64. Currency risk management

Currency risk management

Definition

Currency risk is the risk of incurring losses due to unfavourable exchange rate changes. The risk is generated by maintaining open currency positions in a given foreign currency.

Management objective

Mitigate the risk of incurring potential losses arising from exchange rate fluctuations to an acceptable level by appropriate shaping the structure of statement of the financial position and off-balance sheet items.

Risk identification and measurement

The Group utilizes the following currency rate risk measures: value at risk (VaR) and stress tests.

Control

Control over currency rate risk covers determining currency risk limits and thresholds tailored to the scale and complexity of the Group’s operations, in particular the strategic limit of tolerance to currency risk.

Forecasting and monitoring of risk

The following are monitored by the Group on a regular basis:

• the level of currency risk,
• the degree of utilization of the strategic limit of currency risk tolerance,
• the degree of utilization of internal limits and threshold values relating to currency risk.

Reporting

The reports on currency risk are developed on a daily, weekly, monthly and quarterly basis.

Management actions

Main tools used in currency risk management in the Group include:

• procedures for currency risk management,
• limits and thresholds for currency risk,
• defining allowable types of transactions in foreign currencies and the exchange rates used in such transactions.

The Group has set limits and threshold values for currency risk for i.a.: currency positions, Value at Risk calculated for a 10-day time horizon and daily loss from transactions on currency market.

Financial information

Sensitivity measures

VaR of the Bank and stress-tests analysis of the Bank’s exposure to currency risk are stated cumulatively for all currencies in the table below:

Currency position

The Group’s currency positions are presented in the table below:

The volume of currency positions is a key factor determining the level of currency risk on which the Group is exposed (except for volatility of foreign exchange rates). The level of currency positions is determined by all foreign currency transactions, which are concluded by the Group, both in the statement of financial position and off-balance sheet transactions. The Bank’s exposure to currency risk is low (with reference to own funds, VaR for a 10-day time horizon for the Bank’s currency position as at 31 December 2016 amounted to ca. 0.03% and as at 31 December 2015 0.09% respectively).

Currency Structure