CA-11.1.1

A bank which holds net open positions (whether long or short) in foreign currencies is exposed to the risk that exchange rates may move against it. The open positions may be either trading positions or, simply, exposures caused by the bank's overall assets and liabilities.

CA-11.1.2

This chapter describes the standardised method for calculation of the bank's foreign exchange risk, and the capital required against that risk. The measurement of the foreign exchange risk involves, as a first step, the calculation of the net open position in each individual currency including gold⁶⁸ and, as a second step, the measurement of the risks inherent in the bank's mix of long and short positions in different currencies.

⁶⁸ Positions in gold should be treated as if they were foreign currency positions, rather than as commodity positions, because the volatility of gold is more in line with that of foreign currencies and most banks manage it in similar manner to foreign currencies.

CA-11.1.3

The open positions and the capital requirements are calculated with reference to the entire business, i.e. the banking and trading books combined.

CA-11.1.4

The open positions are calculated with reference to the bank's base currency, which will be either BD or US$.

CA-11.1.5

Banks which have the intention and capability to use internal models for the measurement of their foreign exchange risk and, hence, for the calculation of the capital requirement, should seek the prior written approval of the CBB for those models. The CBB's detailed rules for the recognition and use of internal models are included in chapter CA-14. Banks which do not use internal models should adopt the standardised approach, as set out in detail in this chapter.

CA-11.1.6

In addition to foreign exchange risk, positions in foreign currencies may be subject to interest rate risk and credit risk which should be treated separately.

CA-11.1.7

For the purposes of calculating "Foreign Exchange Risk" only, positions in those GCC currencies which are pegged to US$, will be treated as positions in US$.