For simplicity, foreign currency = dollars only
1. Every bank in Egypt (and in all countries) has dollar-denominated assets and liabilities.
2. Dollar assets include two types of assets:
– Loans for residents denominated in dollars
– Foreign assets, which are funds invested outside Egypt (non-residents)
3. Foreign liabilities are divided into the same two sections:
– Deposits from residents denominated in dollars
– Loans from outside Egypt (non-residents)
There is a fundamental difference between the so-called “foreign” assets and liabilities and “foreign currencies” assets and liabilities because the first is subject to the principle of residence (resident with non-resident) and the second depends on the transaction currency regardless of residence.
If the dollar size of the assets is equal to the dollar amount of the liabilities, then there is no “short position”.
Net open position = 0
Therefore, exposure to the risk of change in the exchange rate = zero
Example
As of December 31, the size of CIB’s assets and liabilities in dollars were as follows:
Dollar assets
1. A loan to Abu Qir Fertilizers Company (resident) = $100
2. US Treasury Bills (non-resident) = $100
Total = $200
Dollar Liabilities
1. Citibank USA loan (non-resident) = $200
2. Egyptian customer deposits in dollars (resident) = $200
What is the value of the short position?
= dollar assets – dollar liabilities = 200 – 400 = – $200
In this case, the exposed position is called the exposed liability position.
If the assets are greater than the liabilities, this position is called…
Net foreign currency asset position.
Back to the example
CIB has a net dollar commitment = $200 = EGP 4,000 at the current exchange rate of EGP 20 to the dollar.
So, if the exchange rate drops from 20 to 25, the value of the net commitment in pounds will increase from EGP 4,000 to EGP 5,000, which means a loss = EGP 1,000 because the bank will arrange an extra EGP 1,000 to buy dollars to pay off the net commitment.
This loss may lead to a decrease in the bank’s capital below the minimum target set by the CBE.
Thus, central banks limit the size of the open position in foreign currencies, if any.
