The Asian Development Bank (ADB) is a multilateral development finance institution whose mission is to reduce poverty in the Asia Pacific region. Although the ADB claims to operate in the interest of Asia’s poorest citizens, civil society groups have long been concerned about the ADB’s role in promoting sustainable and equitable growth in the region. The ADB was founded in 1966 with the goal of eradicating poverty in the region. With over 1. 9 billion people living on less than $2 a day in Asia, the institution has a formidable challenge.It plays the following functions for countries in the Asia Pacific region: • Provides loans and equity investments to its developing member countries (DMCs) • Provides technical assistance for the planning and execution of development projects and programs and for advisory services • Promotes and facilitates investment of public and private capital for development • Assists in coordinating development policies and plans of its DMCs Though well-intentioned, ADB-funded operations have been responsible for causing widespread environmental and social damage, adversely affecting some of the regions poorest and most vulnerable communities.
Though publicly financed by taxpayer dollars, ADB activities (and those of other multilateral development banks) are often carried out without the informed participation of affected people, non-governmental. organizations (NGOs), or, in many cases, the elected officials in the borrowing countries. A global movement to reform the MDBs has based its activities on the assumption that sustainable development and poverty alleviation are impossible without informed public participation in the decision making process. Civil society concerns with the ADB include: • Access to information about the ADB’s operations Public participation in the design, implementation, monitoring and evaluation of ADB projects • The social and environmental impacts of ADB programs and projects, and the Bank’s accountability for those impacts • The ADB’s private sector lending • The ADB’s role in regional and sub-regional economic cooperation The Bank Information Center, in collaboration with its partners, works toward democratizing the ADB so that social and environmental considerations are incorporated in the Banks’ decision making processes and operations.
Risk Management Guidelines Contents 1. Introduction 2. Exposure Analysis 3. Market Forecasts 4. Risk Appraisal 5. Benchmarking 6. Hedging 7. Stop-Loss 8.
Reporting and Review 9. Conclusion IntroductionYour business is open to risks from movements in competitors’ prices, raw material prices, competitors’ cost of capital, foreign exchange rates and interest rates, all of which need to be (ideally) managed. This section addresses the task of managing exposure to Foreign Exchange movements. These Risk Management Guidelines are primarily an enunciation of some good and prudent practices in exposure management. They have to be understood, and slowly internalised and customised so that they yield positive benefits to the company over time.
It is imperative and advisable for the Apex Management to both be aware of these practices and approve them as a policy.Once that is done, it becomes easier for the Exposure Managers to get along efficiently with their task. |Exposure Analysis | | | |An Exposure can be defined as a Contracted, Projected or Contingent Cash Flow whose magnitude is not certain at the moment. The magnitude | |depends on the value of variables such as Foreign Exchange rates and Interest rates.
| |Determination: | |The following cash flows/ transactions will be considered for the purpose of exposure management. | Variable / Cash Flows |Transaction Type | |Contracted Foreign Currency Cash Flows |Both Capital and Revenue in nature | |Foreign Interest Rates, whether Floating or Fixed |All Interest Payments/ Receipts | |Cash Flows from Hedge Transactions |All Open hedge transactions | |Projected/ Contingent Cash Flows |Both Capital and Revenue in nature | • Cash Flows above $100,000/- in value will be brought to the notice of the Exposure Manager, as soon as they are projected. • It is the responsibility of the Exposure Manager to ensure that he receives the requisite information on exposures from various sections of the company in time. Analysis These exposures will be analysed and the following aspects will be studied: • Foreign Currency Cash Flows/ Schedules • Variability of Cashflows – how certain are the amounts and/ or value dates? • Inflow-Outflow Mismatches / Gaps Time Mismatches / Gaps • Currency Portfolio Mix • Floating / Fixed Interest Rate ratio Market Forecasts After determining its Exposures, the company has to form an idea of where the market is headed. The company will focus on forecasts for the next 6 months, as forecasts for periods beyond 6 months can be unreliable. The focus of the Apex Management is to be aware of • the Direction or the Big Trend in rates. • the underlying assumptions behind the forecasts • the Probability that can be assigned to the forecast coming true • the possible extent of the move The Risk Appraisal exercise and Benchmarking decisions will be based on such forecasts. Risk AppraisalThis exercise is aimed at determining where the company’s exposures stand vis-a-vis market forecasts.
The following Risks will be considered 1. Risk to the Exposure or Value at Risk (VAR) Given a particular view or forecast, VAR tries to determine by how much the company’s underlying cashflows are affected. The VAR is the answer to the question, “If the Rate actually moves to xx. xxxx, how much Profit/ Loss does the company make? ” 2. Forecast Risk What is the likelhood of the rate actually moving to xx. xxxx and what is the likelihood of a forecast going wrong.
It is imperative to know this before deciding on a Benchmark and devising a hedging strategy. 3. Market and Transaction RiskThis will take into consideration the risks attached with each particular market and the likelihood of a transaction not going through smoothly. For instance, • The Rupee is given to sudden swings in sentiment, whereas the Deutschemark is generally more predictable. • The monetary and time costs of hedging with a nationalised bank are generally higher than with a private/ foreign bank. 4.
Systems Risk The risks that arise through gaps or weaknesses in the Exposure Management system. Benchmarking This exercise aims to state where the company would like its exposures to reach. 1. The company will set a Benchmark for its Exposure Management practices.
2. The Benchmarks will be set for 6 months periods. 3. The Benchmark will reflect and incorporate the following: i.The Objective of Exposure Management, or in other words, “Should Exposure Management be conducted on a Profit Centre or Cost Centre basis ? ” ii. The Forecasts discussed and agreed upon earlier. Mathematically, the Benchmark should be the Probabilistic Expectation of the rate in question. iii.
The Forecast risk, Market and Transaction risk, and Systems risk as determined earlier. iv. Room for error in keeping with the Stop Loss Policy to be decided 2. 4. The Benchmark will be realistic and achievable.
Hedging This is the most visible and glamourised part of the Exposure Management function. However, the Trader is like the Driver in a car rally, who needs to follow the general directions of the Navigator 1.Hedging strategies will be designed to meet the Exposure Management objectives, as represented by the Benchmarks 2. The Exposure Management Cell will be accorded full operational freedom to carry out the hedging function on a day to day basis 3. Hedges will be undertaken only after appropriate Stop-Loss and Take-Profit levels have been predetermined 4. The company will use all hedging techniques available to it, as per need and requirement.
In this regard, it will pass a Board Resolution authorising the use of the following: • Rupee-Foreign Currency Forward Contracts • Cross Currency Forward Contracts • Forward-to-Forward Contracts • FRAs • Currency Swaps • Interest Rate Swaps • Currency Options • Interest Rate Options Stop LossExposure Management should not be undertaken without having a Stop-Loss policy in place. A Stop-Loss policy is based on the following two fundamental principles: 1. To err is human 2. A stitch in time saves nine Reporting and Review There needs to be continuous monitoring whether the Exposures are headed where they are intended to reach. As such, the Exposure Management activities need to be reported and reviewed. Conclusion Exposure Management is an essential part of business and should be viewed with Objectivity.
It is neither a license to print money nor is it a cause for getting trapped in a Fear Psychosis, and should be viewed with the same clarity of vision as, say, Production or Marketing is viewed.What Is The Balance Of Payments? The balance of payments (BOP) is the method countries use to monitor all international monetary transactions at a specific period of time. Usually, the BOP is calculated every quarter and every calendar year.
All trades conducted by both the private and public sectors are accounted for in the BOP in order to determine how much money is going in and out of a country. If a country has received money, this is known as a credit, and, if a country has paid or given money, the transaction is counted as a debit. Theoretically, the BOP should be zero, meaning that assets (credits) and liabilities (debits) should balance.But in practice this is rarely the case and, thus, the BOP can tell the observer if a country has a deficit or a surplus and from which part of the economy the discrepancies are stemming. The Balance of Payments Divided The BOP is divided into three main categories: the current account, the capital account and the financial account. Within these three categories are sub-divisions, each of which accounts for a different type of international monetary transaction. The Current Account The current account is used to mark the inflow and outflow of goods and services into a country. Earnings on investments, both public and private, are also put into the current account.
Within the current account are credits and debits on the trade of merchandise, which includes goods such as raw materials and manufactured goods that are bought, sold or given away (possibly in the form of aid). Services refer to receipts from tourism, transportation (like the levy that must be paid in Egypt when a ship passes through the Suez Canal), engineering, business service fees (from lawyers or management consulting, for example), and royalties from patents and copyrights. When combined, goods and services together make up a country’s balance of trade (BOT). The BOT is typically the biggest bulk of a country’s balance of payments as it makes up total imports and exports. If a country has a balance of trade deficit, it imports more than it exports, and if it has a balance of trade surplus, it exports more than it imports.Receipts from income-generating assets such as stocks (in the form of dividends) are also recorded in the current account. The last component of the current account is unilateral transfers.
These are credits that are mostly worker’s remittances, which are salaries sent back into the home country of a national working abroad, as well as foreign aid that is directly received. The Capital Account The capital account is where all international capital transfers are recorded. This refers to the acquisition or disposal of non-financial assets (for example, a physical asset such as land) and non-produced assets, which are needed for production but have not been produced, like a mine used for the extraction of diamonds.The capital account is broken down into the monetary flows branching from debt forgiveness, the transfer of goods, and financial assets by migrants leaving or entering a country, the transfer of ownership on fixed assets (assets such as equipment used in the production process to generate income), the transfer of funds received to the sale or acquisition of fixed assets, gift and inheritance taxes, death levies, and, finally, uninsured damage to fixed assets.
The Financial Account In the financial account, international monetary flows related to investment in business, real estate, bonds and stocks are documented. Also included are government-owned assets such as foreign reserves, gold, special drawing rights (SDRs) held with the International Monetary Fund, private assets held abroad, and direct foreign investment. Assets owned by foreigners, private and official, are also recorded in the financial account.
The Balancing Act The current account should be balanced against the combined-capital and financial accounts. However, as mentioned above, this rarely happens.We should also note that, with fluctuating exchange rates, the change in the value of money can add to BOP discrepancies. When there is a deficit in the current account, which is a balance of trade deficit, the difference can be borrowed or funded by the capital account.
If a country has a fixed asset abroad, this borrowed amount is marked as a capital account outflow. However, the sale of that fixed asset would be considered a current account inflow (earnings from investments). The current account deficit would thus be funded. When a country has a current account deficit that is financed by the capital account, the country is actually foregoing capital assets for more goods and services.If a country is borrowing money to fund its current account deficit, this would appear as an inflow of foreign capital in the BOP. Liberalizing the Accounts The rise of global financial transactions and trade in the late-20th century spurred BOP and macroeconomic liberalization in many developing nations.
With the advent of the emerging market economic boom – in which capital flows into these markets tripled from USD 50 million to USD 150 million from the late 1980s until the Asian crisis – developing countries were urged to lift restrictions on capital and financial-account transactions in order to take advantage of these capital inflows. Many of these countries had restrictive macroeconomic policies, by which regulations prevented foreign wnership of financial and non-financial assets. The regulations also limited the transfer of funds abroad. But with capital and financial account liberalization, capital markets began to grow, not only allowing a more transparent and sophisticated market for investors, but also giving rise to foreign direct investment. For example, investments in the form of a new power station would bring a country greater exposure to new technologies and efficiency, eventually increasing the nation’s overall gross domestic product by allowing for greater volumes of production.
Liberalization can also facilitate less risk by allowing greater diversification in various markets.