Banking and Finance

FINANCIAL RISK:CURRENCY RATE RISK

 INTRODUCTION
• Financial risk- any risk associated with any
form of financing:
 INTRODUCTION cont’d
• Currency risk: a
form of risk that
arises from the
change in price of
one currency
against another.

• Mongolia-small
economic
capacity,
comparetively
large number of
int trade partners Source: NSO-National Statistical Office 2009, Statistical Yearbook
 INTRODUCTION cont’d
Theoretical framework
Hence;
-the exchange rate index of
the ith country against domestic
currency unit in the end of t term
-the trade share of the ith
country in foreign trade of home
country in the end of t term
n - number of
trading countries
the exchange rate index (NEER) of the i th
country against domestic currency unit in
the end of t term
the consumer price index (REER) of the ith
country against domestic currency unit in the end
of t term
the trade share of the ith country in foreign
trade of home country in the end of t term
n- number of trading countries
 OBJECTIVES
Main objective- to determine depreciation and
appreciation of Mongolian togrog
Specific objectives:
• Calculate exchange rate indices;
• Estimate nominal effective exchange rate;
• Estimate real effective exchange rate;
• Develop conclusions and recommendations
based on the study results.
 METHODOLOGY
• NEER
• REER
• CASE OF MONGOLIA
• Data 2003-2009
• 2003 BASE YEAR
• 9 MAIN TRADE PARTNER COUNTRIES
 RESULTS AND DISCUSSION
• By end of 2009, decisive impact of exchange
rates of neighbor's currencies
– Russian Federation-20.9%
– People’s Republic of China-48 %
– Germany, Canada, GB –stable
 RESULTS AND DISCUSSION cont’d
Table 2. Exchange rate indices of the selected currencies
against one togrog (S* = Sit / Sio)
Countries 2003 2004 2005 2006 2007 2008 2009

USA 100 64.5 55.1 50.1 41.8 40.7 40.6

Germany 100 69.9 68.2 58.1 56.0 62.3 62.0
Canada 100 60.5 58.9 50.8 49.2 54.1 54.0
Russian 100 78.3 71.7 220.9 245 250 268.6
Federation 100 72.4 67.0 57.6 55.8 58.5 56.6
Switzerland 100 61.2 52.3 47.4 40.9 93.5 92.2
Great Britain 100 64.1 54.6 49.7 41.4 58.5 40.2
China 100 78.0 75.7 61.8 45.3 48.3 55.0
Japan 100 70.2 105.9 78.9 61.4 63.9 67.8
Korea 100 63.8 64.0 58.3 49.3 49.9 52.4
Singapore
 RESULTS AND DISCUSSION cont’d
Table 3. Nominal Effective Exchange Rate of
togrog
Countries 2003 2004 2005 2006 2007 2008 2009
USA 100 99.0 95.5 92.4 98.0 88.2 92.0
Germany 100 98.4 99.0 98.3 97.6 99.1 97.9
Canada 100 95.8 98.5 98.3 98.6 99.4 98.3
Russian Federation 100 93.3 92.2 124 128.2 132.8 139
Switzerland 100 97.5 91.2 95.7 99.7 99.5 99.5
Great Britain 100 98.7 98.4 97.9 98.5 100 99.9
China 100 90.4 88.9 83.3 68.8 82.0 75.3
Japan 100 95.8 98.7 97.4 90.0 97.1 96.5
Korea 100 98.5 100.6 97.2 97.6 96.0 96.8
Singapore 100 99.3 98.9 98.7 99.4 99.3 98.6
100 71.0 67.1 81.2 71.2 87.1 84.9
NEER

In 2009, Depreciated 15.1 com to 2003 and appreciated by 2.2 point to 2008
 RESULTS AND DISCUSSION cont’d
Table 4. Real Effective Exchange Rate of togrog
Countries 2003 2004 2005 2006 2007 2008 2009
USA 100 99.8 99.2 98.3 99.4 96.6 98.7
Germany 100 100.0 100.4 100.1 100.3 100.5 101.5
Canada 100 98.5 99.9 99.6 99.8 100.0 100.4
Russian Federation 100 98.0 97.8 117.0 122.3 134.1 153.3
Switzerland 100 100.3 103.3 100.4 100 100.2 100.3
Great Britain 100 99.6 99.6 99.4 99.5 100.0 101.2
China 100 96.5 96.7 93.6 86.6 89.2 94.6
Japan 100 102.1 101.2 100.6 98.7 100.2 102.0
Korea 100 99.8 104.8 102.5 100.2 101.2 102.4
Singapore 100 99.8 100.2 100.1 100.0 100.1 100.5
• In 2009 the togrog's
100 REER
94.3depreciated by 55.4
103.0 110.6 points
103.7 118.1 155.4
compared to the base year and an appreciation by 32.9 points
NEER
compared to the 2008.
CONCLUSION AND RECOMENDATION
• Togrog's exchange rate is largely determined
by the currencies and price levels of our two
neighbors Russia and China
• IN 2009 NEER=84.9% REER=155.4%
• Stable trade deficit leads togrog’s exchange
rate misalignment
• National bank of Mongolia ought to do proper
policy to stable togrog’s exchange rate.
 References
• Joanna Ledgerwood. Microfinance handbook,2000:, Risk management.
The World Bank.
• National Statistical Office 2009, Statistical Yearbook, Ulaanbaatar,
Mongolia
• Jargal Batulzii. Financial management. 2007:, Currency risk. Ulaanbaatar,
Mongolia
• Mongolbank. Monthly bulletin (10)2009,Ulaanbaatar, Mongola
• Bent Flyvbjerg, Nils Bruzelius, and Werner Rothengatter, 2003,
Megaprojects and Risk: An Anatomy of Ambition (Cambridge University
Press). [online].2011 [cit 2011—02-20].
http://en.wikipedia.org/wiki/Financial_risk
• Currency risk definition [available online] [cit 2011-02-20]
http://www.investopedia.com/terms/c/currencyrisk.asp

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