilities.
Revaluation – An official act wherein the official parity of
a currency is adjusted relative to the dollar, gold, Special
Drawing Rights, or another currency, resulting in less
revalued units relative to those currencies. Also, the
periodic computations of the current values (reevaluations)
of ledger accounts and unmatured future purchase and
sales contracts.
Rollover – The process of extending a maturing forward
foreign exchange contract.
Samurai Bonds – Yen-denominated bonds issued by a
foreign borrower in Japan.
Sanctions – A coercive governmental action that restricts
trade with a specific country (i.e. embargo) for a political
purpose rather than for an economic need.
Seller's Option Contract – When the seller has the right
to settle a forward contract at his or her option anytime
within a specified period.
DSC Risk Management Manual of Examination Policies 11.1-45 International Banking (12-04)
Federal Deposit Insurance Corporation