How foreign exchange risk can be managed for banks operating in Pakistan

Abstract

During the era from 2007 to 2011 the world economy has encountered a heavy financial melt down which contracted many economies. Businesses went bankrupt and loans became none performing for financial institutions. Pakistani financial sector had also been hit by this financial crisis. To rightly judge the impact of the world financial crises there is no better option then to study the capital structure of the financial institutions of Pakistan. It is being also observed that in Pakistan there is gap between financial sector and their risk management. The factor that indented the economy beside the non performing loans was foreign currency movement, as the Pakistani currency was at continuous devaluation; therefore the economy was more exposed to risk. This descriptive study of the financial sector of Pakistan elaborates how the financial institutions and banks manage foreign exchange exposure. In this study, firstly the capital structure of the selected sample banks is being evaluated according to their performance through horizontal and ratio analysis from 2007 to 2011 to observe the impact of the world financial melt down of the world. The VAR is being established through historical stimulation of the foreign exchange assets of the banks translated in Pakistani currency to find the amount to be hedged as well as to decide what can be the most feasible hedging tool to the Pakistani financial sector.