Foreign exchange and gold risk

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Recall that all derivatives have been converted into the equivalent spot positions. A bank's net open position in each individual currency is obtained - all assets less liabilities, including accrued interest. The net positions are converted into US$ at the spot exchange rate. The capital charge of 8% applies to the larger of the sum (in absolute value terms) of the long or short position, plus the net gold position.

Alternatively, subject to approval by national regulators, banks can employ a simulation method. The exchange rate movements over a past period are used to revalue the bank's present foreign exchange positions. The revaluations are, in turn, used to calculate simulated profits/losses if the positions had been fixed for a given period, and based on this, a capital charge imposed.

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