The Sensitivity of Foreign Exchange Trading Income to Exchange Rate Changes: A Study of Large

Ramcharran, Harri
March 2000
Multinational Business Review (St. Louis University);Spring2000, Vol. 8 Issue 1, p39
Academic Journal
The recent growth in income from foreign exchange trading and the volatility of exchange rates have raised concern about the degree of sensitivity of banks' trading profit to currency changes. Using two different models with semiannual data from 1980-94 the empirical (regression) results indicate that income from foreign exchange trading for eleven large U.S.A. banks are highly impacted by the level of exchange rate which is measured in terms of the trade weighted index of the U.S.A dollar and also the value of SDR. The implication of this riskiness is that the other sources of banks' profit (consumer, commercial, and real estate loans) should not be neglected since policies to realign or unify currencies or to reduce their volatility could adversely affect trading income.


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