Latest News

Every business is different

Back | Next

04.06.2009

Currency illiquidity - why size does not always matter

Pelican employees and associates worked for Deutsche Bank during the 1997-98 asian currency crisis. We realised back then that Liquidity Risk is not just an issue for big currencies, but also for smaller currencies when FX market volatility creates difficult funding situations for internationally active banks - Thai Baht was a huge issue back then, along with other currencies with on and offshore (NDFs) components.

So not only have we seen recently issues concerning the big crosses, but we now see recent issues with smaller currencies. Take the Money Market conditions in the Latvian currency - the Lat. With overnight rates rocketing to 25 % and the central banks buying Lats in the open market, any bank without a line of credit with the central bank (or a Liquidity Buffer / CBC) or the ability to borrow Lats from local banks, would be in a position of extreme illiquidity in that currency.

One key principle of these type of phenomena is to have a well understood analysis of currency crises and the ability to model widening spreads in the FX market.

The team have used their experience of these events to help build a robust set of Currency scenarios into the liquidity solutions we build with customers - Bid Offer rates are used rather than the mid-market which many systems providers deem adequate.

So the headaches for Liquidity Risk management do not only revolve around multi-billion positions in the majors, but also in more modest (short) positions in the minor currencies. Planning around these positions has never been more important.

 

Back | Next

RSS

RSSLATEST NEWS://

>>